-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QTsoGGc8a/fC6RsFEEGVbqPSX5rOBR66hwkzwVyUmKEOOuKE++1hU+xsV00XMb0o kz1ptAoJCDJbO/2fUTSOUw== 0000950123-99-006951.txt : 19990802 0000950123-99-006951.hdr.sgml : 19990802 ACCESSION NUMBER: 0000950123-99-006951 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990729 DATE AS OF CHANGE: 19990730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-84001 FILM NUMBER: 99673063 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 S-1 1 MARTHA STEWART LIVING OMNIMEDIA, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1999 REGISTRATION NO. 333- - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MARTHA STEWART LIVING OMNIMEDIA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 2721 APPLIED FOR (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
11 WEST 42ND STREET NEW YORK, NY 10036 (212) 827-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ GREGORY R. BLATT, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL MARTHA STEWART LIVING OMNIMEDIA, INC. 11 WEST 42ND STREET NEW YORK, NY 10036 (212) 827-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: ANDREW J. NUSSBAUM, ESQ. JEFFREY SMALL, ESQ. WACHTELL, LIPTON, ROSEN & KATZ DAVIS POLK & WARDWELL 51 WEST 52ND STREET 450 LEXINGTON AVENUE NEW YORK, NY 10019 NEW YORK, NY 10017 (212) 403-1000 (212) 450-4000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If the only securities being delivered pursuant to this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- - - --------------------------------------------------------------------------------------------------------------------------------- - - - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(2) FEE - - - --------------------------------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $.01 per share................. shares $100,000,000 $27,800 - - - --------------------------------------------------------------------------------------------------------------------------------- - - - ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes an aggregate of shares which the Underwriters have the option to purchase from the Registrant and the Selling Stockholder solely to cover over-allotments. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This Registration Statement contains two separate prospectuses. The first prospectus relates to a public offering in the United States and Canada of an aggregate of shares of Class A common stock. The second prospectus relates to a concurrent offering outside the United States and Canada of an aggregate of shares of Class A common stock. The prospectuses for each of the offerings will be identical with the exception of the alternate front cover page for the offering outside the United States and Canada. Such alternate page appears in this Registration Statement immediately following the cover page for the offering in the United States and Canada. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued , 1999 Shares [MSLO LOGO] CLASS A COMMON STOCK ------------------------ MARTHA STEWART LIVING OMNIMEDIA, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK, CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT TO VOTING AND CONVERSION. EACH SHARE OF CLASS A COMMON STOCK IS ENTITLED TO ONE VOTE PER SHARE. EACH SHARE OF CLASS B COMMON STOCK IS ENTITLED TO TEN VOTES PER SHARE AND IS CONVERTIBLE INTO ONE SHARE OF CLASS A COMMON STOCK. ------------------------ WE EXPECT OUR CLASS A COMMON STOCK TO BE APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL " ." ------------------------ INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 13. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS MSLO ------------ ------------- ------------ Per Share..................................... $ $ $ Total......................................... $ $ $
Martha Stewart Living Omnimedia, Inc. has granted the underwriters the right to purchase up to an additional shares of our Class A common stock to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares of our Class A common stock to purchasers on , 1999. Morgan Stanley Dean Witter is acting as sole book-running manager for this offering, and Morgan Stanley Dean Witter and Merrill Lynch & Co. are acting as joint lead managers for this offering. Bear, Stearns & Co. Inc. is acting as co-lead manager for this offering. ------------------------ MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE BANC OF AMERICA SECURITIES LLC , 1999 4 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) [International Cover Page] Issued , 1999 Shares [MSLO LOGO] CLASS A COMMON STOCK ------------------------ MARTHA STEWART LIVING OMNIMEDIA, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK, CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT TO VOTING AND CONVERSION. EACH SHARE OF CLASS A COMMON STOCK IS ENTITLED TO ONE VOTE PER SHARE. EACH SHARE OF CLASS B COMMON STOCK IS ENTITLED TO TEN VOTES PER SHARE AND IS CONVERTIBLE INTO ONE SHARE OF CLASS A COMMON STOCK. ------------------------ WE EXPECT OUR CLASS A COMMON STOCK TO BE APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE UNDER THE SYMBOL " ." ------------------------ INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 13. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS MSLO ------------ ------------- ------------ Per Share..................................... $ $ $ Total......................................... $ $ $
Martha Stewart Living Omnimedia, Inc. has granted the underwriters the right to purchase up to an additional shares of our Class A common stock to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares of our Class A common stock to purchasers on , 1999. Morgan Stanley Dean Witter is acting as sole book-running manager for this offering, and Morgan Stanley Dean Witter and Merrill Lynch International are acting as joint lead managers for this offering. Bear, Stearns International Limited is acting as co-lead manager for this offering. ------------------------ MORGAN STANLEY DEAN WITTER MERRILL LYNCH INTERNATIONAL BEAR, STEARNS INTERNATIONAL LIMITED DONALDSON, LUFKIN & JENRETTE BANC OF AMERICA INTERNATIONAL LIMITED , 1999 5 [INSIDE COVER GRAPHICS] 2 6 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 4 Recent Developments--Strategic Investment.......................... 12 Risk Factors.......................... 13 Reorganization Transactions Occurring Prior to This Offering.............. 21 Use of Proceeds....................... 22 Dividend Policy....................... 22 Capitalization........................ 23 Dilution.............................. 24 Selected Historical and Pro Forma Consolidated Financial Data......... 25 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 27
PAGE ---- Business.............................. 37 Management............................ 56 Certain Relationships and Related Transactions........................ 66 Principal Stockholders................ 70 Description of Capital Stock.......... 72 Shares Eligible for Future Sale....... 75 Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders............................. 76 Underwriters.......................... 78 Legal Matters......................... 82 Experts............................... 82 Additional Information................ 82 Index to Consolidated Financial Statements.......................... F-1
------------------------ Our principal executive offices are located at 11 West 42nd Street, New York, New York 10036, and our telephone number is (212) 827-8000. Our address on the World Wide Web is marthastewart.com. The contents of our website are not part of this prospectus. ------------------------ In making any investment decision relating to our Class A common stock, you should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of Class A common stock and seeking offers to buy shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus or other date we include in such information, regardless of the time of delivery of this prospectus or any sale of Class A common stock. ------------------------ Until , 1999, all dealers that buy, sell or trade shares of Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ------------------------ We have made some statements in this prospectus, including some under "Prospectus Summary," "Recent Developments--Strategic Investment," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere, which constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statements. These factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus. 3 7 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully, especially the risks of investing in our Class A common stock discussed under "Risk Factors." In this prospectus, the terms "MSLO," "we," "us" and "our" refer to Martha Stewart Living Omnimedia, Inc. and, unless the context requires otherwise, Martha Stewart Living Omnimedia LLC. We use the term MSLO LLC to refer to that specific legal entity, which prior to this offering operated the business we now operate. MARTHA STEWART LIVING OMNIMEDIA, INC. We are a leading creator of original "how to" content and related products for homemakers and other consumers. We leverage the well-known "Martha Stewart" brand name across a broad range of media and retail outlets, providing consumers with the "how to" ideas, products and other resources they need to raise the quality of living in and around their homes. In each of our seven core content areas--Home, Cooking and Entertaining, Gardening, Crafts, Holidays, Keeping and Weddings--our creative experts continually seek to develop new ideas that support the high quality and unique look associated with our brand name. Our editors, art directors, designers, cooks, gardeners and craftspeople have developed an extensive library of "how to" articles, books, television programs, newspaper columns and radio segments, as well as products, relating to our seven core content areas. We have two primary strategic objectives: (1) to provide our original "how to" content and information to as many consumers as possible; and (2) to turn our consumers into "doers" by offering them the information and products they need for do-it-yourself ingenuity the "Martha Stewart way." We accomplish this first objective through our "omnimedia" platform, which currently includes: -- two magazines, Martha Stewart Living(R) and Martha Stewart Weddings(TM), reaching an estimated 9.9 million readers each month -- the Emmy Award-winning and number-one-rated "how to" domestic arts television program in the United States, airing six episodes per week and available in 91% of the U.S. homes with television sets, plus a weekly segment on CBS This Morning -- 27 books, which have sold more than 8.5 million copies, including Martha Stewart's first book, ]Entertaining, published in 1982, and Martha Stewart's Hors d'Oeuvres Handbook, published in 1999 -- the askMartha(R) radio program, airing on 270 stations throughout the United States and reaching an estimated 1.5 million listeners per weekday -- a weekly askMartha newspaper column, syndicated in 233 newspapers that collectively reach an estimated 43 million readers each week -- marthastewart.com, our website, with over 834,000 registered users, 627,000 unique monthly visitors and over ten million monthly page views In the spring of 1999, our omnimedia platform provided us with an estimated 88 million monthly gross adult impressions, not including the readers of the askMartha newspaper column. This number is based on our magazine readership, the number of times our television programs and website are viewed and the number of times people listen to our radio program during the course of a typical month. To accomplish our second business objective, we have created our "omnimerchandising" platform, which consists of our branded products. Through this platform, we seek to offer our consumers quality, convenience and choice across a broad range of traditional retail channels. As of May 1999, our omnimerchandising platform consisted of more than 2,800 stockkeeping units (SKUs) of products, including bed and bath products, interior paints, craft kits, outdoor furniture and garden tools. Retail sales of Martha Stewart 4 8 branded merchandise by Kmart and our other merchandising partners reached $763 million in 1998, an increase of 96% over 1997. We distribute our products through: -- the mass market discount channel, exclusively through Kmart stores in the United States and Zellers stores in Canada -- the national department store channel, through Sears stores in the United States and Canada, and Canadian Tire stores in Canada -- specialty paint stores and, beginning in September 1999, specialty craft and fabric stores, across the United States -- our upscale catalog, Martha by Mail(R), offering 400 products per catalog, with an expected 1999 distribution of 15 million copies in 11 editions -- our online Martha by Mail store, which offers over 750 products Our omnimedia and omnimerchandising platforms support four business segments: Publishing, Television, Merchandising and Internet/Direct Commerce. Our Internet/Direct Commerce business provides a unique opportunity for us to fulfill both of our strategic objectives by leveraging our content and merchandising capabilities to create a one-stop online destination for consumers interested in the domestic arts. Our overall business has grown in recent years by accessing new product markets and leveraging our strong brand name across our omnimedia and omnimerchandising platforms. In 1998, our revenue was $180.0 million and our operating income was $27.4 million, representing a 36% and 65% increase, respectively, over 1997 revenue and operating income. Our net income was $23.8 million in 1998, as compared to $13.9 million in 1997. In the first quarter of 1999, our revenue was $53.4 million and our operating income was $7.4 million, representing a 26% and 7% increase, respectively, over the first quarter of 1998. Our net income for the first quarter of 1999 was $6.6 million, as compared to $6.0 million for the first quarter of 1998. COMPETITIVE STRENGTHS We intend to maintain and enhance our position as a leading creator of high-quality content and products and to continue to capitalize on our competitive strengths, which include: -- Established, Highly Recognizable Brand Name. Our principal assets consist of our well-known Martha Stewart brand name and our related trademarks. The Martha Stewart brands have significant name recognition and trust among consumers. Consumers associate our brands with the unique look and usefulness of our content and with the high quality of living represented by our content and products. -- Leading Authority Across Key Categories of Domestic Arts. We believe that our depth of knowledge and strong brand identity across our seven core content areas provide us with important advantages over many of our competitors that produce content in only one or two specific categories of domestic arts. We reach a broad audience, ranging from brides to gardeners to cooks. We believe that satisfied consumers who are initially only interested in one of our core content areas, whether it be cooking and entertaining, gardening, crafts or weddings, may be drawn to explore content and products from our other core categories as part of our overall concept of living. By stimulating consumer interest in other content areas, we are able to expand the size of our