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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO_____
COMMISSION FILE NUMBER 001-15395
MARTHA STEWART LIVING OMNIMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2187059
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11 WEST 42ND STREET
NEW YORK, NEW YORK 10036
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(212) 827-8000
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(B) of the Act:
(Title of Class)
Class A Common Stock, Par Value $0.01 Per Share
Securities Registered Pursuant to Section 12(G) of the Act: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K OR ANY AMENDMENT TO THIS FORM 10-K [X].
The Aggregate Market Value of Voting Stock Held by Non-Affiliates of the
Registrant as of March 23, 2000:
$313,429,958
Number of Shares Outstanding As of March 23, 2000:
15,491,715 shares of Class A Common Stock
34,126,831 shares of Class B Common Stock
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for Its Annual Meeting of
Stockholders Presently Scheduled for May 11, 2000 Are Incorporated
by Reference into Part III of this Report.
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TABLE OF CONTENTS
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Item 1. Business................................................................................................. 1
Item 2. Properties............................................................................................... 10
Item 3. Legal Proceedings........................................................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 11
Item 5. Markets for Registrant's Common Equity and Related Stockholder Matters................................... 11
Item 6. Selected Financial Data.................................................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................................ 11
Item 8. Financial Statements and Supplementary Data.............................................................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................... 12
Item 10. Directors and Executive Officers of the Registrant....................................................... 12
Item 11. Executive Compensation................................................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 12
Item 13. Certain Relationships and Related Transactions........................................................... 12
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 12
Signature Page..................................................................................................... 15
Index to Consolidated Financial Statements,
Financial Statement Schedules and Other Financial Information...................................................... F-1
Selected Financial Data............................................................................................ F-2
Management's Discussion and Analysis
of Financial Condition and Results of Operations................................................................... F-3
Report of Independent Public Accountants........................................................................... F-8
Consolidated Balance Sheets at December 31, 1999 and 1998.......................................................... F-9
Consolidated Income Statements for each
of the three years ended December 31, 1999......................................................................... F-14
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Consolidated Statements of Shareholders'
Equity for each of the three years ended December 31, 1999......................................................... F-11
Consolidated Statements of Cash Flows
for each of the three years ended December 31, 1999................................................................ F-12
Notes to Consolidated Financial Statements......................................................................... F-13
Financial Statement Schedule: II-Valuation and Qualifying Accounts for each of
the three years ended December 31, 1999............................................................................ F-25
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In this Annual Report on Form 10-K, the terms "we," "us," "our," "MSO"
and the "Company" refer to Martha Stewart Living Omnimedia, Inc. and, unless the
context requires otherwise, Martha Stewart Living Omnimedia LLC("MSLO LLC"), the
legal entity that prior to October 22, 1999, operated the businesses we now
operate.
We have included in this Annual Report certain "forward looking
statements" as that term is defined in The Private Securities Litigation Reform
Act of 1995. These forward-looking statements are not historical facts but
instead represent only our belief regarding future events, many of which, by
their nature, are inherently uncertain and outside of our control. It is
possible that our actual results may differ, possibly materially, from the
anticipated results indicated in these forward-looking statements. These
statements can be identified by terminology such as "may," "will," "should,"
"could," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. Our actual results may differ materially from those projected in
these statements, and factors that could cause such differences include
downturns in national and/or local economies; a softening of the domestic
advertising market; increased consolidation among major advertisers or other
events depressing the level of advertising spending; changes in consumer
reading, purchasing and/or television viewing patterns; unanticipated increases
in paper, postage or printing costs; technological developments affecting
products or methods of distribution such as the Internet or e-commerce; and
changes in government regulations affecting our industries.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are an integrated content and commerce company that creates "how-to"
content and related merchandise for homemakers and other consumers. Our products
bear 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 span seven core areas:
- Home -- decorating, restoring, renovating and collecting items for
use and display in the home
- Cooking and Entertaining -- cooking, recipes, indoor and outdoor
entertaining
- Gardening -- gardening, planting, landscape design and maintenance
- Crafts -- craft projects and similar family activities
- Holidays -- celebrating special occasions through food, gifts,
decorating and entertaining ideas
- Keeping -- household maintenance, organization and planning, such as
homekeeping, petkeeping, recordkeeping and clotheskeeping
- Weddings -- all aspects of planning and celebrating a wedding
Our company comprises four business segments -- Publishing, Television,
Merchandising and Internet/Direct Commerce --through which content and
merchandise relating to our seven core content areas are created and distributed
to consumers. Many of our creative and business personnel contribute
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across all four segments. This allows us to form creative teams dedicated to a
particular content area that can provide their expertise across all our business
segments, creating brand consistency and efficiencies of scale as the same
research and ideas can be exploited in magazines, television, books, merchandise
and on the Internet for only incremental production costs. Additionally, this
allows groups like our advertising sales and marketing staff to sell and
cross-promote across all our media properties, permitting advertisers to
associate with an entire brand rather than a particular product. As of March 23,
2000, we had approximately 430 employees and substantially all of our revenues
were derived from operations in 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 December 1996, Ms.
Stewart contributed all her businesses which were not conducted through TPV to
MSLO LLC, a newly formed entity, and certain minority investors, including
Sharon Patrick, our president and COO, contributed cash to MSLO LLC, each in
exchange for MSLO LLC equity. In February 1997, TPV contributed all of its
assets primarily relating to its Martha Stewart-related businesses to MSLO LLC
in exchange for a $30 million note (the "TPV Note"), a 6.27% equity interest in
MSLO LLC, and certain contractual management and other rights incident to that
interest (the "TPV Rights"). Additionally, affiliates of TPV entered into
various agreements with MSLO LLC pursuant to which such affiliates agreed to
perform newsstand distribution services for our magazines, fulfillment services
for our magazines and Martha by Mail business, publish certain books containing
content originally featured in our magazines, and provide various corporate
services to us.
DEVELOPMENTS
On March 30, 1999, we satisfied all our obligations under the TPV note
with cash on hand and borrowings under a term loan. In July 1999, we sold a five
percent equity interest in MSO, together with a warrant, to an affiliate of
Kleiner Perkins Caufield & Byers ("KPCB") in exchange for $25 million. We used a
portion of the proceeds from this transaction to repay our term loan in full.
Under the terms of the warrant, KPCB could, upon a payment to us of an
additional $21 million, receive 15% of any publicly issued stock that is
intended to primarily reflect the performance of our Internet/Direct Commerce
segment or 15% of the consideration we receive from a business combination
relating to, or a sale of, the businesses comprising our Internet/Direct
Commerce segment.
On October 22, 1999, MSLO LLC merged into MSO, then a wholly-owned
subsidiary of MSLO LLC. In the merger, Ms. Stewart received 34,126,831 shares of
our Class B Common Stock, and MSLO LLC's other members received, in the
aggregate, 6,176,561 shares of our Class A Common Stock. Each share of Class A
Common Stock entitles its holder to one vote and each share of Class B Common
Stock entitles its holder to ten votes. Each share of Class B Common Stock is
convertible at the owner's option one-for-one into shares of Class A Common
Stock. 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 commissions, of
$138.6 million.
On October 19, 1999, we offered to call TPV's entire equity interest in
us pursuant to the terms of MSLO LLC's operating agreement for approximately $42
million. Under the operating agreement, upon our purchase of TPV's interest or
TPV's rejection of our offer, the TPV Rights would terminate. On February 18,
2000, we entered into an agreement pursuant to which we agreed to purchase
1,366,000
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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.
Upon our entering into this agreement, the TPV Rights terminated. As part of
this agreement, 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. Our purchase of TPV's 1,366,000 shares of
Class A Common Stock is scheduled to occur on March 31, 2000.
BUSINESS SEGMENTS
Our four business segments are described below. Additional financial
information relating to these segments may be found in Note 13 to our
Consolidated Financial Statements on page F-21 of this Report.
PUBLISHING
Our Publishing segment currently consists of two regularly published
magazines, Martha Stewart Living and Martha Stewart Weddings, special interest
publications, books, and the syndicated askMartha radio program and newspaper
column.
Magazines
We regularly publish two magazines, Martha Stewart Living and Martha
Stewart Weddings. Martha Stewart Living appeals primarily to the
college-educated woman between the ages of 25 and 54 who owns her principal
residence, and Martha Stewart Weddings appeals to a younger but similarly
well-educated demographic. We also publish periodic special interest
publications. Advertising and circulation revenues represent approximately 60%
and 40%, respectively, of our magazine revenues.
Martha Stewart Living. Martha Stewart Living, our flagship magazine, is
the foundation of our publishing business. Launched in 1991 as a quarterly
publication with a circulation of 250,000, we now publish the magazine ten times
per year and, since the February 1998 issue, guarantee to advertisers a minimum
circulation of 2.1 million. In the event actual circulation for an issue were to
fall below the guaranteed circulation, advertisers in that issue would be
entitled to a credit for the proportionate share of the circulation shortfall.
However, since the launch of the magazine, no shortfall in guaranteed
circulation has occurred. Advertising pages, as reported to Publisher's
Information Bureau, were 1,557 pages in 1999.
Martha Stewart Living seeks to offer its readers reference-quality and
original how-to information for the homemaker and other consumers in a unique
upscale editorial and aesthetic environment. Martha Stewart Living has won
numerous prestigious industry awards. While providing quality editorial content
requires significant investment, these costs are supported by premium
subscription rates and cover prices for the magazine and premium advertising
rates from advertisers that seek association with our brands and the ability to
target our audience. The Martha Stewart Living subscriber lists, as well as our
catalog and other mailing lists, are important assets, permitting us to target
our desired audience with various cross-selling and promotional activities, such
as upcoming book releases, new product announcements and promotional appearances
by Martha Stewart and our other creative and editorial professionals.
Revenues generated by Martha Stewart Living constituted a significant
majority of the segment's 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, and had a
newsstand distribution of approximately 650,000 per issue. Martha Stewart
Weddings targets the upscale bride. Martha Stewart Weddings has the same
fundamental
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goal as Martha Stewart Living -- to provide its readers with editorial content
of the greatest informational and aesthetic quality. Additionally, Martha
Stewart Weddings serves as an important vehicle for introducing young women to
our brands.
Special Interest Publications. We published our first special interest
publication, Clotheskeeping, in 1998, which had a distribution of approximately
750,000. Our 1999 special interest publication, Entertaining, had a distribution
of approximately 1 million copies. In March 2000, we published our third special
interest publication, Martha Stewart Baby, with a distribution of 1.3 million
copies. The purpose of these issues is to provide in-depth advice and ideas
around a particular topic contained in our core content areas, allowing us to
draw upon our brand name to further promote our expertise in our core content
areas. Additionally, we use this format to explore additional content areas, as
we did with Martha Stewart Baby.
Magazine Production, Distribution and Fulfillment. Commencing with our
February 2000 issue of Martha Stewart Living, we print our magazines under
long-term printing agreements with R. R. Donnelly. We currently purchase paper
through an agreement with Time Inc. The type of paper we use is generally 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 2001, and December 2004, issues. Our subscription fulfillment services
are provided by another affiliate of TPV under a long-term agreement that
expires in 2002, and is renewable for two additional three-year periods at our
option.
Books
We create two different types of books: Martha Stewart Living books and
Martha Stewart-authored books. We create three Martha Stewart Living books each
year. 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. We also produce Good Things, which is a continuity
program of periodic card mailings of individual crafts and homekeeping ideas
that our subscribers compile in loose-leaf binders. The publication of these
books and the continuity cards 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 also are distributed through
other retail channels by Clarkson N. Potter, a division of Random House, a
subsidiary of Bertelsmann AG, under various agreements.
Under an agreement with Clarkson N. Potter, we have created one
completely original Martha Stewart-authored book approximately every other year
and are obligated to write one more such book. Most recently, we released Martha
Stewart's Healthy Quick Cook in 1997 and Martha Stewart's Hors d'Oeuvres
Handbook, which was co-authored by our Cooking and Entertaining Editor, Susan
Spungen, in 1999. These books are generally sold by Clarkson N. Potter through
retail distribution channels.
Our current book library comprises 31 titles. Of these books, 17 are
Martha Stewart Living books, and 14 are Martha Stewart-authored books. We own
the copyrights to all these books.
The askMartha Newspaper Column and Radio Program
Newspaper Column. Our newspaper presence began in 1995 with askMartha,
a weekly syndicated newspaper column that answers specific questions relating to
our core content areas. The askMartha column is syndicated through The New York
Times Syndication Sales Corporation. Originally appearing in 57 U.S. newspapers,
the column now appears weekly in approximately 225 U.S. and Canadian newspapers.
The column generally appears as a one-quarter to one-half page layout that
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includes at least one high-quality photograph and provides a complementary forum
to our longer magazine pieces and television segments.
While the revenues generated by the askMartha column are small, the
newspapers carrying the column reach approximately 40 million readers each week,
and the column generally includes a reference to our internet site or to our
products or other publications, promoting product and brand awareness.
We launched a companion column, askMartha Weddings, in the summer of
1999, which appears in the wedding announcement section of newspapers.
Radio Program. In partnership with Westwood One Radio, Inc., we
launched the askMartha program of radio vignettes in September 1997. Each
90-second-long vignette, which is currently narrated by Martha Stewart, is
accompanied by a 60-second commercial or two 30-second commercials that we
jointly sell with Westwood One. These vignettes air five days a week, primarily
between the hours of 6 a.m. and 12 p.m., and follow a format similar to the
newspaper column, providing an answer to a specific question. Currently, the
askMartha program airs on approximately 285 radio stations across the United
States. These stations cover approximately 93% of the total U.S. market. The mix
of stations on which the askMartha program appears generally is intended to
reach as many consumers in our target demographic as possible. In view of the
variety of radio stations airing these vignettes, however, we believe we reach a
much broader demographic with the askMartha program than with many of our other
omnimedia outlets, leading to significant 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
advertising dollars in the women's service magazine category, including Ladies'
Home Journal, McCall's and Redbook. Martha Stewart Living competes for readers
and advertising with decorating, cooking and lifestyle magazines, such as
Architectural Digest, Metropolitan Home, Bon Appetit, Food & Wine, Gourmet,
Country Living, Better Homes & Gardens, Southern Living, and others. Martha
Stewart Weddings competes for readers and advertising dollars primarily in the
wedding service magazine category, which includes Bride's Magazine, Modern
Bride, Bridal Guide and Elegant Bride.
Seasonality
Martha Stewart Living magazine is published ten times annually: three
issues in each of the first and second quarters and two issues in each of the
third and fourth quarters. 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. In addition, the number of advertising pages per issue tends
to be higher in issues published in the fourth quarter. We also publish special
interest issues periodically, and the timing of such publications can lead to
quarterly fluctuations in the segment's results.
TELEVISION
Our television business segment currently produces Martha Stewart
Living, a nationally syndicated, daily, one-hour program with a half-hour
weekend "best of the week" version, from Martha's Kitchen, a daily half-hour
program on cable's Food Network, weekly spots on CBS' The Early Show, and
periodic prime-time specials.
