Item 1. Business
Overview
We are an integrated content and commerce company that creates “how-to” content and domestic merchandise for homemakers and other consumers. Our products are generally sold under various brand labels incorporating the well-known “Martha Stewart” brand name, which we leverage across a broad range of media and retail outlets. We primarily focus on the domestic arts, providing consumers with the how-to ideas, information, merchandise and other resources they need to raise the quality of living in and around their homes. The content and merchandise we create generally span eight core areas:
· Home: decorating, collecting, and renovating.
· Cooking & Entertaining: recipes, techniques, and indoor and outdoor entertaining.
· Gardening: planting, landscape design, and outdoor living.
· Crafts: how-to projects and similar family activities and an appreciation of the natural world.
· Holidays: celebrating special days and special occasions.
· Keeping: homekeeping, organizing, petkeeping, clotheskeeping, restoring, and other types of domestic maintenance.
· Weddings: all aspects of planning and celebrating a wedding.
· Baby & Kids: cooking, decorating, crafts, and other projects and celebrations surrounding infants and children.
Our company comprises four business segments - Publishing, Television, Merchandising and Internet/ Direct Commerce - through which content and merchandise relating to our eight core content areas are created and distributed to consumers. As of March 11, 2003, we had approximately 580 employees. Our revenues from foreign sources were $11.8 million, $9.8 million and $8.3 million in 2002, 2001 and 2000, respectively. Substantially all of our assets are located within the United States.
History
Martha Stewart published her first book, Entertaining, in 1982. Over the next eight years she became a well-known authority on the domestic arts, authoring eight more books relating to a variety of our core content areas. In 1991, Time Publishing Ventures, Inc., a subsidiary of Time Inc. (“TPV”), launched Martha Stewart Living magazine with Ms. Stewart serving as its editor-in-chief. In 1993, TPV began producing a Martha Stewart Living weekly television program hosted by Ms. Stewart. In 1995, TPV launched a mail-order catalog, Martha by Mail, which made available products featured in, or developed in connection with, the magazine and television program. In late 1996 and early 1997 a series of transactions occurred resulting in MSLO LLC operating all Martha Stewart-related business. Ms. Stewart was the majority owner of MSLO LLC and TPV retained a small equity interest in the business. Additionally, affiliates of TPV entered into various agreements with MSLO LLC pursuant to which such affiliates would provide newsstand distribution services for our magazines, provide fulfillment services for our magazines and direct commerce business, publish certain books containing content originally featured in our magazines, and provide various corporate services to us.
On October 22, 1999, MSLO LLC merged into MSO, then a wholly-owned subsidiary of MSLO LLC. Immediately following the merger, we consummated an initial public offering of 8,280,000 shares of our Class A Common Stock at an offering price of $18 per share, receiving aggregate proceeds, net of underwriting discounts, commissions and expenses, of $132.3 million.
On March 31, 2000, we purchased 1,366,000 shares of our Class A Common Stock from TPV (approximately 52% of TPV’s total equity interest in us), for $23.79 per share, or an aggregate $32.5 million. As part of this transaction, TPV agreed to extend certain of the agreements we had with TPV’s affiliates described above, to continue, subject to certain limited exceptions, to hold shares of our Class A Common Stock until 2003, and to allow us to place advertisements in Time Inc. magazines and websites through 2004 at discounted rates, subject to annual limitations.
Business Segments
Our four business segments are described below. Additional financial information relating to these segments may be found in Note 16 to our Consolidated Financial Statements on page of this Report.
Publishing
Our Publishing segment currently consists of our operations relating to magazines, books, radio and newspapers. In 2002, revenues from magazine advertising and circulation represented approximately 62% and 36% of the segment’s revenues, respectively.
Magazines
Martha Stewart Living. Martha Stewart Living, our flagship magazine, is the foundation of our publishing business. It was launched in 1991 as a quarterly publication with a circulation of 250,000. In 2001 we increased the frequency from eleven to twelve times per year. Starting with the January 2003 issue, we have guaranteed our advertisers a minimum circulation of 2.3 million, up from 2.27 million since January 2002. Advertising pages, as reported to Publisher’s Information Bureau, were 1,887 pages in 2002, up from 1,790 in 2001.
Martha Stewart Living appeals primarily to the college-educated woman between the ages of 25 and 54 who owns her principal residence. Martha Stewart Living seeks to offer reference-quality and original how-to information from our core content areas for the homemaker and other consumers in a unique upscale editorial and aesthetic environment. Martha Stewart Living has won numerous prestigious industry awards. Revenues generated by Martha Stewart Living magazine constituted the substantial majority of our magazine revenues.
Martha Stewart Weddings. We launched Martha Stewart Weddings in 1994 as an annual publication, and extended it to a semi-annual publication in 1997. In 1999, Martha Stewart Weddings became a quarterly publication. Martha Stewart Weddings targets the upscale bride and serves as an important vehicle for introducing young women to our brands. Martha Stewart Weddings is sold primarily through newsstand distribution.
Special Interest Publications. We also publish certain special interest magazine editions, beginning with one in 1998, growing to seven publications in 2002. Our special interest publication schedule in 2002 consisted of two issues of Martha Stewart Baby, four issues of Martha Stewart Kids, and one issue of Martha Stewart Holiday Baking, which was custom published for Kmart Corporation. We are scheduled to publish a minimum of eleven special interest editions in 2003. Our special interest publications provide in-depth advice and ideas around a particular topic contained in one or more of our core content areas, allowing us to draw upon our distribution network and brand name to further promote our expertise in our core content areas. Additionally, we use this format to explore additional content areas, potential new standalone titles and branding variations. Our special interest publications can be either sponsored by a single advertiser or multiple advertisers, and depending on the issue, may be sold at newsstands, distributed to subscribers with issues of Martha Stewart Living, or both. Occasionally, we custom publish a special interest publication.
Included in the 2003 schedule are four test issues of Everyday Food, a digest size magazine created for the supermarket shopper and the everyday cook, featuring quick, easy recipes. The premier issue was available on newsstands in January 2003. If the initial test issues are successful, Everyday Food will begin publishing with a regular frequency of ten issues per year in September 2003. Everyday Food has multiple advertisers.
International. Beginning in December 2001, Martha Stewart Japan, Inc., a Japanese publishing company in which we own a minority interest, began publication of a Japanese language magazine entitled Martha Stewart Martha. In exchange for royalties based on advertising and circulation sales of the magazine, we license English language content, and provide advisory services, to Martha Stewart Japan. Martha Stewart Martha was published six times in 2002. The economic contribution from this business has to date been minimal.
Magazine Production, Distribution and Fulfillment. We print most of our domestic magazines under long-term printing agreements with R. R. Donnelly. We currently purchase paper through an agreement with Time Inc. Paper for use in our domestic magazines is widely available. We use no other significant raw materials in our businesses. Newsstand distribution of the magazines is conducted by an affiliate of TPV under a long-term agreement that expires with the December 2007 issue of Martha Stewart Living, but which we have the right to cancel effective after the December 2004 issue. Our subscription fulfillment services are provided by another affiliate of TPV under a long-term agreement that expires in 2005, and is renewable for an additional three-year period at our option. Printing and distribution for the Japanese edition of our magazine is handled by third parties through our Japanese licensee.
Books
We create two different types of books: Martha Stewart Living books and Martha Stewart-authored books. Our current book library comprises 42 titles. Of these books, 29 are Martha Stewart Living books, and 13 are Martha Stewart-authored books. We own the copyrights to all these books.