markets. -- Extensive Library of High-Quality Content, Products and Designs. We have amassed a library of proprietary content and products that we continually enhance through the creation of new "how to" ideas, information and products. As of December 31, 1998, this extensive library included over 10,000 editorial pages, 2,100 television and radio segments, as well as designs for over 2,000 SKUs of original products. -- Extensive Research and Development Process. Our creative staff thoroughly researches, develops and tests each "how to" idea or product in our test kitchens, design studios or manufacturers' 5 9 laboratories before we release content or product into the market. This research and development process ensures that we are regarded as the "source for the source" and that our content continues to consist of innovative and appealing designs, products and recipes. -- Highly Experienced Team of Creative and Business Personnel. We have carefully assembled an experienced team of creative and business professionals. Our creative staff focuses on developing new content and products and presenting our content and products to our consumers. Our business staff focuses on bringing our content and products profitably to market. Many of our creative and business executives have been with us since the launch of Martha Stewart Living magazine in 1991. -- Organizational Structure that Promotes Creativity and Efficiency. Our business segments do not operate as separate units. Instead, we are organized by creative and business skills in a matrix organization in which our business and creative experts render services across our omnimedia and omnimerchandising platforms. We believe this structure provides us with operating efficiencies as well as brand quality and consistency. -- Strong Relationships with Key Distribution, Fulfillment and Marketing Vendors. Our existing alliances with Kmart Corporation, Hudson's Bay Company, which operates Zellers stores, Eyemark Entertainment, a unit of CBS, Inc., The Sherwin-Williams Company, P/Kaufmann, Inc. and affiliates of Time Inc., a subsidiary of Time Warner Inc., among others, enable us to widely distribute content and products across the United States and Canada. These relationships permit us to reduce our inventory risk and to focus on the design and creation of our content and products, rather than the logistics of distribution, fulfillment and manufacturing. STRATEGIES Our strategies focus on continuing to create new content and products and leveraging our brands across multiple media and retail channels: -- Expand Our Merchandising Along Core Content Lines. We seek to create new branded products throughout our seven core content areas. In the last two years, we have introduced numerous product lines, largely focusing on the home category, including bed and bath and paints, in multiple distribution channels. Our Martha Stewart Everyday Baby baby(TM) collection and our Martha Stewart Home collection of decorative fabrics are scheduled to be launched in fall 1999, and we plan to introduce our Martha Stewart Everyday Housewares(TM) collection in 2000. Our other content areas offer significant merchandising opportunities for our brands. -- Leverage the Cost of Developing High Quality Content over Media and Merchandising Platforms. We spread the costs of researching, investing in and producing high quality content across multiple media and merchandising platforms to achieve economies of scale and increased returns on invested capital. This strategy enables us to make substantial investments in producing higher quality content. -- Capitalize on Revenue Opportunities Created by the Internet. We believe that we can effectively participate in the growth of the Internet by creating a user experience that integrates information, electronic commerce and community, all rooted in our library of high-quality content and products. Our website has already achieved significant consumer acceptance and brand awareness, with over 834,000 registered members as of June 1999. We intend to display content from our seven core content areas on the Internet to drive revenues and to use our merchandising capabilities to expand our e-commerce business. An affiliate of Kleiner Perkins Caufield & Byers has recently made a strategic investment in our business. We believe Kleiner Perkins' experience in the Internet industry will be advantageous to us as we implement our growth strategies. See "Recent Developments -- Strategic Investment" for further information. -- Cross-Sell and Cross-Promote Our Brands. We leverage our brands by cross-promoting them and cross-selling and packaging advertising across our network of media and merchandising channels. In 1999, we anticipate that the majority of our top 50 advertisers will purchase advertising space in two 6 10 or more elements of our omnimedia platform. We also use each media and merchandising platform to refer our listeners, readers, viewers and consumers to one or more of our other businesses. -- Evolve Our Brands through Team-based Content and Reduce Dependence on Our Founder. We are seeking to further extend the trust-based relationship consumers share with Martha Stewart, the personality, to our brands. We believe that a reduction in our dependence on Martha Stewart personally will provide additional brand durability, increased growth opportunities and a broader recognition of a new generation of Martha Stewart Living experts. 7 11 THE OFFERING Unless we specifically state otherwise, the information in this prospectus does not take into account the possible issuance of up to additional shares of Class A common stock, which the underwriters have the option to purchase from us solely to cover over-allotments. If the underwriters exercise this option in full, there will be shares of Class A common stock outstanding following this offering. Class A common stock offered....................... shares Common stock to be outstanding after this offering: Class A common stock..... shares(1) Class B common stock..... shares Total.......... shares(1) Voting rights: Class A common stock..... One vote per share Class B common stock..... Ten votes per share Other common stock provisions.................... With the exception of voting rights and conversion rights, shares of Class A and Class B common stock are identical. See "Description of Capital Stock." Use of proceeds............... We may use approximately $42.0 million of the net proceeds from this offering to purchase shares of Class A common stock held by Time Publishing Ventures, Inc., a subsidiary of Time Inc., under the terms of an existing agreement. We plan to use the remainder of the net proceeds of this offering for general corporate purposes, including new business development. See "Use of Proceeds." Proposed NYSE symbol.......... - - - --------------- (1) Includes shares to be issued to our employees upon completion of this offering under the MSLO Phantom Performance Unit Plan. Excludes shares of Class A common stock reserved for issuance under our stock option plans. At the time of this offering, we expect to issue options to acquire shares of Class A common stock at an exercise price equal to the initial public offering price. We refer you to "Management--The Non-Employee Director Stock and Option Compensation Plan" and "--The 1999 Stock Incentive Plan." Also excludes options to acquire shares of Class A common stock pursuant to the MSLO LLC Nonqualified Class A LLC Unit/Stock Option Plan, previously issued and of which options to acquire shares will be vested as of this offering. 8 12 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA In the table below, we provide you with summary historical and pro forma financial information of MSLO LLC. We explain in the first bullet point below how we derived the following pro forma consolidated income statement data for the year ended December 31, 1996. The following consolidated statement of income data for the years ended December 31, 1997 and 1998 is derived from the audited consolidated financial statements of MSLO LLC included elsewhere in this prospectus. The following consolidated statement of income data for the three months ended March 31, 1998 and 1999 and the consolidated balance sheet data as of March 31, 1999 have been derived from the unaudited financial statements of MSLO LLC which, in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation. Results for the three month period ended March 31, 1999 are not necessarily indicative of results that may be expected for the entire year. In the table below, we also provide you with the following pro forma information: -- The pro forma income statement data for the year ended December 31, 1996 has been derived from the financial statements of MSLO LLC audited by Arthur Andersen LLP, independent public accountants, and gives effect to the acquisition of Martha Stewart Living from Time Publishing Ventures as though this acquisition had occurred on January 1, 1996. The net income reflected for that period is the sum of the net income of MSLO LLC for that period of $3.6 million and the net income of Martha Stewart Living for that period of $8.7 million, reduced by amortization of intangible assets of $2.9 million. Total revenues for the period include $1.0 million that had been classified as other income in the Martha Stewart Living statement of operations. There were no intercompany transactions during that period. We include elsewhere in this prospectus the financial statements of Martha Stewart Living, audited by Ernst & Young LLP, independent auditors. -- The income statement data for all of the periods presented includes an adjustment to the income tax provision reflecting the reorganization of MSLO LLC into a C corporation as though the reorganization had occurred prior to the start of each period. See Note 7 of the consolidated financial statements of MSLO LLC for further information. -- The income statement data for the three months ended March 31, 1999 includes a one time benefit that will result from the change in the tax status of MSLO LLC at the time it is reorganized into a C corporation, as though the reorganization had occurred on March 31, 1999. The benefit actually recognized will be determined on the effective date of the reorganization. -- The balance sheet data as of March 31, 1999 is presented on both a pro forma and pro forma as adjusted basis: -- The pro forma data gives effect to the reorganization of MSLO LLC into a C corporation as though the reorganization had occurred on March 31, 1999. These adjustments include the creation of a net future tax benefit of $2.9 million as a result of the reorganization and reflect the effect of recording future tax benefits and deferred tax liabilities. -- The pro forma data gives effect to $13.0 million of distributions to the members of MSLO LLC. This amount is comprised of one or more distributions of profits which will total no more than $10.0 million and a $3.0 million distribution for tax payments, based on the taxable income of MSLO LLC as of March 31, 1999. The amount of the actual tax distribution will change based upon the actual results of operations of MSLO LLC from March 31, 1999 through the date of the reorganization. -- The pro forma data gives effect to the sale of 5% of MSLO LLC and a warrant to Kleiner Perkins, in exchange for $25.0 million, and the retirement of $15.0 million of indebtedness. -- The pro forma as adjusted data gives effect to each of the pro forma adjustments noted above and also gives effect to the issuance of the shares of Class A common stock offered in this prospectus and our receipt and use of the estimated net proceeds from the sale of those shares. 9 13 As used in this prospectus, "EBITDA" means income before provision for interest expense, income taxes and depreciation and amortization. EBITDA is not intended to represent cash flows from operations and should not be considered as an alternative to net income, as an indicator of our operating performance or to cash flows as a measure of liquidity. We believe that EBITDA is widely used by analysts, investors and other interested parties in the publishing and media industries; however, EBITDA as presented in this prospectus may not be comparable to similarly titled measures reported by other companies. The following financial data should be read in conjunction with, and is qualified by reference to, "Selected Historical and Pro Forma Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of MSLO LLC and the combined financial statements of Martha Stewart Living and, in each case, the related notes thereto, included elsewhere in this prospectus. 10 14
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------- ----------------- PRO FORMA 1996 1997 1998 1998 1999 ----------- -------- -------- ------- ------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues Publishing............................. $74,146 $108,694 $127,020 $32,509 $35,536 Television............................. 8,420 12,396 23,351 5,387 6,609 Merchandising.......................... -- 6,919 15,004 3,056 5,679 Internet/Direct Commerce............... 3,292 4,812 14,673 1,348 5,555 ------- -------- -------- ------- ------- Total revenues.................... 85,858 132,821 180,048 42,300 53,379 ------- -------- -------- ------- ------- Operating costs and expenses Production, distribution and editorial........................... 40,610 59,148 82,930 18,052 26,312 Selling and promotion.................. 24,484 31,973 34,540 8,774 9,856 General and administrative............. 7,812 21,182 29,659 7,396 8,449 Depreciation and amortization.......... 3,371 3,927 5,534 1,126 1,342 ------- -------- -------- ------- ------- Total operating costs and expenses....................... 76,277 116,230 152,663 35,348 45,959 ------- -------- -------- ------- ------- Income from operations................... 9,581 16,591 27,385 6,952 7,420 ------- -------- -------- ------- ------- Interest expense, net.................... 165 2,195 2,243 607 457 Income tax provision..................... -- 467 1,336 328 344 ------- -------- -------- ------- ------- Net income............................... 9,416 13,929 23,806 6,017 6,619 ------- -------- -------- ------- ------- Pro forma (unaudited) Benefit from change in tax status...... -- -- -- -- 2,865 Adjustment to income tax provision..... (5,149) (7,038) (10,817) (2,916) (3,171) ------- -------- -------- ------- ------- Pro forma net income..................... $ 4,267 $ 6,891 $ 12,989 $ 3,101 $ 6,313 ======= ======== ======== ======= ======= Pro forma basic and diluted net income per share.............................. $ $ Pro forma weighted average common shares outstanding............................ OTHER DATA: EBITDA................................... $12,952 $ 20,518 $ 32,919 $ 8,078 $ 8,762 Capital expenditures..................... 1,714 11,027 2,730 1,572 517
AS OF MARCH 31, 1999 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- -------------- ----------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash............................................... $ 17,363 $ 14,363 $ Total assets....................................... 123,467 123,332 Long-term debt (including current maturities)...... 15,000 -- Members'/Stockholders' equity...................... 43,434 58,299