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Martha Stewart Living
The Martha Stewart Living program is the cornerstone of our television
business segment and generally seeks to demonstrate our how-to ideas and to
motivate viewers to pursue those ideas in their own lives. The program is a
syndicated daytime program hosted by Martha Stewart consisting of several
segments, each of which ties into one of our seven core content areas.
Originally launched as a half-hour weekend program in 1993, the program was
expanded to also include a daily half-hour program in 1997 and, in a majority of
markets, a one-hour weekday program in 1999. King World syndicates the program
domestically under a distribution agreement that expires after the 2002-03
broadcast season. Your Channel Television, Inc. distributes the program in
Canada over its Life Network cable network. The program can currently be seen by
86% of all U.S. television households. The average U.S. rating of the weekday
program during calendar year 1999 was 1.76.
Under the terms of our agreement with King World, we develop, produce
and retain all copyrights in the programs. We are compensated partially in cash
and partially in airtime. We then sell that airtime to advertisers, subject to a
distribution fee payable to King World. The airtime we receive from the King
World agreement provides us with a substantial degree of control over our
advertising base and allows us to include television advertising in multimedia
sales packages offered to advertisers. Our Life Network agreement in Canada
compensates us with a license fee.
We produce Martha Stewart Living primarily at our state-of-the-art
studio facility in Westport, Connecticut, and segments are filmed both in the
studio and at various other locations.
The Early Show
Martha Stewart is a regular lifestyle correspondent for, and generally
appears each Tuesday on, CBS' The Early Show. In exchange for this appearance,
we receive airtime in the form of one 30-second spot adjacent to the segment.
Our advertising sales staff sells this advertising time.
from Martha's Kitchen
In September 1999, the Food Network cable channel began airing a
half-hour Martha Stewart branded program twice a day (generally in the evenings
and late at night), seven days a week, entitled from Martha's Kitchen. This
program consists primarily of food-related segments repackaged from previous
Martha Stewart Living programs. In exchange for the programming, we receive
airtime during the early showing and some late night showings, which is sold by
our advertising sales staff. We also receive a percentage of the revenue from
advertising aired during the late night showing that is not sold by us.
Prime Time Specials
Periodically, we produce prime time holiday specials. Home for the
Holidays, our 1999 Christmas special, was watched by over 7.5 million U.S.
households. Typically, we purchase the relevant airtime from a television
network and then our advertising sales staff sells the advertising to air during
the special.
Competition
Series television is a highly competitive business. Our television
programs compete directly for viewers and 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
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audience, viewer response to advertisers' products and services and
effectiveness of the advertising sales staff.
Seasonality
Revenue and operating results from our Television segment tend to be
higher in the fourth quarter due to generally higher ratings. Additionally, our
prime-time television specials have historically been broadcast in the fourth
quarter.
MERCHANDISING
Our merchandising segment designs merchandise (and related packaging
and advertising materials) that is then manufactured and distributed through
traditional "bricks and mortar" retail channels by third parties under Martha
Stewart brands. In exchange for our design services and the use of our
trademarks, we are paid royalties by our merchandising partners. In addition, we
are typically reimbursed for our design and other related expenses. Third
parties with whom we have direct merchandising relationships include Kmart
Corporation, The Sherwin-Williams Company, The Hudson's Bay Company, and
P/Kaufmann, Inc. In addition, our merchandise is sold at stores such as Sears,
Calico Corners, Jo-Ann Fabrics and Crafts, Janovic Plaza, Canadian Tire and
various other specialty stores. Our merchandising strategy is to offer
top-quality merchandise in our core content areas at a wide variety of price
points and distribution channels, from mass market discounters and national
department store chains to specialty retailers. In 1999, our revenues from Kmart
constituted the substantial majority of our revenues from this segment.
Martha Stewart Everyday Collections.
The Martha Stewart Everyday collections currently include Martha
Stewart Everyday Home, Martha Stewart Everyday Garden, Martha Stewart Everyday
Baby baby and Martha Stewart Everyday Colors. Products sold in connection with
these trademarks (other than Martha Stewart Everyday Colors) are sold at over
2,100 Kmart stores in the United States and over 300 Zellers stores in Canada.
Martha Stewart Everyday Colors products are sold in the United States at 2,100
Kmart stores and over 800 Sears stores, as well as over 300 Canadian Tire Stores
in Canada.
Each Martha Stewart Everyday collection, other than the Martha Stewart
Everyday Colors collection that is under contract with Sherwin-Williams, is
governed by agreements with Kmart and Zellers. Each of these agreements provides
that we design (or, for seeds and live plants, select) all products, packaging,
signage and associated collateral materials. We retain all rights in the
merchandise designs other than the distribution rights licensed to Kmart and
Zellers, which are exclusive in the United States and Canada at the mass market
discount channel of retail distribution. We are 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 Home products occupy approximately 60% of the
merchandise display space in a typical Kmart home fashion department.
Martha Stewart Everyday Home. The Martha Stewart Everyday Home
collection is a line of sheets, towels, bath accessories, window treatments and
kitchen textiles designed by us and manufactured by a variety of vendors,
including Springs Industries, Inc., Westpoint Stevens Inc., and Pillowtex
Corporation. The collection currently consists of approximately 2400 SKUs and 27
product lines. This agreement expires in February 2003.
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Martha Stewart Everyday Garden. The Martha Stewart Everyday Garden
program is a line of outdoor furniture, garden tools, fertilizers, planting
pots, bulbs, seeds and live plants. Through the live plants program, we are
bringing plants to the mass market discount channel that have previously only
been available in limited quantities and at higher prices at specialty garden
centers. The Kmart garden agreement expires in October 2003 with a three-year
renewal at Kmart's option.
Martha Stewart Everyday Baby baby. Commencing in fall 1999, we launched
the Martha Stewart Everyday Baby baby collection of nursery basics at Kmart.
This agreement expires in February 2003.
Martha Stewart Everyday Colors. Martha Stewart Everyday Colors is a
line of interior latex paints introduced in 1997. The colors are developed by us
and the paints are manufactured and distributed by Sherwin-Williams. The Martha
Stewart Everyday Colors line consists of 256 colors and 69 SKUs. Our agreement
with Sherwin-Williams expires in December 2000.
Martha Stewart Everyday Housewares. In September 2000, we are scheduled
to launch the Martha Stewart Everyday Housewares collection at Kmart, which will
consist of dinnerware, flatware, beverage ware, cookware, bakeware, mirrors,
picture frames, lamps and organizational products relating to our core content
area of keeping, all designed to reflect the Martha Stewart aesthetic.
Other Brands
Martha Stewart Home Collection. The Martha Stewart Home collection
consists of decorative fabrics that we design and license to P/Kaufmann for
manufacture and distribution to retailers. Under our agreement with P/Kaufmann,
which runs through December 2003, we receive guaranteed minimum royalties and
reimbursement of certain costs. In September 1999, the Martha Stewart Home
collection began selling in specialty stores, including in over 1,100 Calico
Corners and Jo-Ann Fabrics and Crafts stores. As in our agreements with Kmart,
we retain creative control over, and intellectual property rights in, the
merchandise included in the Martha Stewart Home collection.
Martha's Fine Paints Collection. The Martha's Fine Paints collections
are our oldest merchandise lines, dating back to 1995. These collections include
approximately 80 colors of interior oil and acrylic paint sold through specialty
paint dealers, such as Janovic Plaza.
Competition
The retail merchandising business is highly competitive. Our principal
competitors are the competitors of the retail stores in which our products are
sold. These include Target stores, Wal-Mart Stores, Inc., The Home Depot, Inc.
and other mass market discount stores, and competitive factors include numbers
and locations of stores, brand awareness and price.
Seasonality
Revenues from the Merchandising segment can vary significantly from
quarter to quarter due to new product launches. Additionally, we receive
revenues from the Martha Stewart Everyday Garden line primarily in the first and
second quarters of each year.
INTERNET/DIRECT COMMERCE
Our Internet/Direct Commerce segment currently consists of our Martha
by Mail catalog business and the operation of our website, marthastewart.com.
The Martha by Mail catalog debuted as an insert in Martha Stewart Living
magazine in 1995 and was originally created to provide our consumers the
materials necessary to pursue the how-to projects presented in our various
media. From those beginnings, it has evolved into our upscale,
direct-to-consumer merchandising business that also includes finished
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products such as outdoor furniture, laundry appliances, bedding and other home
furnishings. Unlike our retail merchandising business, which exclusively
consists of products we design, we include in Martha by Mail other selected
products consistent with our brand image and how-to philosophy that typically
are not offered through any national retail stores. In 1999, we distributed 11
editions and 15 million copies of our catalogs. 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.
Our website, marthastewart.com, currently consists of seven linked
content channels, each dedicated to one of our core areas, as well as our online
store. 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 and magazines. Our
advertising sales force sells advertisements for our website individually and as
part of multi-media packages. Our online store currently offers more than 1200
Martha by Mail products compared with approximately 400 offerings in any given
catalog. These include our marthasflowers offerings of growers bunches of
flowers and seasonal greens, introduced in October, 1999. In an effort to evolve
Martha by Mail from offline direct commerce to e-commerce, we have recently
begun providing discounts and incentives to our consumers who purchase products
over the Internet. Our Internet/Direct Commerce business has grown significantly
during 1999 and we have made significant personnel and technology investments to
prepare for continued growth. As of December 1999, we had over 1,000,000
registered users of our website.
We source and purchase all our Martha by Mail product and manage our
merchandise inventory. Currently, our Martha by Mail fulfillment is conducted by
Time Customer Service, an affiliate of TPV, pursuant to an agreement that is
terminable by either party on 360 days notice. We believe that this arrangement
is adequate to address our current needs, and are taking appropriate steps to
prepare for continued growth in this area.
In December, 1999, we entered into an agreement with BlueLight.com,
L.L.C., a newly-formed e-commerce company, pursuant to which our Martha Stewart
Everyday line of products will be available for sale on marthastewart.com and on
BlueLight.com. We expect Martha Stewart Everyday products to be available for
sale on these sites in the fall of 2000.
Competition
Competitors of our Internet/Direct Commerce segment include Pottery
Barn (and other catalogs owned by Williams Sonoma, Inc.), Plow & Hearth, Chef's
Catalog, Eddie Bauer Home, Garnet Hill Company, Crate and Barrel, garden.com,
homearts.com, women.com, ivillage.com and many others. We compete on the basis
of our content, the quality, uniqueness, price and assortment of our
merchandise, brand name, service to customers and 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
The principal trademarks we use to distinguish our brands are Martha
Stewart Living, Martha Stewart Everyday, Martha Stewart Home, Martha Stewart
Weddings, askMartha, Martha by Mail, marthastewart.com and marthasflowers. These
trademarks are the subject of registrations and pending applications, both
domestic and international, 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
9
<PAGE> 13
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 or denigration by third parties. We own 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.
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:
<TABLE>
<CAPTION>
APPROXIMATE AREA
LOCATION USE IN SQUARE FEET
-------- --- ----------------
<S> <C> <C>
11 West 42nd Street, Principal executive and 111,840
New York, New York administrative offices;
design facilities; and
sales offices
19 Newtown Turnpike, Executive and 30,523
Westport, Connecticut administrative offices for
television, including the
television studio
facilities; and sales
offices for television
601 West 26th Street, Internet development 150,000
New York, New York studio, photography studio,
test kitchens, and prop
storage
</TABLE>
The leases for these offices and facilities expire between August 2000
and November 2010, 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.
Currently, the 601 West 26th Street facility is under construction, and we
expect to begin to occupy the facility in late 2000.
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. LEGAL PROCEEDINGS
We are, from time to time, involved in various legal proceedings in the
ordinary course of our business. We believe that the resolution of any currently
pending legal proceedings, either individually or taken as a whole, will not
have a material adverse effect on our business, financial condition or results
of operations. In addition, Martha Stewart from time to time is the subject of
legal actions relating to or that could otherwise affect our business, which
actions we intend, when appropriate, to vigorously defend in
10
<PAGE> 14
cooperation with Ms. Stewart.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 11, 1999, MSLO LLC, then our sole stockholder, and all the
members of MSLO LLC, approved by unanimous written consent the adoption of the
merger of MSLO LLC into us, as well as the merger agreement pursuant to which
the merger was consummated.
PART II
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
one-for-one basis.
From October 19, 1999 (the date on which our Class A Common Stock began
trading on The New York Stock Exchange) through December 31, 1999, the highest
sale price of our Class A Common Stock was $47.50 per share, and the lowest sale
price was $20.12 per share.
As of March 23, 2000, there were 3,313 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 have no
intentions of paying dividends on our common stock in the near future.
Use of Proceeds
Our first registration statement on Form S-1 (File No. 333-84001) under
the Securities Act of 1933 was declared effective by the Securities and Exchange
Commission on October 18, 1999. Since the completion of the offering, we have
used approximately $13.3 million of the proceeds in connection with the purchase
of an equity interest in BlueLight.com, L.L.C. Additionally, we have entered
into an agreement with TPV, pursuant to which we will use approximately $32.5
million of the offering proceeds to repurchase 1,366,000 shares of our Class A
Common Stock from TPV. We intend to apply the balance of the proceeds from our
public offering to working capital, which, when not being utilized, is invested
in government securities and other short-term, investment-grade, interest
bearing instruments.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth on page F-2 of this
Report.
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 F-3 through
F-7 of this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
11
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth on pages F-8 through
F-24 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
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 May 11,
2000 (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. EXECUTIVE COMPENSATION
The information required by this Item is set forth in our Proxy
Statement under the captions "COMPENSATION OF OUTSIDE DIRECTORS," "EXECUTIVE
COMPENSATION" and "EMPLOYMENT ARRANGEMENTS" and is hereby incorporated herein by
reference.
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. 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. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. See page F-1 of this Report.