Martha Stewart Living Books. We created four Martha Stewart Living books in 2002 and plan to create three such books in 2003. These books consist of a mixture of content previously published in our magazines and original material. The hardcover versions of each of these titles are sold through direct marketing methods to consumers, including Martha Stewart Living readers and regular craft and cookbook buyers, and paperback editions are sold at retail book stores. The publication of these books is done by Oxmoor House, Inc., an affiliate of TPV, which also handles their distribution through direct marketing and some retail channels. The Martha Stewart Living books have been distributed through other retail channels by Clarkson N. Potter, a division of Random House, a subsidiary of Bertelsmann AG, under various agreements.
Martha Stewart Books. Under an agreement with Clarkson N. Potter, we have created thirteen completely original Martha Stewart-authored books, and are obligated to deliver one more such book. These books are generally sold by Clarkson N. Potter through retail distribution channels.
The askMartha Newspaper Column and Radio Program
Our askMartha syndicated newspaper columns appear weekly in over 200 newspapers in North America. Our askMartha syndicated radio program airs for ninety seconds five days a week on over 330 radio stations in North America, covering over 91% of United States markets. In general, both the column and the radio program provide informative how-to content in response to particular questions posed by our consumers. The newspaper columns are syndicated by The New York Times Syndication Sales Corporation and the radio program is syndicated by Westwood One Radio, Inc. Our distribution partners pay us a percentage of the revenues generated by these properties. While the revenues contributed by these businesses are not as significant as those contributed by most of our other media activities, we reach a broader audience and demographic through these two vehicles than through any of our other media enterprises. They therefore provide valuable no-cost brand promotion outside our core audience.
Competition
Publishing is a highly competitive business. Our magazines, books and related publishing products compete with other mass media and many other types of leisure-time activities. Overall competitive factors in this segment include price, editorial content and editorial and aesthetic quality. Competition for advertising dollars in magazine operations is primarily based on advertising rates, editorial and aesthetic quality, the desirability of the magazine’s demographic, reader response to advertisers’ products and services and effectiveness of the advertising sales staff. Martha Stewart Living competes for readers and advertising dollars with women’s service, decorating, cooking and lifestyle magazines. Martha Stewart Weddings competes for readers and advertising dollars primarily in the wedding service magazine category. Our special interest issues can compete with a variety of magazines depending on the focus of the particular issue.
Seasonality
Our Publishing segment can experience fluctuations in quarterly performance. For example, our newsstand sales and advertising dollars for Martha Stewart Living have historically tended to be highest in the November and December issues. Martha Stewart Weddings was published four times in 2002: one issue in each of the second and third quarters and two issues in the fourth quarter. Additionally, the publication schedule for our special interest issues can vary and lead to quarterly fluctuations in the segment’s results.
Television
Our Television business segment consists of our operations relating to the production of new television programming and to the domestic and international distribution of that programming in existing and repurposed formats through a variety of distribution channels, including syndication, network broadcast and cable broadcast. We generally own the copyrights in the television programming we produce.
Martha Stewart Living
The Martha Stewart Living program is the cornerstone of our television production operations. The program is a syndicated how-to daytime program hosted by Martha Stewart consisting of several segments, each of which generally ties into one of our eight core content areas. Originally launched as a half-hour weekend program in 1993, we added a daily half-hour program in 1997 which expanded to a daily one-hour program in 1999. We produce Martha Stewart Living primarily at our studio facility in Westport, Connecticut, and segments are filmed both in the studio and at various other locations. The program has won numerous Emmy awards in various categories.
King World Productions, Inc. syndicates the program domestically. Under our arrangement with King World, we have been compensated partially in cash and partially in airtime. We then sell that airtime to advertisers, subject to a distribution fee payable to King World. This arrangement provides us with a substantial degree of control over our national advertising base and allows us to include television advertising in multimedia sales packages offered to advertisers. The program can currently be seen in approximately 90% of all U.S. television households.
The program is also broadcast in Canada by Alliance Atlantis Broadcasting, Inc. over its Life Network cable channel and HGTV Canada for which we are compensated with a license fee. This agreement expires and is open to re-negotiation in August 2003. The program is also dubbed in Japanese and broadcast over the LaLa cable channel in exchange for a license fee.
Repurposed Programming
We also produce three half hour programs entitled from Martha’s Kitchen, from Martha’s Home and from Martha’s Garden. Each of these programs are produced from category-specific segments that originally aired in the Martha Stewart Living program. During 2002, from Martha’s Kitchen aired daily on The Food Network in the United States and Canada, and from Martha’s Home and from Martha’s Garden aired in the United States on the Home and Garden Television cable network. We receive license fees in exchange for the rights to broadcast this programming, although during the first three quarters of 2002 we were compensated for our domestic runs of from Martha’s Kitchen in airtime. Our agreement with The Food Network in the United States expires in 2005, our agreement with The Food Network in Canada expires in August 2003, and our agreement with HGTV expires in December 2003, although HGTV has an option to extend the agreement for an additional year.
Prime Time Specials
We have occasionally produced prime time holiday specials which have aired on the CBS network. We did not produce such a special in 2002.
Competition
Series television is a highly competitive business. Our television programs compete directly for viewers, distribution and/or advertising dollars with other how-to television programs, as well as with general programming on other channels. Overall competitive factors in this segment include programming content, quality and distribution and demographics of the programming.
Similar to publishing, competition for advertising dollars is primarily based on advertising rates, the demographics of the audience, viewer response to advertisers’ products and services and effectiveness of the advertising sales staff.
Seasonality
Revenue and operating results from our Television segment have historically tended to be higher in the fourth quarter due to generally higher ratings and the broadcast of our prime-time television special.
Merchandising
Our Merchandising segment consists of our operations relating to the design of merchandise and related packaging, promotional and advertising materials, and the licensing of various trademarks owned by us, in connection with retail programs conducted through third party retailers and manufacturers.
Martha Stewart Everyday Collections
Martha Stewart Everyday is the brand label under which our merchandise is sold in the mass-market and national chain channels of distribution. Currently, the label is associated with products that generally fall into the following categories: Home (which includes sheets, towels, pillows, bath accessories, window treatments and kitchen textiles), Garden (which includes outdoor furniture, garden tools, fertilizers, planting pots, bulbs and seeds), Kitchen (which includes cookware, bakeware, dinnerware, flatware, and beverageware), Keeping (which includes organizational products relating to the pantry, closet and laundry), Decorating (which includes mirrors, picture frames, candles and lamps), Holiday (which includes Christmas decorating products and ornaments) and Colors (which consists of a line of interior paints available in 256 colors).
In the United States and Canada, these products, other than the paint products, are sold pursuant to exclusive agreements with Kmart Corporation and The Hudson’s Bay Company (through its Zellers stores), although Zellers does not carry the full assortment of products. Pursuant to these agreements, we are primarily responsible for the design of all merchandise and related packaging, signage and advertising and promotional materials, while our retail partners source the products through a large manufacturer base. In 2003 we will start selling the Martha Stewart Everyday brand label in Sears Canada through a new contract with Sears Canada which expires in 2008. This will replace our contract with The Hudson’s Bay Company which expired in February 2003. The paint products are manufactured pursuant to an agreement with The Sherwin-Williams Company and are then distributed by Sherwin-Williams to Kmart and Sears in the United States and Canadian Tire in Canada. Additionally, merchandise is sold under the Martha Stewart Everyday brand label by The Seiyu, Ltd. in Japan. Pursuant to our agreement with Seiyu, Seiyu offers products from our domestic assortment as well as products modified from our domestic assortment for the Japanese market and original product designed by Seiyu, subject to our brand direction and approval, for the Japanese market.