11 15 RECENT DEVELOPMENTS -- STRATEGIC INVESTMENT On July 27, 1999, we completed a strategic transaction in which an affiliate of Kleiner Perkins Caufield & Byers purchased an equity interest in MSLO LLC. In this transaction, a Kleiner Perkins fund acquired a 5% interest in MSLO LLC, as well as a warrant that we describe below, in exchange for $25.0 million in cash paid to MSLO LLC. Also, as part of this transaction, Mr. L. John Doerr, a general partner of Kleiner Perkins, became a member of our Board of Directors. In the reorganization of MSLO LLC, Kleiner Perkins' interest in MSLO LLC will be converted into shares of MSLO Class A common stock. We refer you to "Reorganization Transactions Occurring Prior to This Offering" for a description of the reorganization. The purchase agreement and warrant are filed as exhibits to the registration statement in which this prospectus is included, and we refer you to those agreements for a full description of our transaction with Kleiner Perkins. We have agreed with Kleiner Perkins to investigate opportunities to maximize the value to our stockholders of our Internet business and our company as a whole, including potential strategic transactions relating to our Internet business. Kleiner Perkins will also assist us in recruiting additional personnel for our Internet business and in developing compensation structures consistent with our overall incentive plans and objectives. Any decisions on these matters will be made by our Board of Directors. If we complete a strategic transaction relating to our Internet business, Kleiner Perkins may participate in the transaction by exercising the warrant for $21.0 million. Upon exercise, Kleiner Perkins would receive 15% of any publicly traded class of stock that we may issue intended to reflect the performance of our Internet business, or 15% of the net consideration we receive in connection with a sale of that business. The warrant percentage and exercise price are subject to adjustment in the event that we sell a portion of the Internet business or contribute an additional business or asset to that business. The warrant expires ten days after the earlier of the time it becomes exercisable, the time Kleiner Perkins sells more than 50% of its original holding of our common stock, or July 27, 2002. Kleiner Perkins has agreed not to sell shares of our common stock for a period of one year following this offering. This restriction has certain exceptions, including certain distributions of our stock by Kleiner Perkins to its limited partners after the first six months. In addition, in the event that Kleiner Perkins exercises its warrant in exchange for an MSLO security, it has agreed not to sell or transfer such securities for one year (subject to the same exceptions described above for our common stock) or, for six months following exercise of the warrant, to transfer any additional shares of our common stock if such transfer would bring Kleiner Perkins' ownership of our common stock to less than 50% of its original position. Kleiner Perkins is also receiving registration rights with respect to its shares of our Class A common stock. We refer you to "Certain Relationships and Related Transactions--Registration Rights." We believe that the investment in our company by Kleiner Perkins, and the participation of John Doerr on our Board of Directors, will provide significant strategic benefits to us as we expand our Internet-related businesses. There can be no assurance, however, that we will succeed in this, or any other, aspect of our strategy. 12 16 RISK FACTORS You should carefully consider the following risks and the other information contained in this prospectus before investing in Class A common stock. The trading price of Class A common stock could decline due to any of these risks, and you could lose all or part of your investment. You also should refer to the other information included in this prospectus, including the financial statements and related notes. In addition, the risks described below are not the only ones facing us. We have only described the risks we consider to be material. However, there may be additional risks that we view as not material or of which we are not presently aware. If any of the events described below were to occur, our business, prospects, financial condition, results of operations or cash flow could be materially adversely affected. When we say below that something could or will have a material adverse effect on us, we mean that it could or will have one or more of these effects. THE LOSS OF THE SERVICES OF MARTHA STEWART OR OTHER KEY EMPLOYEES WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS We are highly dependent upon our founder, Chairman and Chief Executive Officer, Martha Stewart. Martha Stewart's talents, efforts, personality and leadership have been, and continue to be, critical to our success. The diminution or loss of the services of Martha Stewart, and any negative market or industry perception arising from that diminution or loss, would have a material adverse effect on our business. While our other key executives have substantial experience and have made significant contributions to our business, Martha Stewart remains the personification of our brands as well as our senior executive and primary creative force. Effective as of the completion of this offering, we will enter into a five-year employment agreement with Martha Stewart. This agreement is important to the future of our business, and if we were to lose our rights under this agreement for any reason, including as a result of Martha Stewart's voluntary resignation or retirement, our business would be materially adversely affected. See "Management--Employment Agreement with Martha Stewart" for a description of this agreement. Our continued success also is dependent upon retention of other of our key management executives, as well as upon a number of key members of our creative staff, who have been instrumental in our success thus far, and upon our ability to attract and retain other highly capable and creative individuals. The loss of some of our senior executives or key members of our creative staff, or an inability to attract or retain other key individuals, could materially adversely affect us. Growth in our business is dependent, to a large degree, on our ability to retain and attract such employees. We seek to compensate and incentivize our key executives, as well as other employees, through competitive salaries, stock ownership and bonus plans, but we can make no assurance that these programs will allow us to retain key employees or hire new employees. OUR SUCCESS DEPENDS ON THE VALUE OF OUR BRANDS, AND IF THE VALUE OF OUR BRANDS WERE TO DIMINISH, OUR BUSINESS WOULD BE ADVERSELY AFFECTED Our success depends on our brands and their value. Our business would be adversely affected if: Martha Stewart's public image or reputation were to be tarnished Martha Stewart, as well as her name, her image and the trademarks and other intellectual property rights relating to these, are integral to our marketing efforts and form the core of our brand name. Our continued success and the value of our brand name therefore depends, to a large degree, on the reputation of Martha Stewart. Our licensees were to diminish the quality of our brands We have entered into license agreements with a number of partners, including Kmart Corporation, Hudson's Bay Company, which operates Zellers stores, and The Sherwin-Williams Company. While we require that our licensees maintain the quality of our brands through specific contractual provisions, we 13 17 cannot be certain that our licensees, or their manufacturers and distributors, will honor their contractual obligations or that they will not take other actions that will diminish the value of our brand name. We were unable to adequately protect our brand name We are also susceptible to others imitating our products and infringing our intellectual property rights. We may not be able to successfully protect our intellectual property rights, upon which we are materially dependent. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Imitation of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenues. THE LOSS OF OUR RIGHTS TO USE MARTHA STEWART'S NAME, LIKENESS, IMAGE AND VOICE WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS Effective as of the completion of this offering, we will receive an exclusive, perpetual, royalty-free license from Martha Stewart with respect to her name, likeness, image and voice for use in our businesses. If we were to terminate Martha Stewart's employment without cause, or if she were to do so for good reason, the license would cease to be exclusive and we would lose certain other rights. Any loss of our rights to use this intellectual property would adversely affect our business. See "Business--Intellectual Property" for a more detailed description of this license agreement, and "Management--Employment Agreement with Martha Stewart" for a description of the employment agreement with Martha Stewart. TERMINATION OR IMPAIRMENT OF OUR RELATIONSHIPS WITH A SMALL NUMBER OF KEY LICENSING AND STRATEGIC PARTNERS COULD ADVERSELY AFFECT OUR REVENUES AND RESULTS OF OPERATIONS We have developed relationships with a small number of key strategic partners in many areas of our business, including magazine printing and distribution, book publishing, fulfillment, website hosting and licensing of our brands for merchandising. For example, through our licensing agreements with Kmart and Hudson's Bay Company, Martha Stewart Everyday Home(TM) and Martha Stewart Everyday Garden(TM) products are manufactured, advertised and sold at Kmart and Zellers stores. We derive significant income from our licensing arrangements and our Kmart agreements represent a substantial majority of that income. We would also be materially adversely affected if we were to lose our rights under any of our other key contracts or if the counterparty to any of these contracts were to breach its obligations to us. Our license agreements do not prohibit our partners from entering into license agreements with our competitors for the same or similar products offered under other brands. If we were to fail to manage our existing licensing relationships, this failure could have a material adverse affect on our financial condition and results of operations. We rely heavily on a limited number of contracts under which third parties provide us with services vital to our business. These agreements include: -- our agreements under which we receive distribution and fulfillment services for our Publishing and Internet/Direct Commerce businesses -- our agreements with printers under which our magazines and catalogs are printed -- our agreements with various technology vendors that provide tier-one hosting, software and site development services for our website If our relationship with any of these or certain other third parties were to be interrupted, or the services provided by any of these third parties were to be delayed or deteriorate for any reason, our business could be materially adversely affected. In addition, while we have significant control over licensed products and advertising, we do not have operational and financial control over our strategic partners and vendors, including Kmart, Zellers and the third parties that provide us with support services, and have limited influence with respect to the manner in which they conduct their businesses. If any of these strategic partners were to experience a significant 14 18 downturn in their businesses or were otherwise unable to honor their obligations to us, our business could be disrupted and be materially adversely affected. SINCE OUR BUSINESS IS CURRENTLY HEAVILY DEPENDENT ON PUBLISHING, WE ARE VULNERABLE TO INDUSTRY DOWNTURNS AND COST INCREASES In 1998, publishing revenues, including revenues from magazine circulation, magazine advertising, book sales, the askMartha newspaper column and the askMartha radio program, accounted for 71% of our revenues and 75% of our operating income before corporate expenses. Because our business strategy and brand name require that our magazines and books be of a high visual quality, we may be more adversely affected by increased publishing industry costs than some of our competitors. The publishing industry generally, and the magazine sector in particular, are subject to various economic factors that could cause a downturn in industry revenues and profits and a decline in our business. For example, increases in the cost of paper, printing expenses and mailing costs could reduce income from Martha Stewart Living, Martha Stewart Weddings and our special interest publications and books. A decline in magazine popularity generally could also adversely affect our business and financial condition. OUR TELEVISION PRODUCTION BUSINESS IS SUBJECT TO A NUMBER OF UNCERTAINTIES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS Our television production business generates a significant portion of our revenues, approximately 13% in 1998, and is subject to a number of uncertainties. Our business and financial condition could be adversely affected by: Failure of our television programming to maintain a sufficient audience Television production is a speculative business because revenues and income derived from television depend primarily upon the continued acceptance of that programming by the public, which is difficult to predict. Public acceptance of particular programming is dependent upon, among other things, the quality of that programming, the strength of stations on which that programming is broadcast, promotion of that programming, the quality and acceptance of competing television programming and other sources of entertainment and information. The Martha Stewart Living television program has recently experienced a decline in ratings, from a 2.5 household rating for the 1997-98 season as of May 30, 1998 to a 1.9 household rating for the 1998-99 season as of May 30, 1999, according to AC Nielsen Corporation. If this ratings decline continues, it will adversely impact the advertising revenues we derive from television and may result in the television program being broadcast on fewer stations. A continued ratings decline could make it economically inefficient to continue production of the program in the daily one-hour format or otherwise. Adverse trends in the television production business generally Television revenues and income may also be affected by a number of other factors, most of which are not within our control. These factors include a general decline in broadcast television viewers, pricing pressure in the television advertising industry, strength of the stations on which our programming is broadcast, general economic conditions, increases in production costs, availability of other forms of entertainment and leisure time activities and other factors. All of these factors may quickly change, and these changes cannot be predicted with certainty. While we currently benefit from our ability to sell advertising on our television programs, if these changes occur, we can make no assurance that we will continue to be able to sell this advertising or that our advertising rates can be maintained. Our future licensing fees may also be adversely affected by these changes. Accordingly, if any of these changes were to occur, the revenues and income we generate from television programming could decline. Increases in