2. See page F-1 of this Report.
3.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
2.1 -- Agreement and Plan of Merger.*
2.2 -- LLC Membership Interest Purchase Agreement, dated as of July
27, 1999, by and among Martha Stewart Living Omnimedia LLC,
KPCB Holdings, Inc., as nominee, and KPCB IX Associates,
</TABLE>
12
<PAGE> 16
<TABLE>
<S> <C>
LLC.*
3.1 -- Registrant's Certificate of Incorporation.*
3.2 -- Registrant's By-Laws.*
4.1 -- Form of Specimen Certificate for Registrant's Common Stock.*
4.2 -- Loan Agreement (line of credit) between NationsBank, N.A.
and Martha Stewart Living Omnimedia LLC, dated as of
February 3, 1997.*
4.3 -- Amendment No. 1, dated as of June 30, 1998, to the Loan
Agreement, dated as of February 3, 1997, between Martha
Stewart Living Omnimedia LLC and NationsBank, N.A.*
4.4 -- Amendment No. 2, dated as of March 30, 1999, to the Loan
Agreement, dated as of February 3, 1997, between Martha
Stewart Living Omnimedia LLC and NationsBank, N.A.*
4.5 -- Warrant for a Percentage of the Internet Business of Martha
Stewart Living Omnimedia LLC, dated July 27, 1999, issued to
KPCB Holdings, Inc.*
10.1 -- Form of Stockholders' Agreement.*
10.2 -- 1999 Stock Incentive Plan.*+
10.2.1 -- Amendment Number 1 to 1999 Stock Incentive Plan, dated as of
March 9, 2000+
10.3 -- 1999 Non-Employee Director Stock and Option Compensation
Plan.*+
10.4 -- 1999 Employee Stock Purchase Plan.*+
10.5 -- Martha Stewart Living Omnimedia LLC Phantom Performance Unit
Plan.*+
10.6 -- Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC
Unit/Stock Option Plan.*+
10.7 -- Form of Employment Agreement, by and between Registrant and
Martha Stewart.*+
10.8 -- Form of Intellectual Property License and Preservation
Agreement, by and between Registrant and Martha Stewart.*
10.9 -- Form of Location Rental Agreement, by and between Registrant
and Martha Stewart.*
10.10 -- Lease, dated as of September 24, 1992, between Tishman
Speyer Silverstein Partnership and Time Publishing Ventures,
Inc., as amended by First Amendment of Lease dated as of
September 24, 1994 between 11 West 42 Limited Partnership
and Time Publishing Ventures, Inc.*
10.11 -- Lease, dated as of March 31, 1998, between 11 West 42
Limited Partnership and Martha Stewart Living Omnimedia
LLC.*
10.12 -- Lease, dated August, 1999, between 601 West Associates LLC
</TABLE>
13
<PAGE> 17
<TABLE>
<S> <C>
and Martha Stewart Living Omnimedia LLC.*
10.12.1 -- First Lease Modification Agreement, dated December 24, 1999,
between 601 West Associates LLC and Martha Stewart Living
Omnimedia, Inc.
10.13 -- Lease, dated as of March 6, 1996, between Newtown Group
Properties Limited Partnership and Time Publishing Ventures,
Inc., with amendments.*
10.14 -- Lease, dated as of August 1, 1996, between Newtown Group
Properties Limited Partnership and Martha Stewart Living
Omnimedia LLC.*
10.15 -- Lease, dated as of August 14, 1997, between Newtown Group
Properties Limited Partnership and Martha Stewart Living
Omnimedia LLC.*
10.16 -- License Agreement, dated January 28, 1997, by and between
Martha Stewart Living Omnimedia LLC and Kmart Corporation.*
10.17 -- Severance Agreement, dated September 23, 1999, by and between
Martha Stewart Living Omnimedia LLC and Sharon Patrick.*+
10.18 -- Letter Agreement, dated September 3, 1999, by and between
Martha Stewart Living Omnimedia LLC and Helen Murphy.*+
10.19 -- LLC Unit Option Agreement, dated September 3, 1999, by and
between Martha Stewart Living Omnimedia LLC and Helen
Murphy.*+
27.1 -- Financial Data Schedule.
</TABLE>
* Incorporated by reference to our Registration Statement on Form S-1, File
Number 333-84001
+ Indicates management contracts and compensatory plans
(b) None.
14
<PAGE> 18
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.
MARTHA STEWART LIVING OMNIMEDIA, INC.
By: /s/ Martha Stewart
-------------------------------------
Name: Martha Stewart
Title: Chairman of the Board and Chief
Executive Officer
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 Chairman of the Board and Chief
---------------------- Executive Officer
Martha Stewart (Principal Executive Officer)
/s/ Sharon Patrick President, Chief Operating Officer
---------------------- and Director
Sharon Patrick
/s/ Helen Murphy Chief Financial and Administrative
---------------------- Officer
Helen Murphy (Principal Financial Officer)
/s/ James Follo Senior Vice President, Finance and
---------------------- Controller
James Follo (Principal Accounting Officer)
/s/ Charlotte Beers Director
----------------------
Charlotte Beers
Director
----------------------
L. John Doerr
/s/ Naomi O. Seligman Director
----------------------
Naomi O. Seligman
Each of the above signatures is affixed as of March 29, 2000.
15
<PAGE> 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES AND OTHER FINANCIAL INFORMATION
<TABLE>
<S> <C>
Selected Financial Data F-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations F-3
Consolidated Financial Statements:
Report of Independent Public Accountants F-8
Consolidated Balance Sheets at December 31, 1999 and 1998 F-9
Consolidated Income Statements for each of the three years ended December 31, 1999 F-10
Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1999 F-11
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999 F-12
Notes to Consolidated Financial Statements F-13
Financial Statement Schedule:
II- Valuation and Qualifying Accounts for each of the three years ended December 31, 1999 F-25
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
F-1
<PAGE> 20
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
REVENUES
Publishing $ 3,647 $ 3,899 $108,694 $127,020 $145,520
Television -- -- 12,396 23,351 30,590
Merchandising -- -- 6,919 15,004 20,200
Internet/Direct Commerce -- -- 4,812 14,673 36,004
-------- -------- -------- -------- --------
TOTAL REVENUES 3,647 3,899 132,821 180,048 232,314
-------- -------- -------- -------- --------
Income from operations 3,516 3,800 16,591 27,385 22,322
-------- -------- -------- -------- --------
Net income 3,318 3,635 13,929 23,806 25,569
-------- -------- -------- -------- --------
Pro forma net income(1) 1,917 2,072 6,891 12,989 11,692
-------- -------- -------- -------- --------
EBITDA(2) 3,516 3,800 20,518 32,919 28,882
-------- -------- -------- -------- --------
EBITDA before Internet/Direct Commerce(3) $ 3,516 $ 3,800 $ 21,741 $ 37,917 $ 43,649
-------- -------- -------- -------- --------
PER SHARE DATA
Pro forma(1)
Earnings per share-basic and diluted $ .05 $ .05 $ .18 $ .33 $ .28
Weighted average common shares outstanding 39,176 39,176 39,176 39,176 41,720
Adjusted Pro forma(4)
Earnings per share-basic and diluted $ .04 $ .04 $ .14 $ .26 $ .24
Weighted average common shares outstanding 49,583 49,583 49,583 49,583 49,588
FINANCIAL POSITION
Cash and cash equivalents $ 7 $ 85 $ 9,971 $ 24,578 $154,749
Total assets 2,786 4,074 105,706 125,372 281,771
Long term debt -- -- 30,000 27,650 --
Shareholders' equity (436) 589 13,235 36,815 199,402
</TABLE>
(1) Pro forma net income reflects the income taxes that would have been recorded
had the Company been a "C" Corporation for all periods presented.
(2) EBITDA is earnings before interest, taxes, depreciation and amortization.
EBITDA should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
(3) EBITDA before Internet/Direct Commerce represents EBITDA of the Company,
excluding the operations of the Internet/Direct Commerce business segment.
(4) Adjusted pro forma earnings per share amounts are calculated based upon the
number of common shares outstanding as if all common shares issued in connection
with the Kleiner Perkins investment, and the initial public offering were
outstanding for all periods presented in order to better reflect comparability
between periods. Proceeds received from these transactions have not been
included in the calculation of earnings per share.
F-2
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
REVENUES Total revenues increased $52.3 million, or 29%, to $232.3 million for
the year ended December 31, 1999, from $180.0 million for the year ended
December 31, 1998. Publishing revenues increased $18.5 million, or 15%, to
$145.5 million for the year ended December 31, 1999, from $127.0 million for the
year ended December 31, 1998. This increase reflects an increase in advertising
revenues of $14.4 million, primarily due to an increase in advertising pages
sold in Martha Stewart Living magazine and the increased frequency of Martha
Stewart Weddings magazine, which published four times in 1999, compared to two
times in 1998. Circulation revenues increased $4.1 million due to higher
subscription revenues from Martha Stewart Living magazine as a result of higher
net revenue per copy sold, resulting primarily from lower agent orders in 1999.
Circulation revenues also increased due to the increased frequency of Martha
Stewart Weddings magazine. Television revenues increased $7.2 million, or 31%,
to $30.6 million for the year ended December 31, 1999 from $23.4 million for the
year ended December 31, 1998. The increase is due primarily to $7.0 million of
revenues associated with the addition of a second half hour to our syndicated
daily program, $3.6 million revenues received from our prime-time holiday
special "Martha Stewart Home for the Holidays" partially offset by reduced
advertising revenues resulting from lower ratings for the year ended December
31, 1999. Merchandising revenues increased $5.2 million, or 35%, to $20.2
million, for the year ended December 31, 1999, from $15.0 million for the year
ended December 31, 1998, due primarily to revenues received from the addition of
our Martha Stewart Everyday line of garden products, launched in the first
quarter of 1999, and also from Martha Stewart Home decorative fabrics and Martha
Stewart Everyday Baby baby products, both launched in the third quarter of 1999.
Internet/Direct Commerce revenues increased $21.3 million, or 145%, to $36.0
million for the year ended December 31, 1999, from $14.7 million for the year
ended December 31, 1998, due to higher merchandise sales of $18.4 million
resulting from higher catalog circulation and increased Internet traffic.
PRODUCTION, DISTRIBUTION AND EDITORIAL Production, distribution and editorial
expenses increased $43.1 million, or 52%, to $126.0 million for the year ended
December 31, 1999, from $82.9 million for the year ended December 31, 1998.
Internet/Direct Commerce costs increased $27.8 million due to increased
fulfillment costs and cost of goods sold, each as a result of higher revenues,
as well as increased catalog production and distribution costs resulting from
higher catalog circulation. In addition, costs increased $6.6 million due to
increased investment in developing and maintaining our Internet site. Publishing
segment costs increased $9.7 million, reflecting increased costs for Martha
Stewart Living magazine due to an increase in the number of pages printed per
issue as a result of higher advertising pages sold and higher printing costs.
Furthermore, we published an additional two issues of Martha Stewart Weddings
magazine in 1999. Television costs increased $5.6 million, primarily as a result
of higher production and distribution costs incurred for the additional
half-hour of programming in 1999.
SELLING AND PROMOTION Selling and promotion expenses increased $4.9 million, or
14%, to $39.4 million for the year ended December 31, 1999, from $34.5 million
for the year ended December 31, 1998. Publishing segment costs increased $2.6
million, resulting from increased circulation and advertising sales costs
incurred to support higher publishing revenues. Internet/Direct Commerce segment
costs increased $2.3 million primarily due to increased media spending promoting
our Internet site.
GENERAL AND ADMINISTRATIVE General and administrative expenses, consisting
primarily of costs relating to executive, finance, professional services,
information technology, office services, including rent, and human resources,
increased $8.2 million, or 28%, to $37.9 million for the year ended December 31,
1999, from $29.7 million for the year ended December 31,
F-3
<PAGE> 22
1998. We have incurred higher costs as a result of continued infrastructure
development to support higher levels of revenues, including higher information
technology, finance, occupancy and professional fees in 1999.
DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $1.1
million, or 20%, to $6.6 million for the year ended December 31, 1999, from $5.5
million for the year ended December 31, 1998. The increase is attributable to
higher levels of property and equipment, including $5.0 million of equipment
leases that were refinanced into capital leases in 1999.
INTEREST INCOME (EXPENSE), NET Interest income was $0.5 million for the year
ended December 31, 1999, compared to interest expense of $2.2 million for the
year ended December 31, 1998. Net interest income resulted in 1999 from
repayment of all outstanding long term debt, as well as interest income earned
on the invested proceeds received from our initial public offering in October
1999.
INCOME TAX PROVISION (BENEFIT) The provision for income taxes reflects a net
income tax benefit of $2.7 million for the year ended December 31, 1999. The net
income tax benefit in 1999 resulted primarily from the conversion to a "C"
corporation as a result of our merger with Martha Stewart Living Omnimedia LLC
in October 1999. Accordingly, we recognized a deferred tax benefit of $4.8
million in 1999. Prior to the merger, we operated as a limited liability
company. Income tax expense was $1.3 million in 1998, representing primarily
unincorporated business and foreign income taxes.
NET INCOME Net income increased $1.8 million, or 8%, to $25.6 million for the
year ended December 31, 1999, from $23.8 million for the year ended December 31,
1998, primarily as a result of the above mentioned factors.
F-4
<PAGE> 23
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
REVENUES Total revenues increased $47.2 million, or 36%, to $180.0 million for
the year ended December 31, 1998, from $132.8 million for the year ended
December 31,1997. Publishing segment revenues increased $18.3 million, or 17%,
to $127.0 million for the year ended December 31, 1998, from $108.7 million for
the year ended December 31, 1997. This increase primarily reflects higher
advertising revenues of $14.9 million due to an increase in advertising pages
sold in Martha Stewart Living magazine of 17% and an increase in per page
advertising rates of 5%, as well as additional advertising revenues of $1.6
million received from a special issue published in the fourth quarter of 1998.
Circulation revenues increased $4.4 million as a result of generally higher
newsstand revenues, including newsstand revenues recognized on the special
issue. Television revenues increased $11.0 million, or 88%, to $23.4 million for
the year ended December 31, 1998, from $12.4 million for the year ended December
31, 1997, due primarily to producing and airing a full year of the daily
syndicated show in both the United States and Canada, as opposed to a partial
year in 1997, and revenues of $1.9 million earned from licensing a second half
hour of "best of" show during the fourth quarter of 1998. These increases were
partially offset by the elimination of revenues of $0.8 million derived from an
agreement under which reruns of Martha Stewart Living programming were aired on
the Lifetime cable network. In light of Martha Stewart Living programming moving
to a daily format, we elected not to attempt to renew this agreement, which
expired during the third quarter of 1997. Merchandising revenues increased $8.1
million, or 117%, to $15.0 million for the year ended December 31, 1998, from
$6.9 million for the year ended December 31, 1997. This increase resulted from
an increase in revenues of $4.7 million, resulting from a greater assortment of
Martha Stewart Everyday bed and bath products in 1998 and the introduction of
these products at Zellers in Canada in December 1998, which contributed $1.3
million to revenues in 1998. Internet/Direct Commerce revenues increased $9.9
million, or 205%, to $14.7 million for the year ended December 31, 1998, from
$4.8 million for the year ended December 31, 1997. The increase is primarily due
to an increase in catalog merchandise sales resulting from an increase in both
the number of products offered through the catalog and the number of catalogs
mailed, in addition to increased sales on our website. Internet advertising
revenues increased $1.1 million, primarily due to our website's first full year
of operation in 1998, compared with only four months in 1997.
PRODUCTION, DISTRIBUTION AND EDITORIAL Production, distribution and editorial
expenses increased $23.8 million, or 40%, to $82.9 million in the year ended
December 31, 1998, from $59.1 million in the year ended December 31, 1997.
Publishing segment costs increased $7.3 million, as a result of an increased
number of pages printed per issue of 17% resulting from the increase in
advertising pages sold, costs associated with the special issue and higher
printing costs. Television costs increased $4.1 million due to higher production
and distribution costs associated with producing and airing a full year of the
daily syndicated show. Internet/Direct Commerce costs increased $12.4 million,
due to an increase of $3.9 million in catalog production and distribution costs
resulting from higher catalog circulation. In addition, fulfillment costs
increased $2.3 million and cost of goods sold increased $4.7 million, each as a
result of higher revenues.