We own the Martha Stewart Everyday trademark and generally retain all intellectual property rights related to the designs of the merchandise, packaging, signage and collateral materials developed for the various programs. We are also generally assured sufficient in-store presence and volume to establish and protect our brands through guaranteed minimum royalties and through dedicated store-within-a-store selling formats.
Martha Stewart Everyday products are now offered at over 1,500 Kmart stores (net of announced store closings) and 1,070 Sears stores in the United States, and 226 stores owned by Seiyu in Japan. When the program launches at Sears in Canada in August 2003, we expect the products to be carried at over 109 Sears stores and in the Sears Canada Catalog.
In 2001 we entered into a new agreement with Kmart that expires in January 2008. In January 2002 Kmart filed for bankruptcy under Chapter 11. Kmart has subsequently assumed our contract and has announced its intention to emerge from bankruptcy during the second quarter of 2003. Since filing for bankruptcy, Kmart has closed, or announced closure of, 600 stores. Our contract with Kmart provides us with significant guaranteed minimum royalty payments that, presuming Kmart’s continued viability, should insulate our financial results from the impacts of any further Kmart store closings. Revenues from Kmart constituted approximately 17% of our total revenues in 2002.
Our agreement with Seiyu provides for the payment to us of royalties on wholesale purchases of our products and expires in August 2006. Our agreement with Sears Canada provides for the payment to us of royalties on retail sales and expires in 2008. Our agreement with Sherwin-Williams expires in December 2005 and provides for royalties payable on sales by Sherwin-Williams of our Martha Stewart Everyday paints.
Martha Stewart Signature
Martha Stewart Signature is the brand label under which our products are offered in the specialty channel of distribution. Through agreements with various retailers and manufacturing partners, we are developing a national network of retailers offering coordinated categories of home decorating products. We own the trademark Martha Stewart Signature and generally retain all intellectual property rights related to the designs of the merchandise, packaging, signage and collateral materials developed for the various programs.
Fabrics. Through an agreement with P/Kaufmann, Inc. which expires in December 2003, a wide variety of decorative fabrics designed by us are offered at various retail specialty stores. We are paid a royalty on sales by P/Kaufmann to retailers. Martha Stewart Signature fabrics are available at approximately 200 stores nationwide.
Paint. In the Spring of 2002, our Martha Stewart Signature Color Palette, consisting of 416 colors, launched at Sherwin-Williams stores nationwide. Consumers are able to have any of the colors mixed in a wide variety of quality Sherwin-Williams paints. We receive royalties on the sale of all paints mixed in a Martha Stewart Signature color. Our agreement with Sherwin-Williams expires in December 2005. Martha Stewart Signature colors are available at approximately 2,000 Sherwin-Williams stores nationwide.
Floor Coverings. Through an agreement with Shaw Industries, Inc. which expires in Fall 2007, floor covering products, including area rugs, hardwood flooring, and broadloom carpeting, are available at select retailers nationwide. These products were designed by us and manufactured and distributed by Shaw Industries, Inc. We receive royalties on sales of our products by Shaw. Martha Stewart Signature floorcoverings are available at approximately 390 stores nationwide.
Furniture. Beginning in March 2003, furniture products for the living room, bedroom, and dining room will be available at fine furniture stores and department stores nationwide. Through an agreement with Bernhardt Furniture Company, Inc., these products will be designed by us and the Bernhardt design staff and manufactured and distributed by Bernhardt. Our agreement provides for royalty payments to us on sales of our products by Bernhardt and expires in early 2008. We expect approximately 235 stores nationwide to participate in the launch of Martha Stewart Signature furniture.
Competition
The retail merchandising business is highly competitive. The principal competition for our Martha Stewart Everyday lines are the competitors of the retail stores in which these products are sold, including Wal-Mart and Target. Competitive factors include numbers and locations of stores, brand awareness and price. The principal competition for our Martha Stewart Signature products comes from other products in the respective product categories available at the participating stores, including branded and non-branded merchandise.
Seasonality
Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines.
Internet/Direct Commerce
Our Internet/Direct Commerce segment consists of our operations relating to our internet and catalog businesses.
Commerce
We develop and source merchandise that we sell through our catalog and our internet site, marthastewart.com. The merchandise we sell consists of both exclusive and non-exclusive products that fall into a wide variety of home-related categories, including kitchenware, garden products, tabletop products, crafts products, bedding, and fresh cut flowers. During 2002, a given catalog contained from 400 to 600 different product offerings, while our e-commerce site offered approximately 2,000 product offerings. In 2002, we mailed 13.4 million copies of the catalog in 14 editions. Our catalog mailing list includes customers identified through our media activities, such as current and past subscribers, gift subscription recipients, continuity card program subscribers and our website registrants, as well as third-party customer lists. In October 2002, we renamed our Martha by Mail catalog “Martha Stewart: The Catalog for Living.” The re-branding effort was accompanied by a redesign of the catalog and increased circulation.
We source and purchase all our product and manage our merchandise inventory. Since February 2002, our fulfillment services have been provided by Innotrac Corporation pursuant to a three-year agreement terminable by us on 180 days notice.
In June 2002, we decided to exit our Wedding List business, acquired in March 2001, and to report the results of that business as a discontinued operation. It is our expectation that The Wedding List operations will cease completely by the end of the second quarter of 2003.
Content
In addition to our e-commerce capability, marthastewart.com offers eight linked content channels, each dedicated to one of our core content areas, as well as our online television and radio program guides and various other features. Our content channels include recipes featured on our television programs, an interactive question and answer service, community bulletin boards and chats, and information and photographs repurposed from our books, magazines and television program. Our advertising sales force sells advertisements for our website individually and as part of multi-media packages. One of our principal strategies is to use the content portions of our website to attract visitors and then convert them into buyers for our direct commerce business. We believe the content portion of our website is popular with our consumers and is an important ingredient in sustaining brand loyalty and cross-promoting our various activities.
Approximately 90% of this segment’s 2002 revenues were from the sale of merchandise, with the remainder coming from advertising.
Recent Developments
In March 2003, we announced that we were restructuring the commerce portion of this segment. Beginning in the third quarter of 2003, we will begin to reduce mailings and circulation. In 2004, we plan to mail the catalog four times per year to a highly-targeted consumer base with significantly reduced circulation. Merchandise assortments will be reduced and focused on branded and seasonal products. The restructuring will result in a reduction in the segment’s workforce of approximately 40%.
Competition
The direct commerce and internet businesses are highly competitive. Competition in our Internet/Direct Commerce segment includes catalogs that offer products and content in our eight core content areas. We compete on the basis of our content, the quality, uniqueness, price and assortment of our merchandise, our brand name, our service to customers and our proprietary customer lists.
Seasonality
Internet/Direct Commerce segment revenues tend to be higher in the fourth quarter due to increased consumer and advertiser spending during the holiday period.