resources required by television programming and our dependence on Martha Stewart The production and marketing of television programming require substantial resources and expenditures, and in recent years increases in production and marketing costs have generally outpaced increases in licensing 15 19 fees and revenues generated by advertising sales. If these trends continue, the income we generate from television production could be adversely affected. In addition, Martha Stewart is an essential element of our television business. The recent expansion of the Martha Stewart Living television program to one-hour per day, from one-half-hour per day, has required a larger time commitment from Martha Stewart, which has reduced the amount of time she has to devote to other aspects of our business. FAILURE TO DEVELOP NEW OR EXPAND EXISTING RETAIL MERCHANDISING PROGRAMS WILL IMPAIR OUR ABILITY TO GROW Our growth depends to a significant degree upon our ability to develop new or expand existing retail merchandising programs, including our Martha Stewart Everyday Garden and Martha Stewart Everyday Housewares lines. We have limited experience in merchandising in these areas. We cannot guarantee when these programs will be introduced and fully implemented, or if they will be successful when they are in place. If these and other programs are not successful, our business, financial condition and prospects could be materially adversely affected. OUR REVENUES COULD DECLINE DUE TO GENERAL ECONOMIC TRENDS AND DECLINES IN CONSUMER SPENDING The industry segments in which we operate are cyclical and our revenues are largely generated by discretionary consumer spending. Business spending on advertising and consumer spending on our products tend to decline during recessionary periods and may also decline in other times. Accordingly, our revenues could decline during any general economic downturn. FAILURE TO DEVELOP OUR INTERNET/DIRECT COMMERCE BUSINESS WILL IMPAIR OUR ABILITY TO GROW Our growth depends to a significant degree upon the development of our Internet/Direct Commerce business. We have limited experience in electronic commerce and to date we have not derived substantial revenue from our electronic commerce business. In order for our Internet/Direct Commerce business to succeed, we must, among other things: -- make significant investments in our Internet business, in both technology and personnel -- significantly increase our online traffic and sales volume -- attract and retain a loyal base of frequent visitors to our website -- expand the products and services we offer over our website -- respond to competitive developments and maintain a distinct brand identity -- form and maintain relationships with strategic partners -- provide quality customer service -- continue to develop and upgrade our technologies We cannot assure that we will be successful in achieving these and other necessary objectives. If we are not successful in achieving these objectives, our business, financial condition and prospects would be materially adversely affected. Our electronic commerce business will require us to keep up with the rapid technological change that is inherent in electronic commerce. The emerging nature of electronic commerce will require us to quickly adapt as electronic commerce evolves. The markets for our Internet services are relatively new and rapidly evolving, and are characterized by a number of entrants that have introduced or plan to introduce competing services over the Internet. As a result, demand for and market acceptance of new services are subject to a high level of uncertainty, risk and competition. These pressures may force us to incur significant expenditures to remain competitive in the Internet marketplace, and, if we fail to appropriately address these pressures, our business, financial condition and prospects would be materially adversely affected. 16 20 SYSTEM FAILURES COULD HARM OUR BUSINESS If our website systems cannot be expanded to satisfy increased demand or fail to perform, we could experience: -- unanticipated disruptions in service -- slower response times -- decreased customer service and customer satisfaction -- delays in the introduction of new products and services any of which could impair our reputation, damage our brands and materially and adversely affect our prospects. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Any system failure that causes an interruption in service or decreases the responsiveness of our website service could impair our reputation, damage our brand name and materially adversely affect our prospects. OUR GROWTH IS DEPENDENT UPON THE CONTINUED ACCEPTANCE AND GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE Commerce over the Internet is a new and emerging market with many competitors. Because we are relying on electronic commerce as an important part of our growth strategy, our growth is dependent upon the widespread acceptance and use of the Internet and other online services as an effective medium for commerce. If acceptance and growth of Internet use do not occur, our business could be materially adversely affected. Rapid growth in the use of and interest in the Internet and other online services is a recent phenomenon and may not continue. A sufficiently broad base of consumers may not adopt, or continue to use, the Internet as a medium of commerce. Demand for and market acceptance of recently introduced products and services over the Internet are subject to a high level of uncertainty, and there are few proven products and services. In addition, commerce over the Internet is subject to a number of potential adverse developments, including infrastructure failures, failures to maintain transaction security and privacy, and increased government regulation and taxation, any or all of which could adversely affect our Internet commerce strategy and overall business. WE COMPETE IN HIGHLY COMPETITIVE MARKETS AND ARE VULNERABLE TO LARGER AND MORE EXPERIENCED COMPETITORS The markets in which we compete are extremely competitive. Many of our competitors in these markets have significantly greater resources, broader market presence and greater experience than we have. These advantages allow them to spend considerably more on marketing and may allow them to use their greater resources more effectively than we can. Accordingly, these competitors may be better able to take advantage of market opportunities and withstand market downturns than we can. There are few barriers to entry into our lines of business. Existing as well as new companies may launch competitive "how to" and lifestyle magazines, television programs, books and merchandising programs. Some of these competitors may be well financed and may gain popularity in the marketplace at our expense. This could in turn result in a decline in our circulation, advertising revenues and product sales. The existing MSLO LLC operating agreement expressly permits Time Publishing Ventures and Kleiner Perkins, each of whom is a stockholder of MSLO, and their respective affiliates, to compete with our business. Accordingly, Time Inc. and Kleiner Perkins, and their respective affiliates, may compete with us. See "Certain Relationships and Related Transactions--Transactions with Time Publishing Ventures and Its Affiliates--Agreements Relating to the 1997 Acquisition." 17 21 IF WE ARE UNABLE TO PREDICT, RESPOND TO AND INFLUENCE TRENDS, OUR REVENUES WILL BE ADVERSELY AFFECTED Our continued success is dependent on our ability to provide creative, useful and attractive ideas, information, concepts and products, which strongly appeal to a large number of consumers. We must also be able to quickly and effectively respond to changes in the public's tastes. The strength of our brand name depends in part on our ability to influence the public's tastes. We cannot be sure that our new ideas and content will have the appeal and garner the acceptance that they have in the past or that we will be able to quickly respond to changes in public taste. In addition, we can not be sure that our existing ideas and content will continue to appeal to the public. SINCE OUR STOCK HAS NOT BEEN PUBLICLY TRADED BEFORE THIS OFFERING, THE PRICE OF OUR STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS Prior to this offering, you could not buy or sell our Class A common stock publicly. Although we and the underwriters determined the initial public offering price after extensive negotiation and based on numerous factors, the market price of our Class A common stock after the offering may vary from the initial public offering price. The market price of our Class A common stock is likely to be highly volatile and could be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control: -- quarterly variations in our operating results -- operating results that vary from the expectations of securities analysts and investors -- changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors -- announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments -- changes in the status of our intellectual property and other proprietary rights -- announcements by third parties of significant claims or proceedings against us -- future sales of our Class A common stock -- stock market price and volume fluctuations WE HAVE A SHORT OPERATING HISTORY WITH RESPECT TO OUR CURRENT BUSINESSES; WE HAVE NEVER OPERATED AS A PUBLIC COMPANY, AND THE OBLIGATIONS INCIDENT TO BEING A PUBLIC COMPANY WILL REQUIRE ADDITIONAL EXPENDITURES Prior to 1997, substantially all of our current businesses were conducted as part of Time Publishing Ventures and its affiliates, and the remainder of our current businesses were operated separately by Martha Stewart. After our acquisition of Martha Stewart Living from Time Publishing Ventures, we engaged in our current businesses as an integrated independent entity for the first time. Since then we have made significant investments, including personnel additions and organizational changes. Accordingly, with respect to most of our current businesses, we have only a limited operating history for potential investors to consider. Prior to this offering, we have never been a public company, and we expect that the obligations of being a public company, including substantial public reporting and investor relations obligations, will require significant additional expenditures, place additional demands on our management and may require the hiring of additional personnel. As part of this process, we are implementing financial reporting systems and other controls which we have not previously used. We may need to implement additional systems in order to adequately function as a public company. Such expenditures could adversely affect our financial condition and results of operations. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH Our rapid growth in recent years has placed significant demands on our management and other resources. We expect that our growth will require significant additional investment in personnel, systems and related 18 22 capital expenditures, and we may not be able to recruit adequate personnel, implement new systems or invest in capital expenditures in a timely and effective manner. If we fail to effectively manage and continue this growth, our profitability could decline. MARTHA STEWART WILL CONTROL OUR COMPANY Following this offering, Martha Stewart will control all of our outstanding shares of Class B common stock, representing approximately % of our voting power. As a result, Martha Stewart will have the ability to control the outcome of all matters requiring stockholder approval, including the election and removal of our entire Board of Directors, any merger, consolidation or sale of all or substantially all of our assets, and the ability to control our management and affairs. The Class B common stock has ten votes per share, while Class A common stock, which is the stock we are offering in this prospectus, has one vote per share. Because of this dual-class structure, Martha Stewart will continue to be able to control all matters submitted to our stockholders even if she comes to own significantly less than 50% of the equity of our company. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our businesses. As a result, the market price of Class A common stock could be adversely affected. IF OUR SYSTEMS OR THOSE OF OUR VENDORS OR PARTNERS ARE NOT YEAR 2000 COMPLIANT, YEAR 2000 RISKS MAY HARM OUR BUSINESS The risks posed by the inability of certain computer systems, possibly including ours and those of our third-party vendors and strategic partners, to recognize the change of the date to the year 2000 could adversely affect our business in a number of significant ways. We rely on information technology supplied by third parties, and our strategic partners are also dependent upon their own internally developed information technology and third-party systems. Year 2000 problems affecting either our systems or those of our strategic partners, manufacturers and distributors could materially adversely affect our business. Additionally, the Internet could face serious disruptions arising from the year 2000 problem. We are evaluating our information technology and are consulting with our third-party vendors and strategic partners to ascertain year 2000 status. However, we cannot guarantee that our systems will be year 2000 compliant in a timely manner, that the systems of our strategic partners will be year 2000 compliant in a timely manner or that there will not be significant problems among information technology systems. We also cannot guarantee that consumers will be able to visit marthastewart.com without serious disruptions arising from the year 2000 problem. Given the potentially pervasive nature of the year 2000 problem, we cannot guarantee that disruption in other industries and market segments will not adversely affect our business. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price is substantially higher than the net tangible book value of each outstanding share of our common stock. Purchasers of Class A common stock in this offering will experience immediate and substantial dilution. The dilution will be $ per share in net tangible book value of Class A common stock from the initial public offering price, and $ per share if the underwriters exercise their option to purchase additional shares. If outstanding options to purchase shares of Class A common stock are exercised, there would be further dilution. See "Dilution" and "Management." SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE Sales of a substantial number of shares of our common stock after this offering could adversely affect the market price of our Class A common stock by introducing a large number of sellers to the market. Given the potential volatility in the price of our shares, these sales could cause the market price of Class A common stock to decline. After this offering, we will have outstanding shares of Class A common stock and shares of Class B common stock, and we will have reserved an additional shares of Class A common stock for issuance pursuant to outstanding stock options. All of the shares of Class A common stock to be sold 19 23 in this offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by one of our "affiliates" (as that term is defined in Rule 144 under the Securities Act of 1933, as amended). The remaining shares of outstanding common stock, including both Class A and Class B, representing approximately % of the outstanding common stock upon completion of this offering, will be "restricted securities" under the Securities Act of 1933. These restricted securities will be subject to restrictions on the timing, manner and volume of sales of restricted shares. However, under the terms of a stockholders agreement to be entered into immediately prior to completion of this offering, each of Martha Stewart, Time Publishing Ventures and Kleiner Perkins, each of whom is a stockholder, will have rights to require us to register their shares. See "Certain Relationships and Related Transactions--Registration Rights" for more information on these registration rights. If Time Publishing Ventures accepts our offer to purchase its shares of common stock, which we will deliver at the time of this offering, upon completion of that transaction, those shares of common stock will no longer be outstanding for sale in the public markets. Our directors, executive officers, key employees and all of our current stockholders have agreed, subject to limited exceptions, that, for a period of 180 days following this offering, they will not, without the prior written consent of Morgan Stanley, directly or indirectly, offer to sell, sell or otherwise dispose of any shares of common stock. We cannot predict if future sales of our common stock or the availability of our common stock for sale will adversely affect the market price for Class A common stock or our ability to raise capital by offering equity securities. 20 24 REORGANIZATION TRANSACTIONS OCCURRING PRIOR TO THIS OFFERING From February 1997 until , 1999, we operated as a limited liability company. In connection with this offering and immediately before we complete this offering, MSLO LLC will be reorganized into a C corporation through a merger with MSLO in which the equity interests in MSLO LLC will be converted into shares of common stock. We will issue an aggregate of shares of Class A common stock and shares of Class B common stock in this reorganization. In addition, in connection with this reorganization: -- we will reserve an aggregate of shares of Class A common stock for issuance upon exercise of options previously issued under the MSLO LLC Non-Qualified Class A LLC Unit/Stock Option Plan -- at the time of this offering we will issue up to an additional shares of Class A common stock under the MSLO LLC Phantom Performance Unit Plan The options to acquire Class A common stock under the MSLO LLC Non-Qualified Class A LLC Unit/ Stock Option Plan generally vest in increments over a five-year period, generally 10% at December 31, 1998, with additional increments of 10%, 20%, 20% and 40% vesting on each of the four subsequent anniversaries. There will be no further grants under this plan following this offering. Prior to this offering, we will make one or more distributions of profits, totaling approximately $10.0 million, to the members of MSLO LLC, other than Kleiner Perkins. Additionally, at the time of the reorganization we will make a distribution to all members of MSLO LLC to cover their respective tax liabilities resulting from the income of MSLO LLC, which distribution as of March 31, 1999 is estimated to total $3.0 million. However, the actual amount of this distribution is dependent on results of operations of MSLO LLC through the time of the reorganization, which we cannot predict with certainty. Upon completion of this offering, we will exercise our right under an existing agreement to offer to purchase the shares of Class A common stock to be owned by Time Publishing Ventures for an aggregate of approximately $42.0 million, or $ per share. Certain rights which Time Publishing Ventures has with respect to MSLO continue until we either complete that purchase or Time Publishing Ventures declines our offer to purchase. Time Publishing Ventures must decide no later than the 120th day following the date we notify Time Publishing Ventures of our offer to purchase. See "Certain Relationships and Related Transactions--LLC Operating Agreement" for more information. 21 25 USE OF PROCEEDS We estimate the net proceeds to us from the sale of the shares of Class A common stock offered in this prospectus to be approximately $ million, after deducting estimated offering expenses of $ . We plan to use approximately $42.0 million of the net proceeds from this offering to finance the potential purchase of the shares of Class A common stock held by Time Publishing Ventures under the terms of an existing agreement, see "Certain Relationships and Related Transactions--LLC Operating Agreement." We intend to use the remainder of the net proceeds, over time, for general corporate purposes, including new business development. We also could use a portion of the net proceeds to acquire or invest in businesses, technologies, products or services, although no specific acquisitions are planned and no portion of the net proceeds has been allocated for any acquisition. In the event that Time Publishing Ventures declines to accept our offer to purchase its shares of Class A common stock, the entire net proceeds will be used as otherwise described in this paragraph. As of the date of this prospectus, except for the potential purchase of the shares held by Time Publishing Ventures, we cannot specify with certainty the particular uses for the net proceeds we will receive upon completion of this offering. Accordingly, our management will have broad discretion in the application of the remainder of the net proceeds. Pending these uses, we intend to invest the remainder of the net proceeds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We anticipate that we will retain all of our earnings in the foreseeable future to finance the continued growth and expansion of our businesses, and we have no current intention to pay cash dividends. Our future dividend policy will depend on our earnings, capital requirements, requirements of the financing agreements to which we may be a party, financial condition and other factors considered relevant by our Board of Directors. 22 26 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999 on an actual, pro forma and pro forma as adjusted basis: - The actual column reflects our capitalization as of March 31, 1999. - The pro forma column reflects our capitalization as set forth in the actual column, with adjustments to reflect (1) the reorganization of MSLO LLC into a C corporation, including a $2.9 million net future tax benefit resulting from the reorganization; (2) distributions to members of MSLO LLC, totaling $13.0 million, including $3.0 million representing tax distribution payments based upon taxable income for the three months ended March 31, 1999; the actual amount of this tax distribution will change based on the actual results of operations of MSLO LLC from March 31, 1999 through the date of the reorganization; (3) the sale of 5% of MSLO LLC and a warrant to Kleiner Perkins in exchange for $25.0 million and (4) the retirement of $15.0 million of indebtedness primarily with a portion of the proceeds from the Kleiner Perkins transaction, as if each had occurred on March 31, 1999. - The pro forma as adjusted column reflects our capitalization as set forth in the pro forma column, with adjustments to reflect the issuance of the shares of Class A common stock offered in this prospectus and our receipt of the estimated net proceeds from the sale of these shares, as if this offering had been completed on March 31, 1999. This table should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of MSLO LLC and related notes included elsewhere in this prospectus.
AS OF MARCH 31, 1999 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ---------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Long-term debt (including current maturities).......... $15,000 $ -- $ -- Members' equity........................................ 43,434 -- -- Stockholders' equity: Class A common stock ($0.01 par value) no shares authorized actual and pro forma; 350,000,000 shares authorized as adjusted; no shares issued and outstanding actual and pro forma; shares issued and outstanding pro forma as adjusted.......................................... -- Class B common stock ($0.01 par value) no shares authorized actual and pro forma; 150,000,000 shares authorized as adjusted; no shares issued and outstanding actual and pro forma; shares issued and outstanding pro forma as adjusted.......................................... -- Preferred stock ($0.01 par value) no shares authorized actual and pro forma; 150,000,000 shares authorized as adjusted; no shares issued and outstanding actual, pro forma and pro forma as adjusted;......................................... -- -- -- Paid-in capital........................................ 58,299 Retained earnings...................................... ------- ------- ------- Total stockholders' equity............................. -- 58,299 ------- ------- Total capitalization................................... $58,434 $58,299 $ ======= ======= =======
- - - ------------ 23 27 DILUTION Our net tangible book value (deficit) as of March 31, 1999 was approximately $(8.936) million or $ per share based on an aggregate of shares of common stock outstanding. Net tangible book value per share is determined by dividing the number of outstanding shares of common stock into our net tangible book value, which is the total tangible assets less total liabilities. After giving effect to (1) the sale of 5% of MSLO LLC and the issuance of a warrant in exchange for $25.0 million and (2) the sale of the shares of Class A common stock offered in this prospectus, before deducting estimated offering expenses and the underwriting discounts and commissions based on an assumed initial public offering price of $ per share, our net tangible book value as of March 31, 1999 would have been $ million, or $ per share. This represents an immediate dilution of $ per share to new investors purchasing shares of Class A common stock at the initial offering price. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Net tangible book value (deficit) per share as of March 31, 1999............................................... $ Increase in net tangible book value per share attributable to Kleiner Perkins................................................ Increase in net tangible book value per share attributable to new investors....................................... ---- Pro forma net tangible book value per share after the reorganization and this offering.......................... ---- Dilution per share to new investors......................... $ ====
The following table summarizes, as of March 31, 1999 on the pro forma basis described above, the number of shares of capital stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders, Kleiner Perkins and by investors purchasing shares of Class A common stock in this offering at $ , before deducting the underwriting discounts and commissions and estimated offering expenses:
TOTAL SHARES PURCHASED CONSIDERATION AVERAGE ------------------ ------------------ PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- ------- ------- ------- --------- Existing stockholders.......... % $ % $ Kleiner Perkins................ New investors.................. ------- ------- ------- ------- Total..................... % $ % ======= ======= ======= =======
The above discussion and tables exclude (1) shares of common stock issuable on exercise of options outstanding as of March 31, 1999, with a weighted average exercise price of approximately $ per share, and (2) additional shares of common stock reserved for issuance under our equity-based compensation plans. The discussion and tables include up to shares of common stock to be issued upon completion of this offering pursuant to the MSLO LLC Phantom Performance Unit Plan. 24 28 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA In the table below, we provide you with selected historical and pro forma consolidated financial data of MSLO LLC. The following selected consolidated statement of income data for the years ended December 31, 1994 and 1995 and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are derived from the financial statements of MSLO LLC that have been audited by Arthur Andersen LLP, independent public accountants, which are not included in this prospectus. We explain in the first bullet point below how we derived the following pro forma consolidated financial data as of and for the year ended December 31, 1996. The acquisition of Martha Stewart Living in 1997 was accounted for as a purchase and accordingly results of operations for prior periods do not include those businesses. The following selected consolidated statement of income data for the years ended December 31, 1996, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1997 and 1998 are derived from the consolidated financial statements of MSLO LLC that have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The following consolidated statement of income data for the three months ended March 31, 1998 and 1999 and the consolidated balance sheet data as of March 31, 1999 have been derived from the unaudited financial statements of MSLO LLC which, in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for fair presentation. Results for the three month period ended March 31, 1999 are not necessarily indicative of results that may be expected for the entire year. In the table below, we also provide you with the following pro forma information: -- The 1996 pro forma statement of income data, other data and balance sheet data have been derived from the financial statements of MSLO LLC and give effect to the acquisition of Martha Stewart Living from Time Publishing Ventures as though this acquisition had occurred on January 1, 1996. The net income reflected for that period is the sum of the net income of MSLO LLC for that period of $3.6 million and the net income of Martha Stewart Living for that period of $8.7 million, reduced by amortization of intangible assets of $2.9 million. Total revenues for the period include $1.0 million that had been classified as other income in the Martha Stewart Living statement of operations. There were no intercompany transactions during that period. We include elsewhere in this prospectus the financial statements of Martha Stewart Living, audited by Ernst & Young LLP, independent auditors. -- The income statement data for all of the periods presented includes an adjustment to the income tax provision reflecting the reorganization of MSLO LLC into a C corporation as though the reorganization had occurred prior to the start of each period. See Note 7 of the consolidated financial statements of MSLO LLC for further information. -- The income statement data for the three months ended March 31, 1999 includes a one time benefit that will result from the change in the tax status of MSLO LLC at the time it is reorganized into a C corporation, as though the reorganization had occurred on March 31, 1999. The benefit actually recognized will be determined on the effective date of the reorganization. The financial data set forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements of MSLO LLC and the combined financial statements of Martha Stewart Living and, in each case, the related notes thereto, included elsewhere in this prospectus. 25 29