SELLING AND PROMOTION Selling and promotion expenses increased $2.6 million, or
8%, to $34.5 million for the year ended December 31, 1998 from $32.0 million for
the year ended December 31, 1997. This increase primarily reflects increased
Publishing segment costs of $1.3 million resulting from increased circulation
costs and increased Television segment expenses of $0.9 million associated with
the expanded programming schedule.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased $8.5
million, or 40%, to $29.7 million for the year ended December 31, 1998 from
$21.2 million for the year ended December 31, 1997. The increase is attributable
to higher executive compensation, higher costs associated with increased
revenues, the buildup of corporate infrastructure in the business and higher
staffing levels throughout the Company.
F-5
<PAGE> 24
DEPRECIATION AND AMORTIZATION Depreciation and amortization increased $1.6
million, or 41%, to $5.5 million for the year ended December 31, 1998, from $3.9
million for the year ended December 31, 1997, as a result of higher levels of
property, plant and equipment in service.
INTEREST INCOME (EXPENSE), NET Interest expense, net, remained unchanged at $2.2
million.
NET INCOME Net income increased $9.9 million, or 71%, to $23.8 million for the
year ended December 31, 1998, from $13.9 million for the year ended December 31,
1997, primarily as a result of the above mentioned factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $154.7 million at December 31, 1999, compared to
$24.6 million at December 31, 1998, an increase of $130.1 million. Cash flows
from operating activities were $28.3 million in 1999, compared to $17.5 million
in 1998 and $44.6 million in 1997. Cash flows from operating activities in 1999
were primarily a result of earnings for the period and changes in working
capital.
Cash flows used in investing activities were $6.3 million in 1999, compared to
$0.3 million in 1998 and $12.9 million in 1997. The 1999 amount reflects capital
expenditures during the period. The 1998 amount reflects capital expenditures of
$2.7 million, partially offset by the proceeds received from a sale leaseback
transaction. The 1997 amount consists primarily of capital expenditures.
Cash flows provided by financing activities during 1999 were $108.2 million,
compared to cash flows used in financing activities of $2.6 million in 1998 and
$21.8 million in 1997.
In March 1999, we repaid our outstanding long-term debt to Time Publishing
Ventures, totaling $27.7 million plus accrued interest, with the proceeds of a
$15.0 million term loan from Bank of America, N.A., and existing cash of $12.7
million plus accrued interest. The outstanding amount of the loan was repaid in
July 1999 with the net proceeds of $25.0 million received from the Kleiner
Perkins equity purchase. In October 1999, we completed an initial public
offering of 8.3 million shares of class A common stock, raising net proceeds of
$132.3 million. Distributions to the members of the LLC were $21.4 million in
1999. The 1998 amount includes a $2.4 million payment of long-term debt to Time
Publishing Ventures and distribution to members of the LLC of $0.3 million. The
1997 amount represents distributions to members of the LLC.
We have a line of credit with Bank of America in the amount of $10.0 million,
which is available to us for seasonal working capital requirements and general
corporate purposes. As of December 31, 1999, we had no outstanding borrowings
under this facility.
We do not intend to pay any dividends for the foreseeable future.
We believe that our existing cash balances, together with any cash generated
from operations and any funds available under existing credit facilities, will
be sufficient to meet our operating and recurring cash needs for foreseeable
periods.
F-6
<PAGE> 25
SEASONALITY AND QUARTERLY FLUCTUATIONS
Several of our businesses can experience fluctuations in quarterly performance.
For example, Martha Stewart Living magazine is published ten times annually:
three issues in each of the first and second quarters and two issues in each of
the third and fourth quarters. 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. In addition, the number of advertising pages per issue tend
to be higher in issues published in the fourth quarter. Revenue and income from
operations for the television segment tend to be higher in the fourth quarter
due to generally higher ratings and, on occasion, the broadcast of a holiday
prime-time television special. Internet/Direct Commerce revenues also tend to be
higher in the fourth quarter due to increased consumer spending during that
period. Revenues from the Merchandising segment can vary significantly from
quarter to quarter due to new product launches.
YEAR 2000
The Year 2000 issue concerns the inability of information and non information
systems to recognize and process date-sensitive information after 1999 due to
the use of only the last two digits to refer to a year. This problem could have
affected information systems and other information that relies on
microprocessors.
The Company conducted a review of its computer systems and software to identify
any potential malfunctions due to misidentification of the Year 2000. We have
also made inquiries of our important third-party vendors, service providers,
customers and partners to determine whether our business relationships with
these parties could be adversely affected by Year 2000 issues. The Company has
not experienced any material adverse consequences related to Year 2000 failures
of the Company's or third parties' systems or equipment. While management does
not expect any future material issues related to Year 2000 to occur, the Company
will continue to monitor these issues and the related costs if they occur.
Through December 31, 1999, the Company has spent approximately $0.2 million to
address Year 2000 issues. The spending consisted of system evaluation and
remediation of internal systems. Total costs are not expected to be materially
higher than this amount.
F-7
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Martha Stewart Living Omnimedia, Inc.
We have audited the accompanying consolidated balance sheets of Martha Stewart
Living Omnimedia, Inc. (a Delaware corporation) and subsidiary as of December
31, 1999 and 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements, included on pages F-9
through F-24, 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 subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements, financial statement schedules and other financial
information is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, based on
our audits, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 9, 2000
F-8
<PAGE> 27
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Publishing $145,520 $127,020 $108,694
Television 30,590 23,351 12,396
Merchandising 20,200 15,004 6,919
Internet/Direct Commerce 36,004 14,673 4,812
------- ------- -------
TOTAL REVENUES 232,314 180,048 132,821
------- ------- -------
OPERATING COSTS AND EXPENSES
Production, distribution and editorial 126,043 82,930 59,148
Selling and promotion 39,442 34,540 31,973
General and administrative 37,947 29,659 21,182
Depreciation and amortization 6,560 5,534 3,927
------- ------- -------
TOTAL OPERATING COSTS AND EXPENSES 209,992 152,663 116,230
------- ------- -------
INCOME FROM OPERATIONS 22,322 27,385 16,591
Interest income (expense), net 500 (2,243) (2,195)
------- ------- -------
INCOME BEFORE INCOME TAXES 22,822 25,142 14,396
Income tax provision (benefit) (2,747) 1,336 467
------- ------- -------
NET INCOME $ 25,569 $ 23,806 $ 13,929
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 28
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $154,749 $24,578
Accounts receivable, net 41,683 25,260
Inventories 6,163 6,522
Deferred television production costs 2,543 3,038
Other current assets 4,757 275
--------- ---------
TOTAL CURRENT ASSETS 209,895 59,673
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 18,709 11,468
--------- ---------
INTANGIBLE ASSETS, net 50,157 53,108
--------- ---------
OTHER NONCURRENT ASSETS, net 3,010 1,123
--------- ---------
TOTAL ASSETS $ 281,771 $ 125,372
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $36,257 $21,242
Accrued payroll and related costs 4,677 4,056
Accrued interest payable - 1,581
Current portion of deferred subscription
income 26,938 26,756
--------- ---------
TOTAL CURRENT LIABILITIES 67,872 53,635
--------- ---------
DEFERRED SUBSCRIPTION INCOME 8,047 4,722
--------- ---------
DEFERRED ROYALTY INCOME 691 1,782
--------- ---------
LONG TERM DEBT - 27,650
--------- ---------
OTHER NONCURRENT LIABILITIES 5,759 768
--------- ---------
TOTAL LIABILITIES 82,369 88,557
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Class A common stock, $.01 par value,
350,000 shares authorized; 15,484 shares
outstanding 155 -
Class B common stock, $.01 par value,
150,000 shares authorized; 34,127 shares
outstanding 341 -
Capital in excess of par value 193,081 -
Retained earnings 5,825 -
Members' equity - 36,815
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 199,402 36,815
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 281,771 $ 125,372
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 29
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Class A Class B
common stock common stock
------------ -------------
Capital
in
excess
Members' of par Retained
Equity Shares Amount Shares Amount value earnings Total
-------- ------- ------- ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 589 - $ - - $ - $ - $ - $ 589
Net income 13,929 - - - - - - 13,929
Issuance of equity interests 20,508 - - - - - - 20,508
Capital distributions (21,791) - - - - - - (21,791)
-------- ------- ------- ------- ------ ------- ------ --------
Balance at December 31, 1997 13,235 - - - - - - 13,235
Net income 23,806 - - - - - - 23,806
Capital distributions (226) - - - - - - (226)
-------- ------- ------- ------- ------ ------- ------ --------
Balance at December 31, 1998 36,815 - - - - - - 36,815
Net income 19,744 - - - - - 5,825 25,569
Issuance of equity interests 25,000 - - - - - - 25,000
Capital distributions (21,441) - - - - - - (21,441)
Common shares issued in
connection with merger
of Martha Stewart Living
Omnimedia LLC into Martha
Stewart Living Omnimedia, Inc. (60,118) 7,111 71 34,127 341 59,706 - -
Issuance of shares in connection
with initial public offering - 8,280 83 - - 132,172 - 132,255
Issuance of shares for employee
benefit plans and stock options - 93 1 - - 1,203 - 1,204
-------- ------- ------- ------- ------ ------- ------ --------
Balance at December 31, 1999 $ - 15,484 $155 34,127 $341 $193,081 $5,825 $199,402
======== ======= ======= ====== ==== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 30
MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,569 $ 23,806 $ 13,929
Adjustments to reconcile
Net income to net cash provided
by operating activities
Depreciation and amortization 6,560 5,534 3,927
Deferred income tax (benefit) expense (3,825) 267 457
Other non cash charges 1,670 -- --
Changes in operating assets and
liabilities, net of assets acquired
Accounts receivable, net (16,423) (7,314) 341
Inventories 359 (3,561) (1,077)
Other current assets (1,457) 66 4,526
Deferred television production costs 495 767 --
Other noncurrent assets (1,087) (209) (838)
Accounts payable and accrued liabilities 12,717 4,942 12,075
Deferred royalty income (1,091) (11,420) 12,454
Deferred subscription income 3,507 4,278 (1,621)
Other noncurrent liabilities 1,310 368 400
--------- --------- ---------
2,735 (6,282) 30,644
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,304 17,524 44,573
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Martha Stewart Living,
net of cash acquired -- -- (1,869)
Capital expenditures (6,298) (2,730) (11,027)
Proceeds from sale leaseback transaction -- 2,389 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (6,298) (341) (12,896)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayment of long term debt (27,650) (2,350) --
Issuance of equity in LLC 25,000 -- --
Issuance of a class A common stock, -- -- --
net of expenses 132,255 -- --
Distributions to members (21,440) (226) (21,791)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 108,165 (2,576) (21,791)
--------- --------- ---------
NET INCREASE IN CASH 130,171 14,607 9,886
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 24,578 9,971 85
========= ========= =========
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 154,749 $ 24,578 $ 9,971
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
1 THE COMPANY
Martha Stewart Living Omnimedia, Inc. (together with its subsidiary, the
"Company") includes the operations, assets and liabilities of Martha Stewart
Living Omnimedia LLC ("MSLO"), a predecessor to the Company, which was merged
with and into the Company on October 22, 1999. This merger was accounted for as
a combination of companies under common control and accordingly, the financial
statements for prior periods have been retroactively restated.
In 1997, the Company entered into an agreement with Time Publishing Ventures,
Inc. (together with its parent and affiliated companies, "Time") and purchased
Martha Stewart Living magazine as well as the rights to any Martha Stewart
Living publications, television programs related to Martha Stewart and the
Martha by Mail business, as well as related liabilities, for approximately
$53,276, including related acquisition costs (the "MSL acquisition"). Time
received a promissory note for $30,000 and a 6.27% equity interest in the
Company. The purchase price was calculated taking into consideration the special
income distribution of $18 million payable to Time pursuant to the limited
liability company agreement of the Company. This distribution was made in
February 1997. This transaction, which was consummated on February 3, 1997, has
been accounted for as a purchase as of January 1, 1997, the effective date on
which the assets and liabilities were transferred. In addition, Time and certain
of its affiliates entered into transition and other service agreements with the
Company which are described in Note 9.
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. Magazine
operations accounted for over 90% of the revenues of the Publishing segment,
which also includes book publishing, newspaper syndication and radio advertising
revenue. The Television segment includes a television program that airs in
syndication in the United States and on cable in Canada, as well as weekly
segments on CBS's The Early Show and From Martha's Kitchen, a daily program
airing on the Food Channel cable network. The Merchandising segment consists
solely of royalty revenues generated by the sale of Martha Stewart branded
products. The Internet/Direct Commerce segment comprises the sale of Martha by
Mail products through the Company's website and print catalog as well as
advertising revenues derived from advertisements on the website.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company's
wholly-owned subsidiary. All significant intercompany transactions have been
eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all short term securities held for
the primary purpose of general liquidity. Such securities mature within three
months from the date of acquisition.
F-13
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
Revenue Recognition
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 delivered to subscribers.
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 under
delivery.
Royalties and television appearance fees are recorded as earned in accordance
with specific terms of each agreement.
Television Production Costs
Television production costs are capitalized and amortized based on revenue
earned as a percentage of total revenue sold 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
Intangible assets, representing the excess of purchase price over net assets
acquired, include the value assigned to subscriber lists, trade names and
goodwill, and are being amortized over twenty years. Management reassesses
quarterly the appropriateness of both the carrying value and remaining life of
intangible assets, principally based on forecasts of future undiscounted cash
flows.
Inventories
Inventories consisting of paper and catalog products 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.
F-14
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
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:
<TABLE>
<S> <C>
Studios and studio equipment 3-10 years
Furniture, fixtures and equipment 3-5 years
Computer hardware and software 3-5 years
Leasehold improvements life of lease
</TABLE>
Deferred Subscription Income
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 served.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 statements.
Reclassifications
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year's presentation.
3 EQUITY TRANSACTIONS
Initial Public Offering
On October 22, 1999, the Company completed an initial public offering of 8.3
million shares of Class A common stock at $18.00 per share, raising net proceeds
of $132,255 after underwriting discounts, commissions and expenses.
Strategic Investment
In July 1999, an affiliate of Kleiner Perkins Caufield & Byers, a venture
capital firm, acquired 5% of the Company and was issued a warrant to acquire 15%
of any publicly traded class of stock issued by the Company that is intended to
reflect the performance of the Company's Internet business (as defined in the
warrant) in exchange for $25,000 in cash. The warrant may also become
exercisable in the event of a business combination relating to, or a sale of all
or part of, the Company's Internet business. The warrant, which has an exercise
price of $21,000, expires July 27, 2002, and may expire earlier in certain
circumstances. $14,250 of the proceeds from this transaction were used to repay
the loan from Bank of America, N.A. (See Note 10).