Intellectual Property
We use multiple trademarks to distinguish our brands, including Martha Stewart Living, Martha Stewart Everyday, Martha Stewart Signature, Martha Stewart Weddings, askMartha, Martha Stewart: The Catalog for Living, marthastewart.com and marthasflowers. These and numerous other trademarks are the subject of registrations and pending applications, both domestically and internationally, filed by us for use with a variety of products and other content, and we continue to expand our worldwide usage and registration of related trademarks. We file copyrights regarding our proprietary designs and editorial content on a regular basis. We regard our rights in and to our trademarks and materials as valuable assets in the marketing of our products and vigorously seek to protect them against infringement and denigration by third parties. We own and license the rights to many of these marks pursuant to an agreement between us and Ms. Stewart, which is described under Item 13 of this Report.
Available Information
Our website can be found on the Internet at www.marthastewart.com. The website, in addition to the offerings described under Internet/Direct Commerce, contains information about us and our operations. Our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as certain of our other filings with the Securities and Exchange Commission, can be viewed and downloaded free of charge as soon as reasonably practicable after they have been filed with the SEC by accessing marthastewart.com and clicking on Investor Relations and SEC Filings.
Item 2.
Item 2. Properties
Information concerning the location, use and approximate square footage of our principal facilities, all of which are leased, is set forth below:
The leases for these offices and facilities expire between June 2006 and June 2012, and some of these leases are subject to our renewal. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms.
We also lease the right to use various properties owned by Martha Stewart for our editorial, creative and product development processes. These living laboratories allow us to experiment with new designs and new products, such as garden layouts, and help generate ideas for new content available to all of our media outlets. The terms of this location rental agreement are described in Item 13 of this Report.
We believe that our existing facilities are well maintained and in good operating condition.
Item 3.
Item 3. Legal Proceedings
On February 3, 2003, the Company was named as a defendant in a Consolidated and Amended Class Action Complaint (the “Consolidated Complaint”), filed in the United States District Court for the Southern District of New York, by plaintiffs purporting to represent a class of persons who purchased common stock in the Company between January 8, 2002 and October 2, 2002. In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The Consolidated Complaint also names Martha Stewart and seven of the Company’s other officers (Gregory R. Blatt, Dora Braschi Cardinale, Sharon L. Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey (collectively, the “Individual Defendants”)) as defendants. The action consolidates seven class actions previously filed in the Southern District of New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002), Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002), MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002), Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002), Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002), Steele v. Martha Stewart Living Omnimedia, Inc. (filed September 13, 2002), and Hackbarth v. Martha Stewart Living Omnimedia, Inc. ( filed September 18, 2002). The claims in the Consolidated Complaint arise out of Ms. Stewart’s sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The plaintiffs assert violations of Sections 10(b) (and rules promulgated thereunder), 20(a) and 20A of the Securities Exchange Act of 1934. The plaintiffs allege that MSO, Ms. Stewart and the Individual Defendants made statements about Ms. Stewart’s sale that were materially false and misleading. The plaintiffs allege that as a result of these false and misleading statements, the market price of the Company’s stock was inflated during the putative class periods and dropped after the alleged falsity of the statements became public. The plaintiffs further allege that the Individual Defendants traded MSO stock while in possession of material non-public information. The Consolidated Complaint seeks certification as a class action, damages, attorney’s fees and costs, and further relief as determined by the court.
The Company has also been named as a nominal defendant in four derivative actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation, filed on December 19, 2002 in New York State Supreme Court; Beam v. Stewart, initially filed on August 15, 2002 and amended on September 6, 2002, in Delaware Chancery Court; Acosta v. Stewart, filed on October 10, 2002 in the U.S. District Court for the Southern District of New York; and Richards v. Stewart, filed on November 1, 2002 in Connecticut Superior Court. The Company’s present directors and former director, John Doerr, are also named as defendants in Beam. The Company’s present directors, Mr. Doerr, five of the Company’s other officers (Mr. Blatt, Ms. Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins Caufield & Byers are also named as defendants in Richards. In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation consolidates
three previous derivative complaints filed in New York State Supreme Court and Delaware Chancery Court: Beck v. Stewart, filed on August 13, 2002 in New York State Supreme Court, Kramer v. Stewart, filed on August 20, 2002 in New York State Supreme Court and Alexis v. Stewart, filed on October 3, 2002 in Delaware Chancery Court.
All four derivative actions allege that Ms. Stewart breached her fiduciary duties to the Company by engaging in insider trading in ImClone stock and making false and misleading statements about such trading. The plaintiffs allege that these actions have diminished Ms. Stewart’s reputation and injured the Company through lost revenues, loss of reputation and good will, decreased stock price, and increased costs. The plaintiff in Beam further alleges that (i) Ms. Stewart’s actions have jeopardized the Company’s intellectual property; (ii) the directors breached their fiduciary duties by failing to monitor Ms. Stewart’s affairs to ensure she did not harm the Company; (iii) Ms. Stewart and the other directors breached their fiduciary duties by failing to address the impropriety of the Company’s payment of split dollar insurance premiums; and (iv) Ms. Stewart and Mr. Doerr usurped corporate opportunities by selling personally-owned Company stock to an investment firm without first presenting the Company with the opportunity to sell its stock to the firm. The plaintiffs in the Shareholder Derivative Litigation also allege that Ms. Stewart breached the terms of her employment agreement with the Company. The plaintiff in Richards further alleges (i) intentional breach of fiduciary duty by, among other things, acting in reckless disregard of, and failing to prevent, Ms. Stewart’s insider trading in ImClone stock, violating federal securities laws by selling Company stock while in possession of material, non-public information, misuse of corporate information, and gross mismanagement of the Company; (ii) negligent breach of fiduciary duty; (iii) abuse of control; (iv) constructive fraud; (v) gross mismanagement; and (vi) waste.
The derivative actions seek damages in favor of the Company, attorneys’ fees and costs, and further relief as determined by the court. Certain of the complaints also seek declaratory relief. The plaintiffs in the Shareholder Derivative Litigation further seek the creation of a committee or other administrative mechanism to address the alleged “corporate governance” issues raised in the complaints and to protect the Company’s “cornerstone assets.” The plaintiff in Richards further seeks injunctive relief in the form of attachment or other restriction of the proceeds of defendants’ trading activities or other assets.
The Company has moved to dismiss (i) the Consolidated Complaint, (ii) the Beam complaint, and (iii) Shareholder Derivative Litigation complaint. The Richards action has been stayed pending resolution of the Beam motion to dismiss.
While still in their early stages, we believe the Company has substantial defenses to these actions.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ending December 31, 2002.
PART II
Item 5.
Item 5. Markets for Registrant’s Common Equity and Related Stockholder Matters
Securities Matters
Our Class A Common Stock is listed and traded on The New York Stock Exchange. Our Class B Common Stock is not listed or traded on any exchange, but is convertible into Class A Common Stock at the option of its owner on a share-for-share basis.
As of March 26, 2003, there were 5,548 record holders of our Class A Common Stock and one record holder of our Class B Common Stock.
We have not paid any dividends on our common stock. We do not intend to pay dividends on our common stock in the foreseeable future.
Equity Compensation Plan Information
(1) 1,014,020 of these shares, which are available for issuance under the Martha Stewart Living Omnimedia, Inc. 1999 Stock Incentive Plan, may be issued in connection with performance unit awards, restricted stock awards and other forms of equity based compensation, in addition to stock options and stock appreciation rights.
Item 6.