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------------------- --------------------- PRO FORMA 1994 1995 1996 1996 1997 1998 1998 1999 ------ ------ ------ ---------------- -------- -------- ------- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues Publishing................ $3,161 $3,647 $3,899 $74,146 $108,694 $127,020 $32,509 $ 35,536 Television................ -- -- -- 8,420 12,396 23,351 5,387 6,609 Merchandising............. -- -- -- -- 6,919 15,004 3,056 5,679 Internet/Direct Commerce................ -- -- -- 3,292 4,812 14,673 1,348 5,555 ------ ------ ------ ------- -------- -------- ------- -------- Total revenues........ 3,161 3,647 3,899 85,858 132,821 180,048 42,300 53,379 ------ ------ ------ ------- -------- -------- ------- -------- Operating costs and expenses Production, distribution and editorial........... -- -- -- 40,610 59,148 82,930 18,052 26,312 Selling and promotion..... -- -- -- 24,484 31,973 34,540 8,774 9,856 General and administrative.......... 725 131 99 7,812 21,182 29,659 7,396 8,449 Depreciation and amortization............ -- -- -- 3,371 3,927 5,534 1,126 1,342 ------ ------ ------ ------- -------- -------- ------- -------- Total operating costs and expenses....... 725 131 99 76,277 116,230 152,663 35,348 45,959 ------ ------ ------ ------- -------- -------- ------- -------- Income from operations...... 2,436 3,516 3,800 9,581 16,591 27,385 6,952 7,420 ------ ------ ------ ------- -------- -------- ------- -------- Interest expense, net..... -- 153 165 165 2,195 2,243 607 457 Income tax provision...... 71 45 -- -- 467 1,336 328 344 ------ ------ ------ ------- -------- -------- ------- -------- Net income.................. 2,365 3,318 3,635 9,416 13,929 23,806 6,017 6,619 ------ ------ ------ ------- -------- -------- ------- -------- Pro forma (unaudited) Benefit from change in tax status.................. -- -- -- -- -- -- -- 2,865 Adjustment to income tax provision............... (976) (1,401) (1,563) (5,149) (7,038) (10,817) (2,916) (3,171) ------ ------ ------ ------- -------- -------- ------- -------- Pro forma net income........ $1,389 $1,917 $2,072 $ 4,267 $ 6,891 $ 12,989 $ 3,101 $ 6,313 ====== ====== ====== ======= ======== ======== ======= ======== Pro forma basic and diluted net income per share...... $ $ Pro forma weighted average common shares outstanding............... OTHER DATA: EBITDA...................... $2,436 $3,516 $3,800 $12,952 $ 20,518 $ 32,919 $ 8,078 $ 8,762 Capital expenditures........ -- -- -- 1,714 11,027 2,730 1,572 517 BALANCE SHEET DATA: (AT PERIOD END) Cash........................ $ 46 $ 7 $ 85 $ 85 $ 9,971 $ 24,578 $ 17,363 Total assets................ 1,145 2,786 4,074 88,496 105,706 125,732 123,467 Total long-term debt........ -- -- -- 30,000 30,000 27,650 15,000 Members'/Stockholders' Equity (deficit).......... 88 (436) 589 (15,827) 13,235 36,815 43,434
26 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion details the material factors that have affected our financial condition and results of operations in 1996, 1997, 1998 and the first quarters of 1998 and 1999. This discussion should be read in conjunction with "Selected Historical and Pro Forma Consolidated Financial Data," the consolidated financial statements of MSLO LLC and the combined financial statements of Martha Stewart Living and, in each case, the related notes thereto, included elsewhere in this prospectus. In addition to historical and pro forma financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual future results could differ significantly from those anticipated in or implied by these forward-looking statements for the reasons detailed in "Risk Factors" and elsewhere in this prospectus. OVERVIEW We are a leading creator of original "how to" content and related products 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 distribution outlets. We primarily focus on the domestic arts, providing consumers with the "how to" ideas, information, products and other resources they need to raise the quality of living in and around their homes. The content and products we create span seven core areas: Home, Cooking and Entertaining, Gardening, Crafts, Holidays, Keeping and Weddings. The original businesses of MSLO began operations in 1982 with Martha Stewart's publication of the book Entertaining. Through 1996, MSLO derived revenue from royalty income on the sale of books and lecture and appearance fees. In 1997, the character of our business changed significantly with the acquisition from Time Publishing Ventures of the assets and liabilities relating to Martha Stewart Living magazine, Martha Stewart Weddings magazine, the Martha Stewart Living television program, Martha Stewart Living books, and the Martha by Mail mail order business, including certain trademarks and copyrights, for approximately $53.3 million, including acquisition costs. The consideration we paid to Time Publishing Ventures in this transaction consisted of an interest-bearing promissory note in the principal amount of $30.0 million and approximately 6.3% of our equity through the creation of a special class of our equity. In addition, pursuant to the operating agreement of MSLO LLC, Time Publishing Ventures received the right to a special distribution from us for an aggregate $18 million in cash, an amount which we paid in February 1997. Our businesses have expanded to comprise four operating segments: Publishing (magazines, books, newspaper columns and radio programs), Television (daily and weekend nationally syndicated and cable programming and periodic network specials), Merchandising (the design and licensing of products for sale in traditional retail stores) and Internet/Direct Commerce (online and offline catalog and other Internet-related businesses). Much of our growth has occurred since 1997, reflecting the 1997 acquisition of Martha Stewart Living from Time Publishing Ventures, the introduction of new products and services as well as the expansion of our historical businesses. Over the last three years, our revenues have grown from $85.9 million in 1996, on a pro forma basis, to $180.0 million in 1998, and our income from operations has grown from $9.6 million, on a pro forma basis, to $27.4 million during that same period. This growth has resulted primarily from continued growth in our Publishing segment, the switch from a weekly television program to a daily program in September 1997 as reflected in our Television segment, and the creation of our Merchandising segment in February 1997 and its subsequent growth. Additionally, the revenues we derive from the Internet/Direct Commerce segment have increased as a percentage of total revenues during both 1997 and 1998 as compared to prior periods. Our revenues are derived primarily from advertising sales, circulation and book royalties in our Publishing segment, advertising sales and royalties in our Television segment, licensing fees and royalties in our Merchandising segment and product sales and advertising in our Internet/Direct Commerce segment. Our expenses consist primarily of the costs directly associated with creating, producing and distributing our products and services, such as the cost of producing our television programs, researching, developing and creating stories for our Publishing and Television segments and product cost and research and development 27 31 expenses relating to our Merchandising and Internet/Direct Commerce segments. In addition, the recent expansion of our business and operations has resulted in increased corporate overhead and selling and promotion expenses, including material increases in the second half of 1998 and the first quarter of 1999, resulting in slower earnings growth than for prior periods. We expect these expenses to continue to increase through the remainder of 1999. In connection with our growth strategies, we expect that we will make significant investments in technology and new product development, as well as additional investments in infrastructure and facilities related costs. Because our strategy is to closely control our brands and the quality of products and services associated with our brands, the introduction of new products, such as a new category of merchandise, requires substantial investment by us, although a significant portion of this expense is reimbursed by our licensing partners. There can be no assurance that, notwithstanding these investments, our growth strategies will be successful. From February 1997 until immediately prior to completion of this offering, we have operated as a limited liability company. Accordingly, our earnings were included in the taxable income of the members of MSLO LLC for federal and certain state income tax purposes, and we have generally not been subject to income tax on such earnings, other than certain state and local franchise and similar taxes. In connection with this offering, pursuant to the merger of MSLO LLC with and into MSLO, MSLO will become subject to such taxes as it is reorganized from a limited liability company to a C corporation. As a result of the reorganization into a C corporation, we will record future tax benefits and deferred tax liabilities and a corresponding tax benefit in our statement of income. Assuming this reorganization into a C corporation had occurred at March 31, 1999, the net future tax benefit would have been approximately $3.0 million. In connection with this offering, MSLO LLC will make one or more distributions to its members of approximately $13.0 million, which includes one or more distributions of profits totaling no more than $10.0 million to the members other than Kleiner Perkins and approximately $3.0 million in respect of tax liabilities of all members for the three months ended March 31, 1999, which amount will be increased to reflect earnings since that date through the date of the reorganization. Assuming the merger had occurred on January 1, 1998, our pro forma effective tax rate for 1998 would have been 48%. This pro forma effective tax rate is higher than the federal statutory tax rate of 35% due to state and local taxes, as well as the effect of the amortization of non-deductible goodwill. The effect of taxes on our results of operations is not discussed below because the historic taxation of our operations does not provide a meaningful comparison with respect to periods following the merger and this offering. 28 32 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 TO THREE MONTHS ENDED MARCH 31, 1998
THREE MONTHS THREE MONTHS ENDED ENDED MARCH MARCH 31, 1998 % OF REVENUES 31, 1999 % OF REVENUES ------------ ------------- ------------ ------------- (IN THOUSANDS) (UNAUDITED) Revenues Publishing................ $32,509 76.9% $35,536 66.6% Television................ 5,387 12.7% 6,609 12.4% Merchandising............. 3,056 7.2% 5,679 10.6% Internet/Direct Commerce............... 1,348 3.2% 5,555 10.4% ------- ----- ------- ----- Total revenues....... 42,300 100.0% 53,379 100.0% ------- ----- ------- ----- Operating costs and expenses Production, distribution and editorial.......... 18,052 42.7% 26,312 49.3% Selling and promotion..... 8,774 20.7% 9,856 18.5% General and administrative......... 7,396 17.5% 8,449 15.8% Depreciation and amortization........... 1,126 2.7% 1,342 2.5% ------- ----- ------- ----- Total operating costs and expenses...... 35,348 83.6% 45,959 86.1% ------- ----- ------- ----- Income from operations...... 6,952 16.4% 7,420 13.9% ------- ----- ------- ----- Other expenses Interest expense, net..... 607 1.4% 457 0.9% Income tax provision...... 328 0.8% 344 0.6% ------- ----- ------- ----- Net income.................. $ 6,017 14.2% $ 6,619 12.4% ======= ===== ======= =====
Revenues. Total revenues increased $11.1 million, or 26%, to $53.4 million for the three months ended March 31, 1999 from $42.3 million for the three months ended March 31, 1998. Publishing revenues increased $3.0 million, or 9%, to $35.5 million for the three months ended March 31, 1999 from $32.5 million for the three months ended March 31, 1998. This increase primarily reflects higher advertising revenues due to more advertising pages sold and increased per page advertising rates. Television revenues increased $1.2 million, or 23%, to $6.6 million for the three months ended March 31, 1999 from $5.4 million for the three months ended March 31, 1998, due primarily to the addition of a second half hour to our syndicated daily program in a majority of markets in which it is aired, partially offset by reduced advertising revenues resulting from lower ratings for the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. Merchandising revenues increased $2.6 million, or 86%, to $5.7 million, for the three months ended March 31, 1999 from $3.1 million for the three months ended March 31, 1998, due primarily to the addition of our Martha Stewart Everyday line of garden products, sold in Kmart stores beginning in January 1999, and the sale of merchandise by Zellers department stores in Canada beginning in June 1998. Sales of our Martha Stewart Everyday bed and bath products also increased due to offering the full product line during the three months ended March 31, 1999, as compared to offering approximately 50% of the assortment during the three months ended March 31, 1998. Internet/Direct Commerce revenues increased $4.3 million, or 312%, to $5.6 million for the three months ended March 31, 1999 from $1.3 million for the three months ended March 31, 1998, due primarily to higher catalog merchandise sales resulting in part from additional catalog mailings in December 1998 and February 1999 and the fact that no corresponding mailings were made in the last quarter of 1997 or first quarter of 1998. 29 33 Production, distribution and editorial. Production, distribution and editorial expenses increased $8.2 million, or 46%, to $26.3 million for the three months ended March 31, 1999 from $18.1 million for the three months ended March 31, 1998. Publishing segment costs increased $2.4 million, as a result of the increased number of pages printed per issue resulting from an increase in advertising and editorial pages, an increased print order, as well as higher printing costs. Television costs increased $0.9 million primarily as a result of higher production and distribution costs incurred for the additional half-hour of programming in 1999. In our Merchandising segment, certain costs are reimbursed by our licensing partners, and are therefore not reflected in our results of operations. Internet/Direct Commerce costs increased $4.9 million due to higher volume of catalog circulation and a higher cost of goods sold related to increased revenues. Selling and promotion. Selling and promotion expenses increased $1.1 million, or 12%, to $9.9 million for the three months ended March 31, 1999 from $8.8 million for the three months ended March 31, 1998. This increase primarily reflects increased Publishing segment costs resulting from increased subscription acquisition spending and advertising sales costs to support higher advertising revenues. General and administrative. General and administrative expenses, consisting primarily of costs relating to the executive office, finance, professional services, information technology, office services (including rent) and human resources, increased $1.0 million, or 14%, to $8.4 million for the three months ended March 31, 1999 from $7.4 million for the three months ended March 31, 1998. The increase is attributable to higher consulting costs, primarily related to certain human resource and information technology-related projects. Additionally, we have incurred higher costs with respect to finance and occupancy as a result of continued infrastructure development and higher company-wide employment levels over the prior period. Depreciation and amortization. Depreciation and amortization increased $0.2 million, or 19%, to $1.3 million for the three months ended March 31, 1999 from $1.1 million for the three months ended March 31, 1998 as a result of higher levels of property, plant and equipment. Interest expense, net. Interest expense, net, decreased $0.1 million, or 25%, to $0.5 million for the three months ended March 31, 1999 from $0.6 million for the three months ended March 31, 1998, as a result of lower outstanding long-term debt, as well as lower interest rates. Net income increased $0.6 million, or 10%, to $6.6 million for the three months ended March 31, 1999 from $6.0 million for the three months ended March 31, 1998, primarily as a result of the above mentioned factors. 30 34 COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