F-15
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
4 ACCOUNTS RECEIVABLE
The components of accounts receivable at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Advertising $30,039 $22,720
Newsstand 905 1,698
Licensing 7,321 2,659
Other 9,521 4,188
------- -------
47,786 31,265
Less: reserve for credits and
uncollectible accounts 6,103 6,005
------- -------
$41,683 $25,260
======= =======
</TABLE>
5 INVENTORIES
The components of inventories at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Paper $3,465 $4,621
Catalog products 2,698 1,901
------ ------
$6,163 $6,522
====== ======
</TABLE>
6 PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Studios and equipment $ 6,982 $ 6,971
Furniture, fixtures and equipment 6,086 3,189
Computer hardware and software 8,770 1,502
Leasehold improvements 4,502 3,362
------- -------
26,340 15,024
Less: accumulated depreciation and
amortization 7,631 3,556
------- -------
$18,709 $11,468
======= =======
</TABLE>
Depreciation expense was $3,610, $2,537 and $1,019 for the years ended December
31, 1999, 1998 and 1997, respectively.
7 EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company established a 401(k) retirement plan effective July 1, 1997,
available to substantially all employees who have completed one year of service.
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 ($10 in 1999 and
1998), whichever is less. The Company matches 50%
F-16
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
of the first 6% of compensation contributed. Employees vest in employer matching
contributions over a period of four years of service. The employer matching
contributions totaled approximately $385, $259 and $207 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Company does not sponsor any postretirement and/or postemployment benefits.
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
under which options to purchase 539,564 LLC units were outstanding as of
December 31, 1998, based upon an assumed 10 million outstanding LLC units. Under
the merger with MSLO in October 1999, the outstanding options for approximately
509,841 LLC units were converted into options to purchase 1,997,374 shares of
Class A common stock. The Company has an agreement with Martha Stewart whereby
she will periodically return to the Company on a net treasury basis shares of
Class B common stock owned by her or her affiliates in amounts corresponding to
the number of these options exercised during the relevant period. Accordingly,
options outstanding under this plan are not dilutive. Options granted under the
plan are exercisable at $0.60 per share and vested 10% at December 31, 1998, and
10% at December 31, 1999, and generally vest 20%, 20% and 40% on December 31 of
each of the next three years. Options outstanding under the plan at December 31,
1999 were 1,968,277.
The Company has additional stock option plans and agreements that provide for
the granting of stock options 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
after 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 are ten years. Total options granted under these plans
in 1999 were 5,132,840 at a weighted average exercise price of $17.65 per share.
Total options outstanding under the plans at December 31, 1999 were 5,130,940 at
a weighted average exercise price of $17.65.
The Company accounts for the stock option plans pursuant to Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," under which no compensation cost has been recognized for options to
acquire shares granted to employees. For options granted to outside consultants,
the Company, as prescribed by APB Opinion No. 25, has recognized an expense of
$37 for the year ended December 31, 1997. No expense was required to be
recognized in any subsequent years.
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:
F-17
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1997
---- ----
<S> <C> <C>
Risk-free interest rates 5.78% 5.78%
Dividend yields Zero zero
Expected volatility 25% zero
Expected option life 6 years 5 years
Fair market value per share granted $ 6.63 $ 0.15
</TABLE>
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options over the options vesting period. The pro
forma effect on net income for the years ended December 31, 1999, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME
As reported $25,569 $23,806 $13,929
Pro forma $24,569 $23,753 $13,922
</TABLE>
Equity Compensation Plans
The Company had a Phantom Performance Unit Plan which provided for the grant of
performance units to all employees of the Company with at least one year of
service, other than officers, who had no minimum service period. The Phantom
Plan terminated upon the completion of the initial public offering on October
22, 1999, with no benefits payable to participants. However, the Board of
Directors approved the payment of an award to the participants in the Phantom
Plan at termination date, whereby the Company distributed 65,800 shares of Class
A common stock to the participants on the date of the initial public offering.
The company recognized compensation expense of $1,184 in 1999, representing the
market value of the shares distributed at the date of the distribution.
8 INCOME TAXES
Prior to its conversion to corporate form, the Company operated as a limited
liability company and generally was not subject to U.S. federal and state income
taxes. The earnings of the Company were subject to local unincorporated business
taxes. The results of operations were reportable by the members of the limited
liability company on their individual tax returns. Effective with the conversion
from a limited liability company on October 22, 1999, the Company became subject
to U.S. federal, state and local income taxes. The provision/benefit for income
taxes consists of the following for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CURRENT INCOME TAXES
Federal $ 60
State and local 555 $ 578 $ 75
Foreign 463 491
------- ------- -------
TOTAL CURRENT INCOME TAX EXPENSE 1,078 1,069 75
------- ------- -------
DEFERRED
Federal (2,900) (65)
State and local (925) 267 457
------- ------- -------
TOTAL DEFERRED INCOME TAX EXPENSE (BENEFIT) (3,825) 267 392
------- ------- -------
$(2,747) $ 1,336 $ 467
======= ======= =======
</TABLE>
F-18
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
Deferred income taxes reflect the net tax effects of temporary differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when such
differences are expected to reverse. In connection with the conversion to a "C"
corporation, the Company recognized a deferred tax benefit of $4,810 primarily
related to the recognition of net deferred tax assets recorded in accordance
with the provisions of SFAS No. 109. Such benefit is included in the income tax
provision/benefit in 1999. Significant components of the Company's deferred tax
assets as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS:
Depreciation and amortization $ 435
Inventory obsolescence reserves 1,076
Provision for doubtful accounts 815
Accrued rent 382
Reserve for newsstand returns 405
Other 887
----------
TOTAL DEFERRED TAX ASSETS $ 4,000
==========
</TABLE>
9 RELATED PARTY TRANSACTIONS
During 1997, the Company 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 $26,812, $26,595 and 16,340 in 1999, 1998 and 1997,
respectively, including $26,205, $26,010 and $15,265 of paper purchases.
The Company also entered into agreements with Time, whereby Time provides
fulfillment services for Martha by Mail products and the Company's magazines.
The fees for these services amounted to approximately $ 16,063, $11,264 and
$9,960 in 1999, 1998 and 1997, respectively.
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 $1,658, $1,384 and $1,262 in 1999, 1998 and
1997, respectively.
The aggregate amounts due to Time, included in accounts payable and accrued
liabilities, were approximately $3,682 and $5,431 as of December 31, 1999 and
1998, respectively.
Oxmoor House Inc., an affiliate of Time, currently publishes the Martha Stewart
Living series of books. In 1997, the Company entered into 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 $2,531, $1,995
and $2,567, in 1999, 1998 and 1997, 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, $1,500 and $1,500 in 1999, 1998
and 1997, respectively.
F-19
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
The Company used the service of a law firm of which Martha Stewart's son-in-law
is a partner. The Company paid an aggregate of approximately $166 and $92 in
fees and expenses in respect of such services in 1999 and 1998, respectively.
10 NOTE PAYABLE AND LINE OF CREDIT
The Company had a note payable aggregating $27,650 to Time Publishing Ventures,
Inc. at December 31, 1998. The note was due on February 3, 2001 and bore
interest at the current prime rate plus 1% per annum. In March 1999, the Company
entered into an agreement with Bank of America, N.A., formerly known as
NationsBank, N.A., for a loan in the amount of $15,000. The proceeds from the
loan were used, along with existing cash balances, to pay in full, the note
payable to Time Publishing Ventures aggregating $27,650 plus accrued interest.
In July 1999, the Company repaid the Bank of America, N.A. loan with the
proceeds received from the Kleiner Perkins investment (See Note 3).
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 the prime rate per annum.
The agreement also requires the Company to pay a commitment fee equal to
one-half of 1% per annum of the unused available borrowings. As of December 31,
1999, the Company did not have any amounts outstanding under this agreement.
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 $ 3,341, $4,100 and $ 3,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The following is a schedule of future minimum payments under capitalized and
operating leases at December 31, 1999:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
------ ------
<S> <C> <C>
2000 $ 2,649 $ 7,188
2001 2,649 7,218
2002 2,172 6,825
2003 477 6,837
2004 -- 6,926
thereafter -- 40,459
------- -------
Total minimum lease payments 7,947 $75,453
------- =======
Imputed interest (977)
-------
Present value of minimum capitalized
lease payments 6,970
-------
Current portion 2,651
-------
Long-term capitalized lease obligation $ 4,319
=======
</TABLE>
The Company has outstanding letters of credit for $2,252 as security for certain
leases as of December 31, 1999.
F-20
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
In the ordinary course of business, the Company is involved in various legal
proceedings. The Company believes that the ultimate resolution of these claims
to the extent not covered by insurance will not, individually or in the
aggregate, have a material adverse effect on the Company.
12 OTHER INFORMATION
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and long term debt. The
carrying amount of these accounts approximates fair value.
Accumulated amortization of intangible assets was $8,851 and $5,901 at December
31, 1999 and 1998, respectively. Amortization expense was $2,950, $2,997 and
$2,904 for the years ended December 31, 1999, 1998 and 1997, respectively.
Advertising expense was $14,541, $11,564 and $10,440 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Interest paid was $2,705, $3,962 and $0 for the years ended December 31, 1999,
1998 and 1997, respectively.
Income taxes paid were $716, $502 and $ 458 for the years ended December 31,
1999, 1998 and 1997, respectively.
13 INDUSTRY SEGMENTS
The Company's industry segments are discussed in Note 1. Segment information for
the years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Publishing Television Merchandising Internet/Direct Corporate Consolidated
Commerce Charges
---------- ---------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues $145,520 $ 30,590 $ 20,200 $ 36,004 -- $232,314
Income (loss) from
operations 48,525 4,708 20,013 (14,767) (36,157) 22,322
Depreciation and
amortization -- 1,569 -- -- 4,991 6,560
Total assets 24,570 20,696 7,265 7,444 221,796 281,771
Capital expenditures -- 98 -- -- 6,200 6,298
1998
Revenues $127,020 $ 23,351 $ 15,004 $ 14,673 -- $180,048
Income (loss) from
operations 42,669 3,924 15,305 (4,998) (29,515) 27,385
Depreciation and
amortization -- 1,234 -- -- 4,300 5,534
Total assets 21,244 16,021 2,309 8,223 77,575 125,372
Capital expenditures -- 2,313 -- -- 417 2,730
1997
Revenues $108,694 $ 12,396 $ 6,919 $ 4,812 -- $132,821
Income (loss) from
operations 33,090 320 6,619 (1,223) (22,215) 16,591
Depreciation and
amortization -- 430 -- -- 3,497 3,927
Total assets 20,454 12,004 1,175 3,849 68,224 105,706
Capital expenditures -- 8,530 -- -- 2,497 11,027
</TABLE>
F-21
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
14 EARNINGS PER SHARE (UNAUDITED)
The Company became a "C" Corporation on November 22, 1999. Prior thereto, it
operated as an LLC. Historical earnings per share have not been presented since
prior to becoming a "C" corporation the Company had LLC interests outstanding
and no common shares issued or outstanding. Furthermore, historical earnings do
not reflect income taxes that would have been charged had the Company been a "C"
Corporation. The pro forma adjustment to income tax provision reflects the
income taxes that would have been recorded had the Company been a "C"
Corporation for all periods presented.
Pro forma earnings per share amounts are calculated based upon the weighted
average number of common shares outstanding during each period presented.
Adjusted pro forma earnings per share amounts are calculated based upon the
number of common shares outstanding as if all common shares issued in connection
with the Kleiner Perkins investment and the initial public offering were
outstanding for all periods presented in order to better reflect comparability
between periods. Proceeds received from these transactions have not been
included in the calculation of earnings per share.
There was no dilution from common stock equivalents outstanding during such
periods and accordingly diluted earnings per share are not presented separately.
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Net income $25,569 $23,806 $13,929
Pro forma adjustment to income tax provision 13,877 10,817 7,038
Pro forma net income 11,692 12,989 6,891
Pro forma
Earnings per share-basic and diluted $ .28 $ .33 $ .18
Weighted average common shares outstanding 41,720 39,176 39,176
Adjusted pro forma
Earnings per share-basic and diluted $ .24 $ .26 $ .14
Weighted average common shares outstanding 49,588 49,583 49,583
</TABLE>
F-22
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
15 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year ended December 31, 1999 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 53,379 $ 58,123 $ 49,838 $ 70,974 $232,314
Income from operations 7,420 8,045 3,913 2,944 22,322
Net income(1) 6,619 7,547 3,474 7,929 25,569
Pro forma net income(2) $ 3,448 $ 3,965 $ 1,877 $ 2,402 $ 11,692
PRO FORMA(2)
Earnings per share-basic and diluted $ .09 $ .10 $ .05 $ .05 $ .28
Weighted average shares outstanding 39,176 39,176 40,596 47,932 41,720
ADJUSTED PRO FORMA(3)
Earnings per share-basic and diluted $ .07 $ .08 $ .04 $ .05 $ .24
Weighted average shares outstanding 49,583 49,583 49,583 49,601 49,588
STOCK PRICE PER SHARE-NYSE(4)
High -- -- -- 47 1/2
Low -- -- -- 20 5/8
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1998 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 42,300 $ 43,953 $ 42,580 $ 51,215 $180,048
Income from operations 6,950 8,300 9,044 3,091 27,385
Net income 6,017 7,171 8,285 2,333 23,806
Pro forma net income(2) $ 3,101 $ 3,798 $ 4,703 $ 1,387 $ 12,989
PRO FORMA
Earnings per share-basic and diluted $ .08 $ .10 $ .12 $ .04 $ .33
Weighted average shares outstanding 39,176 39,176 39,176 39,176 39,176
ADJUSTED PRO FORMA(3)
Earnings per share-basic and diluted $ .06 $ .08 $ .09 $ .03 $ .26
Weighted average shares outstanding 49,583 49,583 49,583 49,583 49,583
</TABLE>
(1) Fourth quarter 1999 net income reflects a deferred tax benefit of $4,810
resulting from the conversion to a "C" Corporation.
(2) Pro forma net income reflects the income taxes that would have been recorded
had the Company been a "C" Corporation for all periods presented.
(3) Adjusted pro forma earnings per share amounts are calculated based upon the
number of common shares outstanding as if all common shares issued in connection
with the Kleiner Perkins investment and the initial public offering were
outstanding for all periods presented in order to better reflect comparability
between periods. Proceeds received from these transactions have not been
included in the calculation of earnings per share.
(4) The number of holders of record of Class A and Class B common stock of
the Company as of February 25, 2000, was 3,206 and one, respectively.
F-23
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
16 SUBSEQUENT EVENTS (UNAUDITED)
Strategic Investment
In February 2000, the Company made a cash investment of approximately $13
million in BlueLight.com, an e-commerce company, representing a 5% ownership
interest. As part of the transaction, the Company agreed to make its line of
Martha Stewart Everyday products, currently available at Kmart, available on
BlueLight.com for which the Company will receive royalty payments.
Share Repurchase
In February 2000, the Company entered into an agreement to repurchase 1.366
million shares of Class A common stock from Time at a purchase price of $23.79
per share, for a total consideration of $32.5 million. Concurrently, Time's put
and call rights relating to its remaining equity terminated.
F-24
<PAGE> 43
MARTHA STEWART LIVING OMNIMEDIA, INC.