Item 6. Selected Financial Data
The information required by this Item is set forth on page of this Report.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information required by this Item is set forth on pages through of this Report.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
None
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is set forth on pages through of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is set forth in our Proxy Statement for our annual meeting of stockholders scheduled to be held on June 3, 2003 (our “Proxy Statement”) under the captions “ELECTION OF DIRECTORS - Information Concerning Nominees,” “INFORMATION CONCERNING EXECUTIVE OFFICERS,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and is hereby incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information required by this Item is set forth in our Proxy Statement under the captions “COMPENSATION OF OUTSIDE DIRECTORS,” “EXECUTIVE COMPENSATION,” “EMPLOYMENT AND SEVERANCE ARRANGEMENTS,” “EQUITY COMPENSATION PLANS,” and “COMPENSATION AND CORPORATE GOVERNANCE COMMITTEE REPORT ON EXECUTIVE COMPENSATION” and is hereby incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in our Proxy Statement under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and is hereby incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in our Proxy Statement under the caption “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” and is hereby incorporated herein by reference.
Item 14.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. See page of this Report.
2. See page of this Report.
3.
 Indicates management contracts and compensatory plans.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
/s/ Martha Stewart
Martha Stewart
Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ Sharon Patrick
Sharon Patrick
President, Chief Operating Officer and Director
/s/ James Follo
James Follo
Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Arthur C. Martinez
Arthur C. Martinez
Director
/s/ Darla D. Moore
Darla D. Moore
Director
/s/ Naomi O. Seligman
Naomi O. Seligman
Director
/s/ Jeffrey W. Ubben
Jeffrey W. Ubben
Director
Each of the above signatures is affixed as of March 28, 2003.
Certifications
I, Martha Stewart, certify that:
1.
I have reviewed this annual report on Form 10-K of Martha Stewart Living Omnimedia, Inc;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.)
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.)
Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a.)
All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Martha Stewart
Chairman and Chief Executive Officer
I, James Follo, certify that:
1.
I have reviewed this annual report on Form 10-K of Martha Stewart Living Omnimedia, Inc;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.)
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c.)
Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a.)
All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b.)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ James Follo
Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND OTHER
FINANCIAL INFORMATION
Selected Financial Data
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
Consolidated Financial Statements:
Report of Independent Public Auditors
Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
Financial Statements Schedule:
II - Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001, and 2000
SELECTED FINANCIAL DATA
Five Years Ended December 31, 2002
(in thousands except per share data)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance. For example, Martha Stewart Weddings is published four times annually: one issue in each of the second and third quarters and two issues in the fourth quarter. Additionally, the publication schedule of special interest publications can vary from quarter to quarter. Revenue and income from operations for the Television segment have historically tended to be higher in the fourth quarter due primarily to the broadcast of a holiday prime-time television special, however, no such special aired in 2002. Internet/Direct Commerce revenues have tended to be higher in the fourth quarter due to increased catalog circulation and consumer spending during that period. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies, the following may involve the highest degree of judgment and complexity.
Revenue Recognition
Revenues are recognized when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Newsstand revenues in our Publishing segment and product sales in our Internet/Direct Commerce segment are recognized based upon assumptions with respect to future returns. The Company bases its estimates on historical experience and current market conditions. Reserves are adjusted regularly based upon actual results. We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Receivables for royalties in our merchandising business are accrued on a monthly basis and payment is made by our strategic partners on a quarterly basis. With respect to Kmart, following Kmart’s assumption of our contract in March 2002, we continue to expect to be paid on a quarterly schedule and have made no provision for any deviation as a result of Kmart’s bankruptcy proceedings.
Inventory
Inventory, consisting of paper and product merchandise, is stated at the lower of cost or market. The Company has recorded a reserve for excess and obsolete product inventory, reducing inventory from cost to estimated market value, based upon historical experience and current market conditions. The reserve is adjusted regularly based upon actual results.
Television Production Costs
Television production costs are capitalized and amortized based upon estimated of future revenues to be received for the applicable television product. The Company bases its estimates on existing contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues are adjusted regularly based upon actual results and changes in market and other conditions.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Long Lived Assets
We review the carrying values of our long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge.
The Company has invested a total amount of approximately $16.3 million in the development of its website through December 31, 2002. In the fourth quarter of 2002, as a result of a plan to scale down certain operations within our Internet/Direct Commerce segment, the Company recorded an impairment charge of $6.1 million against the cost of the website.
TRENDS AND UNCERTAINTIES
The United States Attorney’s office and the Securities and Exchange Commission are investigating the sale of shares of stock owned in another company, ImClone Systems, by Martha Stewart, our Chairman and Chief Executive Officer, and certain related matters. Because our principal brand labels are closely associated with Ms. Stewart, we have seen, and expect to continue to see, negative impacts on our business as a result of the uncertainty surrounding these ongoing investigations and associated negative publicity. Although it is difficult to quantify with any precision, we believe that, to date, the uncertainty and publicity surrounding these investigations have contributed to the following trends and uncertainties in our business: a more challenging environment for the distribution of our Martha Stewart Living television program for the season beginning in September 2003; a decline in the circulation results of our magazines; a decrease in advertising revenues and a general uncertainty in our advertising sales prospects; a softness in response rates in our direct commerce business; slower than expected distribution of our new Martha Stewart Signature floorcovering line; and a slowdown in new business development and new partner initiatives. While we believe that a positive resolution to these investigations would have a positive impact on our business, and a negative resolution would have a negative impact on our business, we are unable to predict with any certainty the extent to which our business would be impacted in either event. In addition, the Company is incurring additional expenses, principally relating to corporate communications and corporate professional fees, associated with the ongoing investigations and related litigation.
Our Merchandising segment is highly dependent on Kmart Corporation, which is currently involved in a reorganization proceeding under Chapter 11 of the United States Bankruptcy Code. To the extent that Kmart is unable to emerge from bankruptcy, we would need to secure alternative domestic distribution for our Martha Stewart Everyday product lines. If such distribution of our products were not secured on comparable terms it would have a material adverse effect on our results of operations.
In March 2003, we commenced a restructuring of our Internet/Direct Commerce segment. We expect to see this restructuring result in decreased revenues, costs and operating losses from this segment beginning in the second half of 2003, although we cannot predict with certainty the extent and timing of these decreases.
REPORT OF INDEPENDENT PUBLIC AUDITORS
To the Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.
We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. The consolidated statements of income and cash flows and the financial statement schedule of Martha Stewart Living Omnimedia, Inc. for the year ended December 31, 2000 were audited by other auditors who have ceased operations and whose report dated February 2, 2001 expressed an unqualified opinion on those financial statements before the restatement adjustments and transitional disclosures described in Note 2.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Martha Stewart Living Omnimedia, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed above, the consolidated statements of income and cash flows of Martha Stewart Living Omnimedia, Inc. for the year ended December 31, 2000, were audited by other auditors who have ceased operations. As described in Note 2, the Company restated the prior period income statement classification to conform with Emerging Issues Task Force Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” We audited the adjustments described in Note 2 that were applied to restate the 2000 statement of income. In our opinion, such adjustments are appropriate and have been properly applied. Additionally, as described in Note 2, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards Statement No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002. In our opinion, the disclosures for 2000 in Note 2 with respect to such transitional disclosures are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2000 consolidated income statement and cash flows of the Company other than with respect to such adjustments and transitional disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2000 statements of income and cash flows taken as a whole.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, Martha Stewart Living Omnimedia, Inc and Subsidiaries adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.