% OF % OF 1997 REVENUES 1998 REVENUES -------- ----------- -------- ----------- (IN THOUSANDS) Revenues Publishing.................................. $108,694 81.8% $127,020 70.5% Television.................................. 12,396 9.3% 23,351 13.0% Merchandising............................... 6,919 5.2% 15,004 8.3% Internet/Direct Commerce.................... 4,812 3.6% 14,673 8.1% -------- ----- -------- ----- Total revenues......................... 132,821 100.0% 180,048 100.0% -------- ----- -------- ----- Operating costs and expenses Production, distribution and editorial...... 59,148 44.5% 82,930 46.1% Selling and promotion....................... 31,973 24.1% 34,540 19.2% General and administrative.................. 21,182 15.9% 29,659 16.5% Depreciation and amortization............... 3,927 3.0% 5,534 3.1% -------- ----- -------- ----- Total operating costs and expenses..... 116,230 87.5% 152,663 84.8% -------- ----- -------- ----- Income from operations........................ 16,591 12.5% 27,385 15.2% -------- ----- -------- ----- Other expenses Interest expense, net....................... 2,195 1.7% 2,243 1.2% Income tax provision........................ 467 0.4% 1,336 0.7% -------- ----- -------- ----- Net income.................................... $ 13,929 10.5% $ 23,806 13.2% ======== ===== ======== =====
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 due to more advertising pages sold and increased per page advertising rates, as well as additional revenues received from a special issue published in the fourth quarter of 1998. Circulation revenues increased as a result of generally higher newsstand revenues and 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 earned from licensing a second half hour of "best of" shows during the fourth quarter of 1998. These increases were partially offset by the elimination of revenues 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 a greater assortment of Martha Stewart Everyday bed and bath products in 1998, the introduction of these products at Zellers in Canada in June 1998 and the distribution of our Martha Stewart Everyday Colors line of paints through Sears in the United States and Canada in the first half of 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 also increased, 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 31 35 December 31, 1997. Publishing segment costs increased $7.3 million, as a result of an increased number of pages printed per issue resulting from the increase in advertising and editorial pages per issue, costs associated with the special issue, an increased print order 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, based on higher volume of catalog circulation and a higher cost of goods sold due to increased product sales. Selling and promotion. Selling and promotion expenses increased $2.5 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 reflects increased Publishing segment costs resulting from increased subscription acquisition spending and advertising sales costs to support higher advertising revenues, increased Television segment expenses associated with the expanded programming schedule and increased Internet/Direct Commerce segment costs associated with higher revenue volume. 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 information technology and consulting costs, the creation of an integrated marketing department, higher costs associated with increased revenues and the buildup of corporate infrastructure in the business and higher staffing levels throughout the Company. 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 expense, net. Interest expense, net, remained unchanged at $2.2 million. 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. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO PRO FORMA YEAR ENDED DECEMBER 31, 1996 Financial information for 1996 is presented on a pro forma basis to reflect the acquisition by MSLO LLC of Martha Stewart Living from Time Publishing Ventures in 1997, as if such transaction were completed as of January 1, 1996. Actual financial information for 1996 is not presented in this section as it is not material and does not provide a meaningful comparison with subsequent periods. We present the actual financial information for 1996 in the consolidated financial statements of MSLO LLC included elsewhere in this prospectus. 32 36
PRO FORMA % % OF 1996 OF REVENUES 1997 REVENUES ----------- ----------- -------- -------- (UNAUDITED) (IN THOUSANDS) Revenues Publishing............................ $74,146 86.4% $108,694 81.8% Television............................ 8,420 9.8% 12,396 9.3% Merchandising......................... -- -- 6,919 5.2% Internet/Direct Commerce.............. 3,292 3.8% 4,812 3.6% ------- ----- -------- ----- Total revenues................... 85,858 100.0% 132,821 100.0% ------- ----- -------- ----- Operating costs and expenses Production, distribution and editorial.......................... 40,610 47.3% 59,148 44.5% Selling and promotion................. 24,484 28.5% 31,973 24.1% General and administrative............ 7,812 9.1% 21,182 15.9% Depreciation and amortization......... 3,371 3.9% 3,927 3.0% ------- ----- -------- ----- Total operating costs and expenses...................... 76,277 88.8% 116,230 87.5% ------- ----- -------- ----- Income from operations.................. 9,581 11.2% 16,591 12.5% ------- ----- -------- ----- Other expenses Interest expense, net................. 165 0.2% 2,195 1.7% Income tax provision.................. -- -- 467 0.4% ------- ----- -------- ----- Net income............................ $ 9,416 11.0% $ 13,929 10.5% ======= ===== ======== =====
Revenues. Total revenues increased $47.0 million, or 55%, to $132.8 million for the year ended December 31, 1997 from $85.9 million for the year ended December 31, 1996 on a pro forma basis. Publishing segment revenues increased $34.6 million, or 47%, to $108.7 million for the year ended December 31, 1997 from $74.1 million for the year ended December 31, 1996 on a pro forma basis. This increase primarily reflects higher advertising revenues due to more advertising pages sold and increased per page advertising rates, as well as higher circulation revenues resulting from both higher subscription revenues and newsstand revenues due to increased copies sold. Television revenues increased $4.0 million, or 47%, to $12.4 million for the year ended December 31, 1997 from $8.4 million for the year ended December 31, 1996 on a pro forma basis. This increase was primarily due to production and airing of a daily syndicated half-hour show in both the United States and Canada beginning in September 1997, while prior to that date the show was aired only weekly. Merchandising revenues in 1997 represent revenues received from our Martha Stewart Everyday bed and bath products, which were introduced at Kmart in March 1997. Internet/Direct Commerce revenues increased $1.5 million, or 46%, to $4.8 million for the year ended December 31, 1997 from $3.3 million for the year ended December 31, 1996 on a pro forma basis. The increase is primarily due to an increase in product sales resulting from the promotion of catalog products in Martha Stewart Living magazine. Production, distribution and editorial. Production, distribution and editorial expenses increased $18.5 million, or 46%, to $59.1 million for the year ended December 31, 1997 from $40.6 million for the year ended December 31, 1996 on a pro forma basis. Publishing segment costs increased $15.0 million, primarily as a result of an increased number of pages printed per issue due to the increase in advertising and editorial pages and an increased print order. Television costs increased $2.8 million due to the increase in programming resulting from the change from a weekly to a daily show beginning in September 1997. Internet/Direct Commerce costs increased $0.7 million due to higher sales of catalog merchandise. Selling and promotion. Selling and promotion expenses increased $7.5 million, or 31%, to $32 million for the year ended December 31, 1997 from $24.5 million for the year ended December 31, 1996 on a pro forma basis. This increase reflects higher Publishing segment costs resulting from increased subscription acquisition spending and advertising sales costs to support higher advertising revenues. 33 37 General and administrative. General and administrative expenses increased $13.4 million, or 172%, to $21.2 million for the year ended December 31, 1997 from $7.8 million for the year ended December 31, 1996 on a pro forma basis. The increase is attributable to overall costs associated with the staffing and the development of a corporate infrastructure as a result of the acquisition of Martha Stewart Living from Time Publishing Ventures, including higher executive compensation, information technology, finance, consulting and human resource costs. Depreciation and amortization. Depreciation and amortization increased $0.6 million, or 16%, to $3.9 million for the year ended December 31, 1997 from $3.4 million for the year ended December 31, 1996 on a pro forma basis, as a result of higher levels of property, plant and equipment placed in service. Interest expense, net. Interest expense increased $2.0 million to $2.2 million for the year ended December 31, 1997 from $0.2 million for the year ended December 31, 1996 on a pro forma basis, as a result of the long-term debt incurred in connection with the acquisition from Time Publishing Ventures. Net income increased $4.5 million, or 48%, to $13.9 million for the year ended December 31, 1997 from $9.4 million for the year ended December 31, 1996 on a pro forma basis, primarily as a result of the above mentioned factors. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $17.4 million at March 31, 1999, compared to $11.7 million at March 31, 1998. Cash and cash equivalents decreased $7.2 million during the three months ended March 31, 1999, and increased $1.7 million during the three months ended March 31, 1998, as stated below. Cash flows from operating activities were $6.0 million during the three months ended March 31, 1999, compared with $3.3 million for the three months ended March 31, 1998. The increase in cash flows from operating activities in 1999 was a result of increased net income, increased accounts payable and accrued liabilities and the reduction in deferred royalty income, offset by higher inventory and accounts receivable levels. Cash flows used in investing activities were $0.5 million and $1.6 million during the three months ended March 31, 1999 and 1998, respectively, representing capital expenditures to acquire property and equipment. Cash flows used in financing activities during the three months ended March 31, 1999 were $12.7 million. In March 1999, we prepaid 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., formerly known as NationsBank, N.A., and existing cash of $12.7 million plus accrued interest. The Bank of America term loan bears interest at 2% above the three-month London Interbank Offered Rate and principal of $0.8 million is payable quarterly from June 1999 through March 2004. The outstanding amount of the loan was repaid in July 1999 with the net proceeds of the Kleiner Perkins equity purchase. We have a line of credit with Bank of America in the amount of $10.0 million at the prime rate per annum, which is available to us for seasonal working capital requirements and general corporate purposes. As of March 31, 1999, we had no outstanding borrowings under this facility. The line of credit is secured by accounts receivable, inventory, intangible assets and certain contracts and contains customary financial and other covenants relating to our financial condition and business. Capital expenditures, primarily for information technology, television studio and other equipment, office furniture and leasehold improvements, were $11.0 million, $2.7 million, $1.6 million and $0.5 million for the years ended December 31, 1997 and 1998 and for the three months ended March 31, 1998 and 1999, respectively. In 1998, we sold certain property and equipment for $2.4 million and leased back that property and equipment under operating leases. In July 1999, MSLO refinanced existing operating leases for computer and television studio equipment, pursuant to which the new lease will be recorded as a capital lease. Accordingly, in July 1999, MSLO recorded property, plant and equipment of $4.7 million with a corresponding liability for capital lease obligations. 34 38 While we extend credit to our customers, no one customer accounts for more than 10% of our outstanding accounts receivable balance at March 31, 1999. We have credit policies and procedures which we use to manage our credit risk. We believe that the net proceeds from this offering, together with any cash generated from operations, the net proceeds to MSLO from the Kleiner Perkins equity purchase in July 1999 and any funds available under existing credit facilities, will be sufficient to meet our liquidity requirements for the foreseeable future. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such funds through public or private equity financings or from other sources. There can be no assurance that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us or that any additional financing will not be dilutive. 