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE, CHARGED TO
BEGINNING OF COSTS AND BALANCE, END
DESCRIPTION YEAR EXPENSES DEDUCTIONS OF YEAR
----------- ---- -------- ---------- -------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
YEARS ENDED DECEMBER 31,
1999........................... $1,202 $1,572 $ 837 $1,937
1998........................... 1,123 293 214 1,202
1997........................... 500(a) 787 164 1,123
RESERVE FOR AUDIENCE UNDER DELIVERY:
YEARS ENDED DECEMBER 31,
1999........................... $4,803 $2,159 $2,796 $4,166
1998........................... 1,434 5,724 2,355 4,803
1997........................... 605(a) 1,525 696 1,434
</TABLE>
(a) balance at acquisition.
F-25
<PAGE> 44
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
2.1 -- Agreement and Plan of Merger.*
2.2 -- LLC Membership Interest Purchase Agreement, dated as of July
27, 1999, by and among Martha Stewart Living Omnimedia LLC,
KPCB Holdings, Inc., as nominee, and KPCB IX Associates,
LLC.*
3.1 -- Registrant's Certificate of Incorporation.*
3.2 -- Registrant's By-Laws.*
4.1 -- Form of Specimen Certificate for Registrant's Common Stock.*
4.2 -- Loan Agreement (line of credit) between NationsBank, N.A.
and Martha Stewart Living Omnimedia LLC, dated as of
February 3, 1997.*
4.3 -- Amendment No. 1, dated as of June 30, 1998, to the Loan
Agreement, dated as of February 3, 1997, between Martha
Stewart Living Omnimedia LLC and NationsBank, N.A.*
4.4 -- Amendment No. 2, dated as of March 30, 1999, to the Loan
Agreement, dated as of February 3, 1997, between Martha
Stewart Living Omnimedia LLC and NationsBank, N.A.*
4.5 -- Warrant for a Percentage of the Internet Business of Martha
Stewart Living Omnimedia LLC, dated July 27, 1999, issued to
KPCB Holdings, Inc.*
10.1 -- Form of Stockholders' Agreement.*
10.2 -- 1999 Stock Incentive Plan.*+
10.2.1 -- Amendment Number 1 to 1999 Stock Incentive Plan, dated as of
March 9, 2000+
10.3 -- 1999 Non-Employee Director Stock and Option Compensation
Plan.*+
10.4 -- 1999 Employee Stock Purchase Plan.*+
10.5 -- Martha Stewart Living Omnimedia LLC Phantom Performance Unit
Plan.*+
10.6 -- Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC
Unit/Stock Option Plan.*+
10.7 -- Form of Employment Agreement, by and between Registrant and
Martha Stewart.*+
10.8 -- Form of Intellectual Property License and Preservation
Agreement, by and between Registrant and Martha Stewart.*
10.9 -- Form of Location Rental Agreement, by and between Registrant
and Martha Stewart.*
<PAGE> 45
10.10 -- Lease, dated as of September 24, 1992, between Tishman
Speyer Silverstein Partnership and Time Publishing Ventures,
Inc., as amended by First Amendment of Lease dated as of
September 24, 1994 between 11 West 42 Limited Partnership
and Time Publishing Ventures, Inc.*
10.11 -- Lease, dated as of March 31, 1998, between 11 West 42
Limited Partnership and Martha Stewart Living Omnimedia
LLC.*
10.12 -- Lease, dated August, 1999, between 601 West Associates LLC and
Martha Stewart Living Omnimedia LLC.*
10.12.1 -- First Lease Modification Agreement, dated December 24, 1999,
between 601 West Associates LLC and Martha Stewart Living
Omnimedia, Inc.
10.13 -- Lease, dated as of March 6, 1996, between Newtown Group
Properties Limited Partnership and Time Publishing Ventures,
Inc., with amendments.*
10.14 -- Lease, dated as of August 1, 1996, between Newtown Group
Properties Limited Partnership and Martha Stewart Living
Omnimedia LLC.*
10.15 -- Lease, dated as of August 14, 1997, between Newtown Group
Properties Limited Partnership and Martha Stewart Living
Omnimedia LLC.*
10.16 -- License Agreement, dated January 28, 1997, by and between
Martha Stewart Living Omnimedia LLC and Kmart
Corporation.*
10.17 -- Severance Agreement, dated September 23, 1999, by and
between Martha Stewart Living Omnimedia LLC and Sharon
Patrick.*+
10.18 -- Letter Agreement, dated September 3, 1999, by and between
Martha Stewart Living Omnimedia LLC and Helen Murphy.*+
10.19 -- LLC Unit Option Agreement, dated September 3, 1999, by and
between Martha Stewart Living Omnimedia LLC and Helen
Murphy.*+
27.1 -- Financial Data Schedule.
* Incorporated by reference to our Registration Statement on Form S-1, File
Number 333-84001
+ Indicates management contracts and compensatory plans
<PAGE> 1
Exhibit 10.2.1
AMENDMENT NO. 1 TO
THE MARTHA STEWART LIVING OMNIMEDIA, INC.
1999 STOCK INCENTIVE PLAN
The Martha Stewart Living Omnimedia, Inc. 1999 Stock Incentive Plan
(the "Plan") is hereby amended, effective March 9, 2000 (the "Effective Date"),
as set forth below.
1. The definition of "Fair Market Value" in Section 1 of the Plan is hereby
amended to read in its entirety as follows:
"Fair Market Value" of the Common Stock means, as of any given
date, the price of the Common Stock on the composite
transaction tape of the New York Stock Exchange as of the
close of the regular business hours of the New York Stock
Exchange, without regard to any after-hours trading that may
hereinafter be commenced on such exchange, on the most recent
prior date for which such closing price is available, or, if
the Common Stock is not listed on the New York Stock Exchange,
the analogous closing price on the most recent prior date on
any other national securities exchange on which the Common
Stock is listed or on The Nasdaq Stock Market. If there is no
regular public trading market for the Common Stock, the Fair
Market Value of the Common Stock shall be determined by the
Committee in good faith.
<PAGE> 1
Exhibit 10.12.1
FIRST
LEASE MODIFICATION AGREEMENT
AGREEMENT, made as of the 24th day of December, 1999, by and between 601 WEST
ASSOCIATES LLC, having an address at 601 West 26th Street, Suite 900, New York,
New York 10001 ("Lessor"), and MARTHA STEWART LIVING OMNIMEDIA, INC., as
successor in interest to MARTHA STEWART LIVING OMNIMEDIA LLC having an address
at 11 West 42nd Street, New York, New York 10036 ("Lessee").
W I T N E S S E T H:
By lease dated August 20, 1999 (which lease, together with all exhibits thereto
are hereinafter referred to as the "Lease"), Lessor leased to Lessee the
following space: Ninth Floor North 12 through 39, Ninth Floor South 25 through
37, and Ninth Floor West A through J, as more particularly shown on Exhibit A of
the Lease (collectively, the "Premises") in the building known as 601 West 26th
Street, New York, New York (the "Building").
Lessee desires to rent the additional space on the Ninth Floor known as Ninth
Floor East Columns 1 through 12, as well as all corridors and bathrooms and the
truck bay area (see Exhibit A attached hereto).
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and
other good and valuable consideration by each party to the other paid, the
receipt and sufficiency whereof are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. Landlord hereby leases to Tenant the following space: Ninth Floor East
Columns 1 through 12, so that as of this date the term "Premises" or
"Demised Premises" in the "Witnesseth" section of the Lease shall mean
(a) Ninth Floor North Columns 12 through 39, (b) Ninth Floor South
Columns 25 through 37, (c) Ninth Floor West Columns A through J, and
(d) Ninth Floor East Columns 1 through 12, and appurtenant truck bays,
bathrooms and corridors (as shown on Exhibit A attached hereto) which
space constitutes the entire rentable area of the Ninth Floor of the
Building.
2. Article 42 of the Lease is hereby amended to delete the last two
sentences and to replace them with the following:
"Landlord anticipates that Landlord's Work to the Premises shall be
substantially completed on or about January 2, 2000. In the event
Landlord's Work to the Premises is not completed on or before January
2, 2000, Tenant shall be entitled to an abatement against Fixed Rental
in addition to the Credit defined in Article 43.2, in the amount of
$4,920.36 multiplied by
<PAGE> 2
the number of days between January 2, 2000 and the date Landlord's Work
to the Premises is substantially complete."
3. Article 42 of the Lease is hereby amended to add the following:
"Notwithstanding anything set forth herein to the contrary, Tenant
acknowledges that the space designated on Exhibit C attached hereto
(the "Chelsea Storage Space") is currently occupied by Chelsea Storage,
the existing occupant, and that as of the Commencement Date the
Premises shall not include the Chelsea Storage Space. Landlord
represents that the termination date set forth in the lease between
Landlord and Chelsea Storage is April 30, 2001. Landlord shall be
obligated to deliver the Chelsea Storage Space to Tenant upon the
vacatur of said space by the existing tenant, its successors, assigns
and subtenants. Upon delivery of the Chelsea Storage Space, in the
condition required under this Lease, the Chelsea Storage Space shall be
deemed to be part of the Premises (the "Chelsea Storage Inclusion
Date"). Tenant agrees that the continued occupancy of the Chelsea
Storage Space by Chelsea Storage shall not give rise to any offset,
claim or defense against Landlord or an abatement in rent, except as
follows: in the event Chelsea Storage does not vacate the Chelsea
Storage Space on or before March 1, 2000, Tenant shall be entitled to
an abatement against the Fixed Rental in the amount of $555.56 for each
day after March 1, 2000 that Chelsea Storage has not vacated the
Chelsea Storage Space. Landlord shall have twenty (20) days from the
date Chelsea Storage vacates the Chelsea Storage Space within which to
complete the applicable items of Landlord Work, and during such twenty
(20) day period, the $555.56 per diem abatement shall be tolled. In the
event Landlord has not substantially completed the applicable items of
Landlord's Work within said twenty (20) day period, the abatement shall
recommence upon the twenty-first (21st) day and shall continue until
the applicable items of Landlord's Work to the Chelsea Storage Space
have been substantially completed and the Chelsea Storage Space has
been delivered to Tenant.
"With regard to the space described on Exhibit A attached hereto (the
"Northwest Space"), from and after the date the Credit in the amount of
$848,526, as described in Article 43, has been fully exhausted, Tenant
shall be entitled to an abatement against Fixed Rental in the sum of
$526.03 per day for each day Tenant does not use all or part thereof
while the Chelsea Storage Space has not been delivered to Tenant in the
required condition. Tenant agrees that for the purposes of this
paragraph Tenant shall be deemed to be using the Northwest Space during
the performance of its Initial Installations to the Northwest Space.
Tenant shall not be deemed to be using the Northwest Space once the
Initial Installations to said space have been substantially completed.
However, if Tenant uses for any purpose (other than for the storage of
construction materials during the performance of Tenant's Initial
Installations) all or part of the Northwest Space and the Chelsea
Storage Space has not been delivered to Tenant in the required
condition, the abatement shall be reduced to $263.01 per diem
commencing on the date Tenant uses all or part of the Northwest Space
(irrespective of the purpose) through the date the Chelsea Storage
Space is delivered to Tenant in the required condition. Upon the
delivery of the Chelsea Storage Space to Tenant
<PAGE> 3
in the required condition, the abatement shall terminate, irrespective
of whether or not Tenant uses any or all of the Northwest Space.
"For the purposes of setting the Commencement Date, Landlord
acknowledges that as of the date of this Agreement, there have been no
Tenant Delays, as defined in Article 46.2 of the Lease."
Landlord shall, at its sole cost and expense, indemnify, defend and
hold Tenant and Tenant's shareholders, officers and employees harmless
from and against any and all claims, suits, actions, damages, fees,
costs, court costs, expenses (including, but not limited to, all
reasonable fees and disbursements of attorneys engaged by Tenant and
liabilities which may be incurred by or imposed on Tenant or which may
arise in connection with any claims, suits or actions by Chelsea Moving
& Storage, Inc. ("Chelsea Storage") (or anyone claiming by or through
Chelsea Storage), Alex Saidon and/or Naomi Saidon, or from the
enforcement of this indemnity, which may be entered or which may arise
only with respect to or on account of a claim by Chelsea Storage, Alex
Saidon and/or Naomi Saidon against Tenant for interference with
contractual relations, Tenant's occupancy or use of the Chelsea Storage
Space, or any common areas of the 9th Floor of the Building, or
relating to Tenant entering into the Lease or this Agreement, or
exercise of its rights under the same (including, without limitation,
the claims made in the pending litigation), and specifically excluding
any inability of Tenant to use the Chelsea Storage Space or make full
use of the Northwest Space, which is otherwise provided for herein.
Tenant shall give Landlord written notice of any claims under this
paragraph promptly upon becoming aware of such claim. All such actions,
suits, claims, damages and/or proceedings shall be resisted and
defended by counsel of Landlord's choice, at Landlord's sole cost and
expense. The indemnity under this paragraph runs for the benefit of
Tenant and Tenant's shareholders, officers and employees only, and does
not create any right or benefit in favor of any other person or entity.
The consent of Tenant to Landlord's settlement of any claims by Chelsea
Storage covered by this indemnity provision shall be required if Tenant
is adversely affected by the terms of such settlement.
4. Article 43 of the Lease is hereby amended so that Articles 43.1.1 (i)
through (x) are deleted and replaced with the following:
43.1.1 Prior to the Chelsea Storage Inclusion Date, a fixed rental
("Fixed Rental") at an annual rate of:
(i) $3,394,104.00 ($282,842.00 per month) for the lease
year commencing on the Commencement Date (defined in
Article 42 above) and continuing thereafter to and
including the day immediately preceding the first
anniversary of the first day of the month after the
Commencement Date. Each twelve (12) month period
thereafter shall be deemed a "Lease Year";
<PAGE> 4
(ii) $3,487,441.86 ($290,620.16 per month) for the second lease
year commencing the first day of the first month of the Second
Lease Year and continuing thereafter until the last day of the
last month of the Second Lease Year;
(iii) $3,583,346.51 ($298,612.21 per month) for the lease year
commencing on the first day of the first month of the Third
Lease Year and continuing thereafter through and including the
last day of the last month of the Third Lease Year;
(iv) $3,681,888.54 ($306,824.05 per month) for the lease year
commencing on the first day of the first month of the Fourth
Lease Year and continuing thereafter through and including the
last day of the last month of the Fourth Lease Year;
(v) $3,783,140.48 ($315,261.71 per month) for the lease year
commencing on the first day of the first month of the Fifth
Lease Year and continuing thereafter through and including the
last day of the last month of the Fifth Lease Year;
(vi) $3,887,176.84 ($323,931.40 per month) for the lease year
commencing on the first day of the first month of the Sixth
Lease Year and continuing thereafter through and including the
last day of the last month of the Sixth Lease Year;
(vii) $3,994,074.20 ($332,839.52 per month) for the lease year
commencing on the first day of the first month of the Seventh
Lease Year and continuing thereafter through and including the
last day of the last month of the Seventh Lease Year;
(viii) $4,103,911.24 ($341,992.60 per month) for the lease year
commencing on the first day of the first month of the Eighth
Lease Year and continuing thereafter through and including the
last day of the last month of the Eighth Lease Year;
(ix) $4,216,768.80 ($351,397.40 per month) for the lease year
commencing on the first day of the first month of the Ninth
Lease Year and continuing thereafter through and including the
last day of the last month of the Ninth Lease Year; and
(x) $4,332,729.95 ($361,060.83 per month) for the lease year
commencing on the first day of the first month of the Tenth
Lease Year and continuing thereafter through and including the
last day of the last month of the Tenth Lease Year.