ERNST & YOUNG LLP
New York, New York
March 28, 2003
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the filing of our Annual Report on Form 10-K for the year ended December 31, 2000. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. The financial statements and schedule for the year ended December 31, 2000, referred to in the report below, can be found on pages through in this Annual Report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.
We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedule referred to below included on pages through, are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Martha Stewart Living Omnimedia, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
February 2, 2001
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2002, 2001, and 2000
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
1 THE COMPANY
Martha Stewart Living Omnimedia, Inc. (together with its wholly owned subsidiaries, the “Company”) is a leading creator of original “how to” content and related products for homemakers and other consumers. The Company’s business segments are Publishing, Television, Merchandising and Internet/ Direct Commerce. The Publishing segment primarily consists of the Company’s magazine operations, and also its book, radio and newspaper operations. The Television segment consists of the Company’s television production operations that produce television programming that airs in syndication in the United States and on cable in the United States, Canada, Japan (and certain other international markets), as well as occasional prime-time specials. The Merchandising segment consists of the Company’s operations related to the design of, and licensing of certain of the Company’s trademarks in connection with, merchandise and related promotional and packaging materials that are distributed by the Company’s retail and manufacturing partners in exchange for royalty income. The Internet/Direct Commerce segment comprises the Company’s operations relating to Martha Stewart - The Catalog For Living (formerly known as Martha by Mail) and the website marthastewart.com.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash equivalents that mature within three months of the date of acquisition.
Short-term Investments
Short-term investments include investments that have maturity dates in excess of three months on the date of acquisition. Unrealized gains/losses were insignificant.
Revenue Recognition
Magazine advertising revenues are recorded upon release of magazines for sale to consumers and are stated net of agency commissions and cash and sales discounts. Allowances for estimated bad debts are provided based upon historical experience.
A proportionate share of magazine subscription revenue is recognized as magazines are shipped to subscribers.
Deferred subscription income results from advance payments for subscriptions received from subscribers and is amortized on a straight-line basis over the life of the subscription as issues are delivered.
Newsstand revenues are recognized based on the on-sale dates of magazines and are recorded based upon estimates of sales. Estimated returns are recorded based upon historical experience.
Television advertising revenues are recognized when the related commercial is aired and is recorded net of estimated reserves for television audience underdelivery. Royalties are recorded as earned in accordance with the specific terms of each agreement.
Product revenues are recognized upon shipment of goods to customers. Shipping and handling expenses are included in cost of goods sold. Estimated returns are recorded based on historical experience.
Television Production Costs
Television production costs are capitalized and amortized based on revenue earned as a percentage of total projected revenue for the applicable television product. If a total net loss is projected for a particular product, television production costs are written down to net realizable value.
Intangible Assets
Commencing January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.” Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to annual assessment for impairment by applying a fair-value based test. The Company completed the initial impairment test in the second quarter of 2002 which resulted in a charge of $5,039 ($3,137 net of income taxes) to reduce the carrying value of its goodwill related to The Wedding List. The remaining intangible assets of $44,257 represent gross carrying value of $59,009 of goodwill of the Publishing segment less related accumulated amortization of $14,752. Therefore, the Company anticipates no further goodwill amortization in the foreseeable future. The Company has performed its annual impairment review during the fourth quarter resulting in no further adjustment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
The 2001 and 2000 results on a historical basis do not reflect the provisions of SFAS No. 142. Had the Company adopted SFAS No. 142 on January 1, 2001 and 2000, the historical net income and basic and diluted net income per common share would have changed to the adjusted amounts indicated below for the twelve months ended:
Inventories
Inventories consisting of paper and product merchandise are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
Advertising Costs
Advertising costs, consisting primarily of direct-response advertising, are expensed in the year incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
Restatement Adjustments
The prior period presentation has been restated to conform with Emergency Issues Task Force Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” These rules require that certain expenditures of the Publishing segment related to newsstand product placement historically presented as expenses be reclassified and netted against revenue. Accordingly, Publishing revenue has been reduced by $1,100 in 2002 and $1,500 in 2001. In addition, the prior year periods have been restated to reflect as discontinued operations the result of the operations of The Wedding List discussed in Note 12.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that would occur from the exercise of common stock options outstanding. For the years ended December 31, 2002, 2001, and 2000 the dilutive effect of stock options included in the determination of diluted weighted average common shares outstanding were approximately 375,000, 401,000, and 946,000 respectively. The antidilutive options excluded from this amount totaled 4,409,000, 5,014,000, and 571,000 with a weighted average exercise price of $13.58, $19.05, and $25.91 in 2002, 2001, and 2000, respectively.
Options granted under the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan are not included as they are not dilutive (see Note 8).
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lease term or, if shorter, the estimated useful lives of the related assets. The useful lives are as follows:
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company’s consolidated financial position or results of operations.
Stock Compensation
As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” the Company has elected to continue accounting for employee stock compensation under the APB 25 rules, but disclose pro forma results using SFAS No. 123’s alternative accounting treatment, which calculates the total compensation expense to be recognized as the fair value of the award at the date of grant. The fair value of options granted were estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options over the relevant vesting periods. The pro forma effect on net income for the years ended December 31, 2002, 2001 and 2000, were as follows:
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. The amount of legal obligation should be capitalized as part of the related long-lived asset when the cost is recognized and allocated to expense over the useful life of the asset. We do not believe that the adoption of SFAS No. 143 will have a material impact on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability associated with an exit or disposal activity be measured at fair value and recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Our adoption of SFAS No. 146 had no impact on our financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure - An Amendment of FASB Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in annual financial statements for the years ending after December 15, 2002 and interim financial statements for periods beginning after December 15, 2002.
3 ACCOUNTS RECEIVABLE, NET
The components of accounts receivable at December 31, 2002 and 2001 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
4 INVENTORIES
The components of inventories at December 31, 2002 and 2001 are as follows:
5 PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment at December 31, 2002 and 2001 are as follows:
Depreciation expense was $11,631, $9,179, and $6,140, for the years ended December 31, 2002, 2001 and 2000, respectively. Included in property, plant and equipment are assets that were acquired under capital leases in the amount of $7,781, with accumulated amortization of $7,537 and $5,793 at December 31, 2002 and 2001, respectively. Depreciation expense associated with assets under capital leases is included in total depreciation expense.
6 LINE OF CREDIT
The Company has an agreement with Bank of America, N.A. for a line of credit in the amount of $10,000 with an interest rate equal to LIBOR plus 1% per annum and an expiration date of June 30, 2003. The agreement also requires the Company to pay a commitment fee equal to one-quarter of 1% per annum of the unused available borrowings. As of December 31, 2002, the Company did not have any amounts outstanding under this agreement.
7 STOCKHOLDERS’ EQUITY
Common Stock
The Company has two classes of common stock outstanding. The Class B common stock is identical in all respects to Class A common stock, except with respect to voting and conversion rights. Each share of Class B common stock entitles its holder to ten votes and is convertible on a one-for-one basis to Class A stock at the option of the holder and automatically upon most transfers.