<PAGE> 5
43.1.2 From and after the Chelsea Storage Inclusion Date, the Fixed
Rental shall be increased to the following annual rate,
provided however that there shall be no retroactive increase
of the Fixed Rental due for any period prior to the Chelsea
Storage Inclusion Date:
(i) $3,586,104.00 ($298,842.00 per month) for the lease year
commencing on the Commencement Date (defined in Article 42
above) and continuing thereafter to and including the day
immediately preceding the first anniversary of the first day
of the month after the Commencement Date. Each twelve (12)
month period thereafter shall be deemed a "Lease Year";
(ii) $3,684,721.86 ($307,060.16 per month) for the second lease
year commencing the first day of the first month of the Second
Lease Year and continuing thereafter until the last day of the
last month of the Second Lease Year;
(iii) $3,786,051.71 ($315,504.31 per month) for the lease year
commencing on the first day of the first month of the Third
Lease Year and continuing thereafter through and including the
last day of the last month of the Third Lease Year;
(iv) $3,890,168.13 ($324,180.68 per month) for the lease year
commencing on the first day of the first month of the Fourth
Lease Year and continuing thereafter through and including the
last day of the last month of the Fourth Lease Year;
(v) $3,997,147.76 ($333,095.65 per month) for the lease year
commencing on the first day of the first month of the Fifth
Lease Year and continuing thereafter through and including the
last day of the last month of the Fifth Lease Year;
(vi) $4,107,069.32 ($342,255.78 per month) for the lease year
commencing on the first day of the first month of the Sixth
Lease Year and continuing thereafter through and including the
last day of the last month of the Sixth Lease Year;
(vii) $4,220,013.73 ($351,667.81 per month) for the lease year
commencing on the first day of the first month of the Seventh
Lease Year and continuing thereafter through and including the
last day of the last month of the Seventh Lease Year;
(viii) $4,336,064.11 ($361,338.68 per month) for the lease year
commencing on the first day of the first month of the Eighth
Lease Year and continuing
<PAGE> 6
thereafter through and including the last day of the last
month of the Eighth Lease Year;
(ix) $4,455,305.87 ($371,275.49 per month) for the lease year
commencing on the first day of the first month of the Ninth
Lease Year and continuing thereafter through and including the
last day of the last month of the Ninth Lease Year; and
(x) $4,577,826.78 ($381,485.57 per month) for the lease year
commencing on the first day of the first month of the Tenth
Lease Year and continuing thereafter through and including the
last day of the last month of the Tenth Lease Year.
5. The Credit defined in Article 43.2 shall be $848,526.00 in lieu of
$447,966.00. Tenant shall be entitled to an additional credit against
Fixed Rental commencing on the Chelsea Storage Inclusion Date. The
amount of the credit shall be the escalated monthly Fixed Rent for the
Chelsea Storage Space only as of the Chelsea Storage Inclusion Date,
multiplied by three (3). The credit for the Chelsea Storage Space shall
be applied in three successive monthly installments commencing on the
Chelsea Storage Inclusion Date.
6. The definition of Tenant's Proportionate Share in Article 48.5 is
hereby changed from 3.64% to 7.30%, provided however that prior to the
Chelsea Storage Inclusion Date the Tenant's Proportionate Share shall
be deemed to be 6.91%. The maximum annual Tax Payments described in
Article 48.6 for each calendar year (or part thereof, with pro ration
for partial lease years) are hereby increased to the following amounts:
(a) from the Commencement Date through December 31, 2002, $37,355.25
per annum; from January 1, 2003 through the Termination Date,
$52,297.35 per annum.
7. Article 44.3 is amended to provide that the expiration date of the
Second Renewal Period is November 30, 2019 and not November 30, 2029.
8. Article 45, Sections 45.3.1 through 45.3.6 are deleted and replaced
with the following:
45.3.1 Upgrade two (2) existing freight elevators by
February 15, 2000;
45.3.2 Install two (2) new passenger elevators in the existing
truck elevator shaft by April 1, 2000.
45.3.3 Landlord will no longer be responsible to renovate
public corridors. Landlord will renovate existing bathrooms to Building Standard
on the Ninth Floor of the Building by January 31, 2000;
45.3.4 Upgrade (i.e., new cabs and controls) the existing four
manual passenger elevators serving the Premises to high speed automatic
elevators by June 15, 2000; and
<PAGE> 7
45.3.5 Upgrade lobby of the Building as contemplated, or in
other commercially reasonable manner, by January 15, 2000.
45.3.6 Provide the electrical service to a single point within
the Premises mutually agreed upon by Landlord and Tenant as required under
Article 84.1 of the Lease, as modified hereby.
45.3.7 Install a base, Class E fire alarm system within the
Building, and bring to the perimeter of the Premises a connection to said
system, by July 1, 2000.
9. Article 51.15 of the Lease is hereby amended to include the following:
"Notwithstanding the foregoing, Tenant may sublet, without
Landlord's consent, up to a total of 20,000 square feet of the
Additional Space to no more than three (3) subtenants
collectively for terms no greater than five (5) years. Tenant
shall not be required to pay to Landlord any excess
consideration with regard to said sublease for the first three
(3) years of the sublet term. Tenant shall pay to Landlord
one-third (1/3rd) of the excess consideration in the fourth
(4th) year of the sublet term and one-half (1/2) of the excess
consideration in the fifth (5th) year of the sublease term."
10. The amount of the security deposit required under Article 32 is hereby
increased to $1,793,052. Simultaneously herewith, Tenant shall deliver
to Landlord a check in the amount of $448,560 and a letter of credit in
the amount of $448,560 (which letter of credit complies with the
provisions of Article 59 of the Lease) representing the difference
between the new security deposit and the amount already paid to
Landlord.
11. (a) Tenant acknowledges that the tenant ABC Die is located
above part of the Premises and that ABC Die's machinery has
generated considerable disruptive noise and vibrations above a
certain area within the Premises, estimated to be
approximately 20,000 square feet, as is described on Exhibit
_____ (the "Disrupted Space Beneath ABC Die"). Tenant agrees
that the continued occupancy and the operation of machinery by
ABC Die or any successor assignee or subtenant shall not give
rise to any offset, claim or defense against Landlord or an
abatement in Fixed Rental, except as set forth below.
Landlord agrees that if Tenant does not use all or part of the
Disrupted Space Beneath ABC Die (Tenant agrees that for the
purpose of this paragraph, Tenant shall be deemed to be using
said space during the performance of its Initial
Installations; therefore, Tenant shall not be deemed to be
using the Disrupted Space Beneath ABC Die once the Initial
Installations to said space have been substantially
completed.), Tenant shall be entitled to an abatement in Fixed
Rental from and after the date the Credit in the amount of
$848,526.00 as described in Article 43.2 has been fully
exhausted, in the amount of $1,315.07 per diem for so long as
ABC Die or any successor assignee or subtenant occupies and
operates its machinery above the Disrupted Space Beneath ABC
Die, except as set forth below.
<PAGE> 8
If Tenant uses all or part of the Disrupted Space Beneath ABC
Die for any purpose (other than for the storage of
construction materials during the performance of Tenant's
Initial Installations), then the abatement shall be reduced to
$657.53 per diem commencing on the date Tenant uses all or
part of the Disrupted Space Beneath ABC Die.
(b) Notwithstanding anything set forth herein to the contrary,
upon the occurrence of (i) the permanent cessation by ABC Die,
and all successors, assignees or subtenants of the use of its
machinery, or (ii) ABC Die and all successors, assignees or
subtenants installing its machinery on foundations and/or
skids as required under its lease, irrespective of whether
Tenant has taken possession of, uses or occupies any or all of
the Disrupted Space Beneath ABC Die, or (iii) the
objectionable noise heard within the Disrupted Space Beneath
ABC Die ceases permanently, all rent abatements under this
section shall cease.
(c) In the event neither of the events described in (b) (i) or
(ii) above occurs on or before July 1, 2000, then Tenant shall
be entitled to a rent abatement, in addition to the abatement
described in paragraph 11(a) above, in the amount of $273.97
per day for each day after July 1, 2000 that either of the
events described in (b) (i) or (ii) above has not occurred. In
the event neither of the events described in (b) (i) or (ii)
above occurs on or before July 1, 2002, then the additional
rent abatement shall increase from $273.97 per day to $547.95
per day for each day after July 1, 2002 that either of the
events described in (b) (i) or (ii) above has not occurred.
(d) Landlord shall not knowingly enter into leases with new
tenants for the space above the Premises where the noise
levels generated by said tenant in connection with the
operation of its business shall exceed NC-35, subject to
Section 97.2 of the Lease regarding the installation of
generators. Landlord shall insert provisions in each of its
leases for the space above the Premises, which provisions will
prohibit noise levels emanating from such space to exceed
NC-35.
(e) Landlord agrees that it will not extend the lease expiration
date of the ABC Die lease beyond the stated expiration date,
which Landlord represents to be May 31, 2006. Landlord shall
not enter into any agreement with ABC Die whereby it would be
in Landlord's economic interest not to promote the occurrence
of any of the events listed in subparagraphs (b)(i), (ii) and
(iii).
12. In no event shall Tenant's failure to use the Disrupted Space Beneath
ABC Die or Landlord's failure to deliver the Chelsea Storage Space
entitle Tenant to (i) terminate the Lease pursuant to Article 87 of the
Lease, (ii) or otherwise claim actual or constructive eviction or
breach of lease and/or breach of any express or implied warranty of
habitability or fitness for use. The provisions of this Section 12
shall not limit any of Tenant's remedies
<PAGE> 9
in the event Landlord defaults in its obligations under Article 97 of
the Lease or under Section 11(d) or (e) above or Section 3 hereof.
13. Provided that Tenant is not in default under the terms of this Lease
beyond applicable grace and notice periods, Tenant shall have an option
(the "Option"), which must be exercised by written notice to Landlord,
to lease additional space (each an "Option Space") in the Building,
which Option Space is comprised of distinct areas known as (i) ABC-I
consisting of 61,259 rentable square feet, (ii) ABC-II consisting of
11,667 rentable square feet , (iii) Hunt Slonem consisting of 9,635
rentable square feet , and (iv) LCW consisting of 12,339 rentable
square feet. Each Option Space is depicted on Exhibit B attached
hereto. The "Inclusion Date" of each of (i) ABC-I, (ii) ABC-II, (iii)
Hunt Slonem and (iv) LCW, if Tenant elects to exercise the Option with
regard to the Option Spaces, shall be the date Landlord delivers the
Option Space to Tenant in the required condition. The stated expiration
dates of the respective leases for the Option Spaces are as follows:
(i) ABC-I and ABC-II: May 30, 2006; (ii) Hunt Slonem: December 31,
2003; and (iii) LCW: June 30, 2004. In the event Tenant intends to
exercise an Option, the dates by which the Option must be exercised
with respect to each Option Space is as follows: (i) ABC-I and ABC-II
on or before January 31, 2006, (ii) Hunt Slonem on or before August 31,
2003, and (iii) LCW on or before February 29, 2004, time being of the
essence. In the event Tenant does not exercise its respective Option by
the date set forth above, Tenant's Option with respect to such Option
Space shall terminate, and Landlord shall have no further obligation to
Tenant with regard to such Option Space except as set forth in Article
89. In the event any of the Option Spaces are to become vacant prior to
their stated lease expiration dates, Landlord shall promptly send a
notice to Tenant informing Tenant of same and specifying the date (the
"Availability Date") Landlord anticipates the Option Space to be
available. If the Availability Date is more than two hundred and ten
(210) days after the date of Landlord's notice to Tenant, Tenant may,
on or before the "Prior Availability Exercise Date" exercise the option
with regard to such Option Space, time being of the essence to exercise
the Option on or before such date. "Prior Availability Exercise Date"
shall be the date which is {(x) thirty (30) days plus (y) (i) the
number of days between the date of Landlord's notice and the
Availability Date, less (ii) two hundred ten (210)} days from the date
of Landlord's notice. If the Availability Date is two hundred and ten
(210) days or less from the date of Landlord's notice, Tenant may,
within thirty (30) days after the date of Landlord's notice, exercise
the Option with regard to such Option Space, time being of the essence
to exercise the Option within said thirty (30) day period.
Within ten (10) days after Tenant notifies Landlord that an Option has
been exercised (irrespective of whether the information referred to in
subparagraphs (a) and (b) below exist), Landlord shall notify Tenant in
writing of the rental to be charged for the Option Space as well as the
other economic terms of the proposed tenancy (the "Rental Notice"),
which rental and other economic terms shall be the greater of (i) the
rentable square footage of the Option Space multiplied by the then
escalated per square foot Fixed Rental of the Premises, as escalated
for the balance of the Lease Term, and the prorated
<PAGE> 10
additional rent (but subject to paragraph 25 hereof) and concessions
provided for in the Lease, and (ii) 90% of the (a) then current rental
rate and other economic terms and/or concession provisions and security
requirements then prevailing in leases in the Building for space
comparable in size and for similar length terms and starting dates, on
the three (3) floors above or below the Premises executed
contemporaneously with Tenant's exercise of the Option, or if no leases
have been contemporaneously executed, (b) the rental rates and other
economic terms and/or concession provisions and security requirements
proposed in written offers from bona fide third parties for space
comparable in size and for similar length terms, on the three (3)
floors above or below the Premises. Landlord shall provide Tenant with
copies of all applicable leases and bona fide offers simultaneously
with Landlord's notice of the rental rate. Tenant shall then have ten
(10) days after receipt of the rental rate and other terms within which
to rescind, by written notice to Landlord, the exercise of the Option.
In the event there are no contemporaneous leases or bona fide third
party offers as provided above, and if Landlord and Tenant are not able
to otherwise agree on the rental to be paid by Tenant, Landlord and
Tenant agree to submit the dispute to arbitration in accordance with
Article 44, section 44.5 of the Lease, provided however that the
criteria to be used by the arbitrators in computing a rental rate shall
be limited to relevant factors applicable to the Building only, and not
factors applicable to any other building whether or not located in the
same neighborhood as the Building. In addition, Landlord agrees that
the maximum amount of Fixed Rental to be set in the arbitration
proceeding shall be the amount set forth in the Rental Notice.
In the event Tenant exercises its Option under any of the scenarios set
forth in this Article, Tenant shall pay fixed rent and additional rent
and deliver all required security as of the date Landlord delivers the
Option Space in the condition required under this Lease, at the rates
set forth in the Rental Notice (or in the More Favorable Offer, defined
below), irrespective of whether Landlord and Tenant have entered into a
written modification of lease. Tenant shall continue to pay rent and
additional rent at the rates in the Rental Notice or the More Favorable
Offer until such time as a written lease modification is executed by
Landlord and Tenant. Landlord shall immediately credit Tenant with any
rent overpayments as then agreed to. After the execution of the lease
modification agreement, Tenant shall pay fixed and additional rent at
the rates set forth therein.
Tenant's Proportionate Share shall be increased based upon the rentable
square footage of the Option Space. For the purpose of computing the
increase in Tenant's Proportionate Share, the total square footage of
the Building shall be deemed 2,050,000.
Upon the Inclusion Date with respect to any of the Option Spaces
referred to in this paragraph, such space shall be deemed to be added
to and included in the Premises and shall be under and subject to all
the terms, covenants and conditions of this Lease, including, without
limitation, the expiration of the term hereof.
<PAGE> 11
Notwithstanding anything set forth to the contrary, Landlord shall
perform work to ready an Option Space for occupancy similar to
Landlord's Work described on Exhibit B of the Lease, and Tenant shall
be entitled to a three (3) month rent concession with respect thereto.
Notwithstanding anything contained herein to the contrary, in the event
that the time for Tenant to exercise any particular Option expires
without Tenant having exercised the same, or Tenant rescinds the
exercise of an Option within the ten (10) day period set forth above
(the date of such expiration or giving of rescission notice the "Option
Free Date"), then for a period of ninety (90) days thereafter, Landlord
shall be free to lease the applicable Option Space to any third party
provided the economic terms of such deal are not such that the third
party's net effective rent is more than seven and one-half percent
(7.5%) less than what had been quoted to Tenant in the Rental Notice
(the "Option Free Terms"). In the event the proposed third party deal
has a net effective rent which is more than 7.5% less than what had
been quoted Tenant, Landlord shall offer such deal to Tenant and Tenant
shall then have ten (10) business days within which to accept or reject
the offer to lease the applicable Option Space on the Option Free
Terms. If Tenant rejects such offer, then Landlord shall be free to
lease such space to a third party on the Option Free Terms. If Landlord
and the third party fail to execute a lease containing the Option Free
Terms within said ninety (90) day period, Tenant's right under Article
89 shall become applicable. If Landlord and the third party execute a
lease containing the Option Free Terms within said ninety (90) day
period, then, at Tenant's request, Landlord shall provide Tenant with a
copy thereof to confirm that the seven and one-half percent (7.5%)
limit was not exceeded.
If Landlord is unable to give possession to Tenant of any of the Option
Spaces provided for in this Article by reason of the holding over or
retention of possession by any tenant, tenants or occupants or for any
other reason beyond the reasonable control of Landlord, then and in
such event the Inclusion Date with respect to the Option Space shall
not be deemed to occur until such later date as said Option Space is
delivered in the condition required and available for Tenant's
occupancy, and such later date shall be deemed to be the Inclusion Date
for the purpose of this Article. Notwithstanding any of the foregoing
provisions of this Article, if any Option Space is not available for a
period of six (6) months after the Availability Date, Tenant shall give
notice to Landlord within thirty (30) days after the expiration of such
six (6) month period that either (i) it does not want to occupy the
Option Space, and, in such event, rent, additional rent and other
charges shall be adjusted on a per square foot basis, and any such rent
or other charges prepaid by Tenant with respect to such Option Space
shall be refunded to Tenant, and neither Landlord nor Tenant shall have
any liability to the other with respect to said Option Space, except
pursuant to Article 89, or (ii) it shall wait an additional period of
six (6) months (commencing on the seventh [7th] month from the
Availability Date) for Landlord to give possession of the Option Space,
before notifying Landlord that it does not want to occupy the Option
Space. This process shall continue until such time as either Tenant
<PAGE> 12
accepts delivery of the applicable space or rescinds its Option to
lease the space. This process shall also apply to the space offered
pursuant to Article 89.
All of the Options contained in this Article are independent options,
and the exercise or non-exercise of any Option or part thereof shall in
no way affect Tenant's right to exercise any other Option, whether in
whole or in part.
Landlord agrees not to voluntarily extend any of the stated expiration
dates of the existing leases for the Option Spaces.
14. Exhibit B "Landlord's Work" is hereby modified as follows:
(i) In lieu of Landlord's obligation under item 7, Landlord will
deliver the floor in the Premises in an "as is" condition.
(ii) In lieu of Landlord's obligation under item 9, Landlord will
remove all sprinkler branches except those necessary for
egress during construction. Landlord will leave the mains in
place.
(iii) Landlord will not demolish or remove existing water or waste
risers for the former bathrooms.
(iv) Landlord will leave all existing overhead heating units in the
Premises in their "as is" condition. Landlord will install
working perimeter radiators where ever there are existing
radiator stems. Landlord will not be responsible to provide
any additional radiators or heating units or other heat to the
Premises. Landlord will not be obligated to repair any
non-functioning overhead heating units or radiators within the
Premises.
(v) Modifying item 2, Landlord will not paint any windows or
window frames in the Premises.
In consideration of the modifications to Exhibit B, Landlord shall give
Tenant a credit against the first months Fixed Rent due under this
Lease in the amount of $150,000.00.
With regard to item 2 of Exhibit B, (a) Tenant acknowledges that
Landlord is obligated to re-putty only those window frames where the
existing putty is not in good condition, and that as a result of the
re-puttying, and the existing putty which is in good condition, there
shall be several different colors of putty on the window frames. Tenant
also acknowledges that placement of putty requires extensive manual
labor, which by its nature cannot be perfect or absolutely uniform, and
as such, Tenant agrees to accept the Premises with putty imperfections,
some of which Tenant may choose to re-putty, in consideration for
which, Landlord shall give Tenant a credit against the first months
Fixed Rent due under this Lease in the amount of $10,000.00; (b) For
the long term maintenance of the Premises, Landlord
<PAGE> 13
recommends that it is in the Tenant's interest that up to twenty (20)
window vent sections and steel frame supports be replaced. Tenant
agrees that Landlord may complete the installation of the new window
sections and steel frame supports within approximately sixty days after
the Commencement Date and that Tenant shall have no offset or claim
against Landlord for the completion of such work after the Commencement
Date; (c) Tenant has requested a uniform look through out the Premises
regarding the size of the window panes and surrounding metal frames.
Tenant has requested that Landlord remove the oversized window panes
and replace same with fabricated steel frames and panes of uniform
size. Tenant agrees that Landlord may complete the installation of the
new steel frames and uniform panes within sixty (60) days after the
Commencement Date and that Tenant shall have no offset or claim against
Landlord for the completion of such work after the Commencement Date.
Nothing contained herein shall be deemed a waiver of any rights of
Tenant in the event Landlord has not taken reasonable efforts to
minimize interference with the operation of Tenant's business during
performance of the work. In the event Landlord has not commenced and
diligently pursued the installation of the window vent sections, steel
frame supports or steel frames and uniform panes within one hundred
(100) days after the Commencement Date, Tenant may install same and
offset the cost of installation against the next installment of Fixed
Rent then due.
15. Article 84 of the Lease, as amended in paragraph 8 above, is hereby
further amended to provide that Landlord shall provide Tenant with an
additional 200 amperes of electrical service at 208 volts to a second
point in the Premises. The February 1, 2000 date in Section 84.1 is
hereby changed to April 15, 2000. Upon receipt of the 480 volt service,
Tenant shall return to Landlord the additional 200 amperes of
electrical service at Tenant's sole cost and expense. Landlord shall
also provide Tenant with 12 watts per average of rentable and useable
square foot for the additional space demised hereby in accordance with
Article 84 of the Lease.
16. Article 89 of the Lease is hereby deleted and replaced with the
following:
"ACCOMMODATION RIGHT OF FIRST OFFER Provided that this Lease is in full
force and effect and Tenant is not in default in respect of its
monetary obligations hereunder beyond any applicable period of notice,
cure and grace, if at any time after Tenant's Option described in
Section 13 of the First Lease Modification Agreement above has expired,
but otherwise during the term of this Lease, Landlord receives a bona
fide offer to lease space on the tenth floor of the Building (the
"Adjacent Space"), Landlord shall send a notice to Tenant informing
Tenant of same, setting forth the name of the offeree and the terms of
the offer, and specifying the date Landlord anticipates the Adjacent
Space to be available. Tenant shall then have the right, exercisable
within ten (10) business days after the date of Landlord's notice, to
notify Landlord in writing of Tenant's desire to lease the Adjacent
Space on the terms set forth in the offer, in which event Landlord and
Tenant shall promptly
<PAGE> 14
execute an agreement modifying this lease to include such space at the
rental rate and other terms and conditions specified in Landlord's
notice.
"In the event Tenant fails to exercise its option for the space
specified in the notice within such ten (10) business day period, then
Landlord shall be free to lease the Adjacent Space to any third party
at the terms set forth in the above described offer. Landlord shall
provide Tenant with evidence thereof if Landlord concludes a
transaction.
"Upon the expiration of any third party tenant's lease of any part of
the Adjacent Space, Tenant shall continue to have a right of first
offer with respect to such space on the terms set forth herein."
17. Exhibit D attached hereto is a substitute for the Exhibit D attached to
the Lease, so that the Site described in Article 94 of the Lease refers
only to the Southwest Corner of the Ninth Floor Roof and not the
Northwest Roof.
18. Tenant hereby acknowledges that the three (3) pipe and conduit shafts
to be built by Landlord adjacent to the three (3) stairwells in the
Premises (see Exhibit E) are not part of the Premises, but are retained
by Landlord for pipe and conduit use. Tenant may use its pro rata share
of such shafts for the installation of its pipe or conduit runs.
19. In Article 59, the references to Article 31 and 34 are hereby changed
to Article 32.
20. In Article 63, the word "General" is hereby deleted.
21. In Article 69, Section 69.1 and 69.4, the threshold amount for
alterations requiring Landlord's consent is increased from $150,000.00
to $300,000.00. Landlord agrees that the threshold amount will increase
proportionately whenever the square footage of the Premises is
increased.
22. The last line of Section 70.2 is hereby modified to provide that the
form Non Disturbance Agreement is in the form previously executed by
Landlord and Tenant. Landlord shall obtain a non-disturbance agreement
relating to this Agreement from the holders of Superior Mortgages in
recordable form, along with all documents needed for recordation.
Landlord shall cooperate with Tenant and take all action within its
ability to record the Non Disturbance Agreements previously executed.
23. Landlord and Tenant represent and warrant to each other that it has
neither consulted nor negotiated with any broker or finder with regard
to this Agreement other than Insignia/ESG, whose commission shall be
paid by Landlord pursuant to Landlord's separate agreement with said
broker. Landlord and Tenant agree to indemnify and hold each other
harmless from any damages, costs and expenses (including reasonable
attorneys' fees incurred in defending an action or claim or enforcing
this indemnity) suffered by Landlord or Tenant by reason of any breach
by the indemnifying party of its
<PAGE> 15
representation, warranty or agreement described above. The provisions
of this paragraph shall survive the expiration or earlier termination
of this Lease.
24. Tenant acknowledges that its obligation to pay the Additional Rental
for the tap in fee and the annual usage fee described in Article 83
shall apply to the Premises, as expanded by this Agreement. Tenant
hereby agrees to pay said fees to Landlord simultaneously herewith on
the basis of 375 tons of HVAC for the Premises. In the event Tenant's
plans call for more tonnage, upon submission of such plans to Landlord
or the Building Department, Tenant shall, upon ten (10) days' notice,
pay for the cost of the tap charge and annual usage fee on all HVAC
tons above 375. Landlord shall provide the condenser water for the
additional space now included in the Premises.
25. Landlord agrees that there shall not be any contribution from Tenant
towards the cost of the installation of the fire alarm system or roof
applicable to the Space known as Ninth Floor East Columns 1 through 12
or any of the Option Spaces.
26. Article 100 of the Lease is hereby modified to provide that Landlord
shall, within the next forty-five (45) days, weather permitting, remove
the existing roof and all asbestos above the Premises and install
temporary waterproof roofing material. The permanent roof replacement
shall still begin in the spring of 2000, unless Landlord can, in its
sole discretion, install the new roof sooner. In the event, prior to or
in connection with the installation of the permanent roof, the paint on
the ceiling of the Premises below the roof peels, Landlord shall, at
its cost, scrape and repaint the effected areas beneath the roof area.
Tenant agrees that Landlord's installation of the new roof and scraping
and repainting the ceiling after Tenant completes its Initial
Installation or moves into the Premises for the operation of its
business shall no give rise to any offset or claim against Landlord.
Landlord agrees, however, to reasonably cooperate with Tenant in
connection with the coordination and performance of the roof work and
to complete the work in a timely manner. Nothing herein shall be deemed
a waiver of any rights of Tenant in the event Landlord has not taken
reasonable efforts to minimize interference with the operation of
Tenant's business during the performance of the work.
27. Landlord agrees that all abatements of Fixed Rent provided for in the
Lease as modified hereby shall be applied against the next ensuing
payment of Fixed Rental then due, or, if no payment of Fixed Rent is
then due, such remaining abatement shall be carried forward until fully
applied.
28. Except as herein specifically modified, all of the terms, covenants and
conditions of the Lease are and shall remain the same, in full force
and effect, and are hereby ratified and confirmed.
29. This First Lease Modification Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective legal
representatives, successors and assigns.
<PAGE> 16
30. This Lease Modification Agreement was drafted as a joint effort by
counsel for each of Landlord and Tenant.
IN WITNESS WHEREOF, the parties hereto have executed this First Lease
Modification Agreement as of the day and year first above written.
LESSOR:
601 WEST ASSOCIATES LLC
BY: SLB MANAGER LLC, A NY
LIMITED LIABILITY COMPANY
By: /s/ Mark Karasick
----------------------
Name: Mark Karasick
Title: Managing Member
LESSEE:
MARTHA STEWART LIVING
OMNIMEDIA, INC.
By:/s/ Peter Mark
------------------
Name: Peter Mark
Title: Executive Vice President
<PAGE> 17
EXHIBIT A
DESCRIPTION OF PREMISES EXCLUDED
<PAGE> 18
EXHIBIT B
DESCRIPTION OF PREMISES EXCLUDED
<PAGE> 19
EXHIBIT C
DESCRIPTION OF PREMISES EXCLUDED
<PAGE> 20
EXHIBIT D
DESCRIPTION OF PREMISES EXCLUDED
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1999 consolidated financial statements of the Company and is qualified in
its entirety to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 154,749
<SECURITIES> 0
<RECEIVABLES> 41,683
<ALLOWANCES> 0
<INVENTORY> 6,163
<CURRENT-ASSETS> 209,895
<PP&E> 18,709
<DEPRECIATION> 0
<TOTAL-ASSETS> 281,771
<CURRENT-LIABILITIES> 67,872
<BONDS> 0
0
0
<COMMON> 496
<OTHER-SE> 198,906
<TOTAL-LIABILITY-AND-EQUITY> 281,771
<SALES> 0
<TOTAL-REVENUES> 232,314
<CGS> 0
<TOTAL-COSTS> 209,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (500)
<INCOME-PRETAX> 22,822
<INCOME-TAX> (2,747)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,569
<EPS-BASIC> .33
<EPS-DILUTED> .33
</TABLE>