Stock Repurchases
In September 2001, the Board of Directors authorized the repurchase of up to $5,000 of the Company’s outstanding common stock. Pursuant to the program, purchases of stock may be made from time to time, in the open market, subject to market conditions and at prevailing market prices. During the year ended December 31, 2001, the Company purchased approximately 59,000 shares of its Class A common stock at a cost of $775. No such purchases were made during 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
8 EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company established a 401(k) retirement plan effective July 1, 1997, available to substantially all employees. An employee can contribute any percentage of compensation to the plan, up to a maximum of 15% or the maximum allowable contribution by the IRS ($11.0 in 2002, $10.5 in 2001 and 2000), whichever is less. The Company matches 50% of the first 6% of compensation contributed. Employees vest ratably in employer matching contributions over a period of four years of service. The employer matching contributions totaled approximately $956, $927 and $779 for the years ended December 31, 2002, 2001 and 2000, respectively.
In December 2002, the Company terminated its defined benefit pension plan and distributed to all participants their accrued benefits at that time. The termination of the pension plan resulted in a gain of approximately $1,221, which is included as an offset to general and administrative expenses in the statement of operations for the year ended December 31, 2002.
The Company does not sponsor any post retirement and/or post employment benefit plan.
Stock Options
The Company established the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (the “1997 Option Plan”) in November 1997. The Company has an agreement with Martha Stewart whereby she will periodically return to the Company shares of Class B common stock owned by her or her affiliates in amounts corresponding on a net treasury basis to the number of options exercised under the 1997 Option Plan during the relevant period. Accordingly, options outstanding under this plan are not dilutive. During 2000, 238,000 shares of Class B common stock were returned under this agreement. In March 2003, an additional 236,000 shares were returned under the agreement, representing shares due the Company as of December 31, 2002. All options granted under the 1997 Option Plan are fully vested as of December 31, 2002. The status of this stock option plan is summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
The Company has additional stock option plans that provide for the granting of stock options and issuance of restricted stock to employees and non-employee members of the Company’s Board of Directors. The options granted under these plans are to purchase Class A common stock at the fair market value at the date of grant. Employee stock options vest ratably on each of the first four anniversaries of the grant date. Non-employee director options vest on the first anniversary of the date of the grant of such option. The term of the options granted under these plans is ten years. The status of these stock option plans is summarized as follows:
The following table summarizes information about the stock options outstanding under the Company’s option plans as of December 31, 2002:
In 2002, the Company issued 185,000 shares of restricted stock to certain employees. The stock vests on the second anniversary date of the grant provided that the employee is still employed by the Company. The aggregate market value of the restricted stock at the date of issuance of $1,254 has been recorded as unamortized restricted stock which is a separate component of shareholders’ equity and is being amortized over the two year vesting period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
9 INCOME TAXES
The provision for income taxes consists of the following for the years ended December 31, 2002, 2001, and 2000:
A reconciliation from the federal income tax provision from continuing operations at the statutory rate to the effective rate for the year ended December 31, 2002 and 2001 is as follows:
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2002 and 2001 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
10 RELATED PARTY TRANSACTIONS
Time Publishing Ventures, Inc. (together with its affiliates, “Time”) owns approximately 5% of the outstanding Class A common stock of the Company. The Company has entered into a services agreement with Time, whereby Time provides certain administrative, purchasing, editing and sales services to the Company, including the purchase of paper. The cost of these services amounted to approximately $31,484, $32,042 and $34,749 in 2002, 2001 and 2000, respectively, including $30,511, $31,331 and $34,149 of paper purchases, respectively.
The Company also entered into agreements with Time, whereby Time provides fulfillment services for catalog products and magazines. The fees for these services amounted to approximately $13,890, $21,753 and $21,462 in 2002, 2001 and 2000, respectively. In February 2002, the Company stopped using Time to provide such services for catalog products.
The Company also entered into an agreement with Time whereby Time provides newsstand distribution services for the Company’s magazines. The fees for these services amounted to approximately $2,386, $2,338 and $2,091 in 2002, 2001 and 2000, respectively.
The aggregate amounts due to Time included in accounts payable and accrued liabilities were approximately $9,196 and $6,784 as of December 31, 2002 and 2001, respectively. Aggregate amount due from Time included in accounts receivable, net, was $631 and $1,335 million as of December 31, 2002 and 2001 respectively.
Oxmoor House Inc., an affiliate of Time, currently publishes the Martha Stewart Living series of books. The Company has a contract with Oxmoor House whereby the Company and Oxmoor House split net profits from the sale of books. Income recognized under these agreements was approximately $3,206, $2,296 and $2,327, in 2002, 2001 and 2000, respectively.
The Company has entered into a location rental agreement with Martha Stewart, whereby the Company uses various properties owned by Martha Stewart. The fees for use of these properties amounted to $2,000 in each of 2002, 2001, and 2000.
During 2002, 2001 and 2000 the Company paid $452, $255 and $216, respectively, to MS Real Estate Management Company, a company owned by Martha Stewart, for various expenses incurred on the Company’s behalf in connection with Martha Stewart’s properties. Additionally, Martha Stewart reimbursed the Company $150,000 for certain services provided by the Company’s personnel, primarily in connection with MS Real Estate Management Company.
In 2001, the Company entered into a split dollar life insurance arrangement with Martha Stewart and a partnership controlled by her (the “Partnership”) pursuant to which the Company agreed to pay a significant portion of the premiums on a whole life insurance policy insuring Ms. Stewart and owned by and benefiting the Partnership. The Company will be repaid the cumulative premium payments it has made upon the earlier of Ms. Stewart’s death or the voluntary termination of the arrangement by Ms. Stewart out of the policies’ existing surrender value at the time of repayment. If the arrangement lasts more than sixteen years, the Company will no longer be obligated to make premium payments and will receive interest on the outstanding amount paid by the Company as of such time. As of December 31, 2002, the aggregate amount paid by the Company under this arrangement is $2,238. In 2003, the arrangement was amended such that the Company would not be obligated to make further premium payments unless recent legislation is clarified to permit such payments.
From time to time, the Company uses the service of a law firm of which Martha Stewart’s son-in-law is a partner. The Company paid an aggregate of approximately $75, $16 and $72 in fees and expenses in respect of such services in 2002, 2001, and 2000, respectively.
In 2002, the Company paid approximately $62 to a design firm for design services in connection with the Company’s direct commerce business. The husband of Gael Towey, an executive officer of the Company, is a partner in the firm.
11 COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and equipment for terms extending through 2010 under operating lease agreements. Total rent expense charged to operations for all such leases was approximately $8,192, $8,390, and $8,927 for the years ended December 31, 2002, 2001, and 2000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
The following is a schedule of future minimum payments under capitalized and operating leases at December 31, 2002:
The Company has outstanding letters of credit for $2,326 as security for certain leases as of December 31, 2002.
On February 3, 2003, the Company was named as a defendant in a Consolidated and Amended Class Action Complaint (the “Consolidated Complaint”), filed in the United States District Court for the Southern District of New York, by plaintiffs purporting to represent a class of persons who purchased common stock in the Company between January 8, 2002 and October 2, 2002. In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES). The Consolidated Complaint also names Martha Stewart and seven of the Company’s other officers (Gregory R. Blatt, Dora Braschi Cardinale, Sharon L. Patrick, Margaret Roach, Suzanne Sobel, Lauren Podlach Stanich, and Gael Towey) (collectively, the “Individual Defendants”) as defendants. The action consolidates seven class actions previously filed in the Southern District of New York: Semon v. Martha Stewart Living Omnimedia, Inc. (filed August 6, 2002), Rosen v. Martha Stewart Living Omnimedia, Inc. (filed August 21, 2002), MacKinnon v. Martha Stewart Living Omnimedia, Inc. (filed August 30, 2002), Crnkovich v. Martha Stewart Living Omnimedia, Inc. (filed September 4, 2002), Rahilly v. Martha Stewart Living Omnimedia, Inc. (filed September 6, 2002), Steele v. Martha Stewart Living Omnimedia, Inc. (filed September 13, 2002), and Hackbarth v. Martha Stewart Living Omnimedia, Inc. ( filed September 18, 2002).
The claims in the Consolidated Complaint arise out of Ms. Stewart’s sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The plaintiffs assert violations of Sections 10(b) (and rules promulgated thereunder), 20(a) and 20A of the Securities Exchange Act of 1934. The plaintiffs allege that MSO, Ms. Stewart and the Individual Defendants made statements about Ms. Stewart’s sale that were materially false and misleading. The plaintiffs allege that as a result of these false and misleading statements, the market price of the Company’s stock was inflated during the putative class periods and dropped after the alleged falsity of the statements became public. The plaintiffs further allege that the Individual Defendants traded MSO stock while in possession of material non-public information. The Consolidated Complaint seeks certification as a class action, damages, attorney’s fees and costs, and further relief as determined by the court.
The Company has also been named as a nominal defendant in four derivative actions, all of which name Ms. Stewart as a defendant: In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation, filed on December 19, 2002 in New York State Supreme Court; Beam v. Stewart, initially filed on August 15, 2002 and amended on September 6, 2002, in Delaware Chancery Court; Acosta v. Stewart, filed on October 10, 2002 in the U.S. District Court for the Southern District of New York; and Richards v. Stewart, filed on November 1, 2002 in Connecticut Superior Court. The Company’s present directors and former director John Doerr are also named as defendants in Beam. The Company’s present directors, Mr. Doerr, five of the Company’s other officers (Mr. Blatt, Ms. Cardinale, Ms. Roach, Ms. Sobel, and Ms. Towey), and Kleiner Perkins Caufield & Byers are also named as defendants in Richards. In re Martha Stewart Living Omnimedia, Inc. Shareholder Derivative Litigation consolidates three previous derivative complaints filed in New York State Supreme Court and Delaware Chancery Court: Beck v. Stewart, filed on August 13, 2002 in New York State Supreme Court, Kramer v. Stewart, filed on August 20, 2002 in New York State Supreme Court and Alexis v. Stewart, filed on October 3, 2002 in Delaware Chancery Court.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except share and per share data)
All four derivative actions allege that Ms. Stewart breached her fiduciary duties to the Company by engaging in insider trading in ImClone stock and making false and misleading statements about such trading. The plaintiffs allege that these actions have diminished Ms. Stewart’s reputation and injured the Company through lost revenues, loss of reputation and good will, decreased stock price, and increased costs. The plaintiff in Beam further alleges that (i) Ms. Stewart’s actions have jeopardized the Company’s intellectual property; (ii) the directors breached their fiduciary duties by failing to monitor Ms. Stewart’s affairs to ensure she did not harm the Company; (iii) Ms. Stewart and the other directors breached their fiduciary duties by failing to address the impropriety of the Company’s payment of split dollar insurance premiums; and (iv) Ms. Stewart and Mr. Doerr usurped corporate opportunities by selling personally-owned Company stock to an investment firm without first presenting the Company with the opportunity to sell its stock to the firm. The plaintiffs in the Shareholder Derivative Litigation also allege that Ms. Stewart breached the terms of her employment agreement with the Company. The plaintiff in Richards further alleges (i) intentional breach of fiduciary duty by, among other things, acting in reckless disregard of, and failing to prevent, Ms. Stewart’s insider trading in ImClone stock, violating federal securities laws by selling Company stock while in possession of material, non-public information, misuse of corporate information, and gross mismanagement of the Company; (ii) negligent breach of fiduciary duty; (iii) abuse of control; (iv) constructive fraud; (v) gross mismanagement; and (vi) waste.
The derivative actions seek damages in favor of the Company, attorneys’ fees and costs, and further relief as determined by the court. Certain of the complaints also seek declaratory relief. The plaintiffs in the Shareholder Derivative Litigation further seek the creation of a committee or other administrative mechanism to address the alleged “corporate governance” issues raised in the complaints and to protect the Company’s “cornerstone assets.” The plaintiff in Richards further seeks injunctive relief in the form of attachment or other restriction of the proceeds of defendants’ trading activities or other assets.
The Company has moved to dismiss (i) the Consolidated Complaint, (ii) the Beam complaint, and (iii) the Shareholder Derivative Litigation complaint. The Richards action has been stayed pending resolution of the Beam motion to dismiss.
While still in their early stages, we believe the Company has substantial defenses to these actions. The Company is unable to predict a range of potential losses, if any, at this time.
12 DISCONTINUED OPERATIONS
In March 2001, the Company paid cash of approximately $3.9 million and assumed certain liabilities to acquire the assets of The Wedding List, a wedding registry and gift business. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations of the acquired business have been included in the Company’s results of operations commencing upon the acquisition date. The acquisition resulted in goodwill of approximately $5.3 million, which was being amortized over twenty years. The Wedding List was reported as a component of the Internet/Direct Commerce segment.
In June 2002, the Company decided to exit The Wedding List business. The 2001 financial statements have been restated accordingly. The loss from exiting these operations resulted in charges related to the write-down of property and equipment and the accrual of future lease commitments, net of anticipated sublease rental income of $4,979, of approximately $1,277. These lease payments and offsetting receipts are payable through September 2015.
These charges have been included with the losses from operations during the current year and are reflected as a loss from the discontinued operations in the income statements.
Revenue and loss from the discontinued operations for the years ended December 31, 2002 and 2001 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
The summarized balance sheet of the discontinued operations were as follows as of December 31, 2002 and 2001 were as follows:
13 RESTRUCTURING CHARGE
In 2002, the Company recorded a restructuring charge of $7,692, which includes an asset impairment charge of $6,087 related to the Company’s website, and a $1,607 charge to increase the Company’s inventory valuation allowances, which includes a $300 accrual for losses on firm inventory purchase commitments. The website was written down to the fair value of its hardware. These charges were taken in contemplation of a restructuring plan which will be implemented beginning in the first quarter of 2003 to downsize the operations of the Internet/Direct Commerce business segment in order to achieve improved operating results.
14 OTHER INFORMATION
The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses. The carrying amount of these accounts approximates fair value.
The Company’s revenues from foreign sources were $11,778, $9,795 and $8,322 in 2002, 2001 and 2000, respectively.
During the year ended 2002, 2001, and 2000, the revenues from Kmart Corporation were approximately 17%, 14%, and 7% respectively of the Company’s total revenues. As of December 31, 2002 and 2001, accounts receivable from Kmart were approximately $7,769 and $10,700, respectively.
Advertising expense was $15,215, $15,415, and $16,276 for the years ended December 31, 2002, 2001, and 2000, respectively.
Interest paid was $180, $390, and $598 for the years ended December 31, 2002, 2001, and 2000, respectively.
Income taxes paid were $4,665, $17,613, and $10,372 for the years ended December 31, 2002, 2001, and 2000 respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
15 INDUSTRY SEGMENTS
The Company’s industry segments are discussed in Note 1. Segment information for the years ended December 31, 2002, 2001, and 2000 was as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARTHA STEWART LIVING OMNIMEDIA, INC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
EXHIBIT INDEX
II-1
 Indicates management contracts and compensatory plans.
II-2