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 Beginning in 1998, and continuing in 1999, we have conducted a review of our 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. We are using both internal and external resources to identify, test and correct our systems and software for year 2000 readiness. As of June 1, 1999, we have completed the research and validation of all infrastructure, hardware and software, including platform, wide-area network and local-area network components. We are currently testing all systems identified during the research and validation phase and plan to complete the testing process by September 1999. Contingency plans will be developed for all systems found to be non-compliant as of September 1999. We are currently contacting all significant third-party vendors and service providers to determine their year 2000 compliance status. This phase is expected to be completed as of September, 1999. We have also made inquiries of our important customers and partners as to whether their state of year 2000 compliance could have an adverse effect on our relationship with these parties. As of July 15, 1999, we have not been informed that any of these parties expects material disruption in their business relationship with us due to year 2000 compliance. However, this process is ongoing, and we cannot independently verify the state of readiness of these vendors, service providers, partners and customers. We anticipate that by October 1999, all of our internal non-compliant systems will have been remedied or contingency plans will have been put into place so that we will not experience any significant disruption or down-time resulting from year 2000 compliance issues. Excluding internal costs which are not tracked separately and are therefore not readily determinable, we expect the costs of these year 2000 remedial actions to be less than $.3 million, including the costs to us of external service provider compliance. We do not believe, based upon our investigations to date, that the year 2000 issue will have a material effect on our operations or those of our material service providers or our business relationship with our important partners and customers. However, if we or any of our significant service providers, partners or 35 39 customers do experience a year 2000 compliance problem, this could have a material adverse effect on our profitability and liquidity. In some cases, these services, partners and customers cannot be easily replaced, and we may suffer a disruption in our business while we seek to identify a new service provider, customer or partner. In addition, any material disruption in the use or accessibility of the Internet due to year 2000 issues could result in a serious decline in our Internet-related businesses, including advertising revenues, as well as delay implementation of this portion of our growth strategy. These contingencies could have a material adverse effect on our financial condition and results of operations, and we are not aware of any adequate replacement service for the Internet. 36 40 BUSINESS OVERVIEW We are a leading creator of original "how to" content and related products 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, products and other resources they need to raise the quality of living in and around their homes. The content and products we create span seven core areas: Home, Cooking and Entertaining, Gardening, Crafts, Holidays, Keeping and Weddings. In each of our core content areas, we have assembled a team of in-house creative experts. Many of the leaders of these teams have been with us since the launch of Martha Stewart Living magazine in 1991. Each member of our creative staff of more than 160 editors, writers, stylists, art directors and designers is continually challenged to develop new ideas that support and strengthen the high quality and unique look associated with our brands. As a result of these efforts, we have amassed an extensive library of proprietary content, which serves as a comprehensive resource for the development of new content and branded products. We have two primary strategic objectives: (1) to provide our original "how to" content and information to as many consumers as possible; and (2) to turn our consumers into "doers" by offering them the information and products that they need for do-it-yourself ingenuity the "Martha Stewart way." We accomplish our first objective through our "omnimedia" platform, and our second objective through our "omnimerchandising" platform. Our Internet/Direct Commerce business provides a unique opportunity to fulfill both of our objectives by leveraging our content and merchandising capabilities to create a one-stop online destination for consumers interested in the domestic arts. Omnimedia Platform Our omnimedia platform currently consists of: -- two magazines, Martha Stewart Living, published ten times a year, and Martha Stewart Weddings, published quarterly, together reaching an estimated 9.9 million readers per month -- the Emmy Award-winning and number-one-rated "how to" domestic arts television program in the United States, airing six episodes per week on affiliates of all four major national networks and available in 91% of U.S. homes with television sets, plus a weekly segment on CBS This Morning -- 27 books, which have sold more than 8.5 million copies, including Martha Stewart's first book, Entertaining, published in 1982, and Martha Stewart's Hors d'Oeuvres Handbook, published in 1999 -- the askMartha radio program, airing five days per week on 270 stations throughout the United States and reaching an estimated 1.5 million listeners per weekday -- a weekly askMartha newspaper column, syndicated in 233 newspapers in the United States and Canada, that collectively reach an estimated 43 million readers each week -- beginning in September 1999, From Martha's Kitchen, a daily program on the Food Network -- marthastewart.com, our website, with over 834,000 registered users, 627,000 unique monthly visitors and over ten million monthly page views In the spring of 1999, our omnimedia platform provided us with an estimated 88 million monthly gross adult impressions, not including the readers of the askMartha newspaper column. This number is based on our magazine readership, the number of times our television programs and website are viewed and the number of times people listen to our radio program during the course of a typical month. 37 41 Omnimerchandising Platform To accomplish our second objective, we have created our omnimerchandising platform consisting of our branded products. We believe this platform offers our consumers quality, convenience and choice across a wide range of retail and direct-to-consumer channels. As of May 1999, our omnimerchandising platform included more than 2,800 SKUs, which we currently distribute through the following: -- the mass market discount channel, exclusively through Kmart Stores in the United States and Zellers Stores in Canada -- the national department store channel, through Sears stores in the United States and Canada, and Canadian Tire Stores in Canada -- the specialty retail channel, such as Janovic Plaza, and, beginning in September 1999, Calico Corners and Jo-Ann Fabrics and Crafts, across the United States -- our upscale catalog, Martha by Mail, offering 400 products per catalog, with an expected 1999 distribution of 15 million copies in 11 editions -- our online Martha by Mail store, which offers over 750 products Retail sales of Martha Stewart branded merchandise by Kmart and our other merchandising partners reached $763 million in 1998, an increase of 96% over 1997. We believe that the high quality and usefulness of our content and products, coupled with our expansive reach, have allowed us to influence the way consumers think about the home as well as the shopping patterns of consumers across the United States. Our Internet/Direct Commerce business provides a vehicle through which our omnimedia and omnimerchandising platforms converge. We plan to accelerate the expansion of marthastewart.com by introducing seven linked channels, each focused on one of our core content areas and related products. We believe that the other elements of our omnimedia and omnimerchandising platforms provide our Internet/Direct Commerce business with the content and products necessary to develop a comprehensive, interactive and attractive online destination for our consumers. Our overall business has grown in recent years by accessing new product markets and leveraging our strong brand name across our omnimedia and omnimerchandising platforms. In 1998, our revenue was $180.0 million and our operating income was $27.4 million, representing a 36% and 65% increase, respectively, over 1997 revenue and operating income. Our net income was $23.8 million in 1998, as compared to $13.9 million in 1997. In the first quarter of 1999, our revenue was $53.4 million and our operating income was $7.4 million, representing a 26% and 7% increase, respectively, over the first quarter of 1998. Our net income for the first quarter of 1999 was $6.6 million, as compared to $6.0 million for the first quarter of 1998. HISTORY The Martha Stewart name first gained prominence in 1982 with the publication of Martha Stewart's first book, Entertaining, which is now in its 30th printing. Martha Stewart Living magazine was then launched by Martha Stewart and Time Publishing Ventures in 1991. We purchased the magazine and related businesses from Time Publishing Ventures and consolidated it with other businesses previously owned by Martha Stewart in February 1997. The following is a timeline of significant events in the development of our brands and our omnimedia and omnimerchandising platforms:
YEAR EVENT - - - ---- ----- 1991..... Martha Stewart Living magazine launched as a quarterly publication 1993..... Martha Stewart Living television program launched as a weekly half-hour syndicated show 1994..... Martha Stewart Weddings magazine launched as an annual publication
38 42
YEAR EVENT - - - ---- ----- 1995..... Martha by Mail catalog tested as an insert in Martha Stewart Living magazine askMartha syndicated newspaper column published in the United States and Canada Martha Stewart Living magazine expanded to ten issues per year 1997..... MSLO LLC acquires magazine and related businesses from Time Publishing Ventures in February Branded bed and bath and paint collections launched at Kmart Martha Stewart Living television program expanded to six days per week Weekly television segment on CBS This Morning debuted Martha Stewart Weddings expanded to semi-annual publication askMartha radio program launched marthastewart.com launched in September 1998..... Martha Stewart Living weekday television program expanded to one hour Branded bed and bath products launched at Zellers in Canada Branded kitchen textiles, window treatments and bath accessories launched at Kmart and Zellers First special interest publication, Clotheskeeping, published Branded paints launched at Sears in the United States and Canada 1999..... Branded garden products launched at Kmart and Zellers Martha Stewart Weddings published as a quarterly publication From Martha's Kitchen television program to air daily on the Food Network cable channel in September Branded decorative fabrics to launch in September Branded baby bedding to launch in October at Kmart
COMPETITIVE STRENGTHS We intend to maintain and enhance our position as a leading creator of high-quality content and products and to continue to capitalize on our competitive strengths, which include: ESTABLISHED, HIGHLY RECOGNIZABLE BRAND NAME Our principal assets consist of our well-known Martha Stewart brand name and our related trademarks (e.g., Martha Stewart Living, Martha Stewart Weddings, Martha Stewart Everyday, Martha Stewart Home, askMartha, Martha by Mail and marthastewart.com). The Martha Stewart brands have significant name recognition and trust among consumers. We believe that consumers associate the brands with the unique look and usefulness of our content and with the high quality of living represented by our products and content. The ability to leverage our single, well-known brand identity across our seven core content areas is a principal strength of our business. Upon completion of this offering, we will have an exclusive, perpetual royalty-free license to use Martha Stewart's name, image, likeness, voice and signature, and we are the registered owner of the related marks under which our content and products are marketed. In all of our merchandise licensing arrangements, we retain significant control over product design, quality and advertising in order to preserve the consistent look and feel of our brands. LEADING AUTHORITY ACROSS KEY CATEGORIES OF DOMESTIC ARTS We have developed expertise in each of our seven core categories of domestic arts: -- 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 39 43 -- 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 We believe that our depth of knowledge and strong brand identity across these core content areas provide us with important advantages over many of our competitors that produce content in only one or two of these categories. We are able to reach a broad audience of consumers, ranging from brides to gardeners to cooks. In addition, satisfied consumers who are initially only interested in one of our core content areas, whether it be cooking and entertaining, gardening, crafts or weddings, may be drawn to explore content and products from other core categories as part of our overall concept of living. By stimulating consumer interest in other content areas, we are able to expand the size of our markets. EXTENSIVE LIBRARY OF HIGH-QUALITY CONTENT, PRODUCTS AND DESIGNS We have amassed an extensive library of proprietary content products, which consists of our presentations of "how to" ideas and information used by homemakers and other consumers to raise the quality of living in and around their homes. As of December 31, 1998, this library included over 10,000 editorial pages, 2,100 television and radio segments, as well as the designs for more than 2,000 SKUs of original products. We also have the right to use over 160,000 photographs that have appeared in, or been photographed for, one of our magazines or books. Additionally, the evergreen nature of our content allows us to repurpose it for later use at a low incremental cost. The following chart indicates the approximate mix by media business of our content library, excluding products, as of December 31, 1998:
MARTHA MARTHA STEWART STEWART MARTHA STEWART ASKMARTHA ASKMARTHA LIVING WEDDINGS Living Newspaper Radio Magazine Magazine Television(1) Books Column Program ----------- -------------- ------------------ ----------- --------- ------------ HOME.................. 24.8% -- 8.4% 11.0% 20.5% 21.6% COOKING AND ENTERTAINING........ 36.6% 15.7% 51.2% 38.7% 23.5% 38.5% GARDENING............. 13.7% -- 19.6% 13.6% 15.2% 16.1% CRAFTS................ 2.9% -- 8.9% 4.8% 11.7% 4.1% HOLIDAYS.............. 6.7% -- 3.4% 14.8% 5.3% 3.6% KEEPING............... 15.1% -- 6.9% -- 19.3% 15.8% WEDDINGS.............. .2% 84.3% 1.6% 17.1% 4.5% .3% TOTALS............ 5,908 1,329 1,786 2,814 264 366 (pages) (pages) (segments) (pages) (topics) (segments)
- - - ------------ (1) Includes prime time specials. EXTENSIVE RESEARCH AND DEVELOPMENT PROCESS Our creative staff thoroughly researches, develops and tests each "how to" idea or product in our test kitchens, design studios or manufacturers' laboratories before we release any content or product into the market. This research and development process ensures that we are regarded as the "source for the source," and that our content continues to consist of innovative and appealing designs, products and recipes. In 1998, we created over 1,000 original recipes in our own research facilities, and we published over 275 pages of, and broadcast over 50 television and 25 radio segments devoted to, original craft projects. 40 44 HIGHLY EXPERIENCED TEAM OF CREATIVE AND BUSINESS PERSONNEL We have carefully assembled an experienced team of creative and business professionals. Our creative staff consists of more than 160 in-house editors, gardeners, craftspeople, cooks, designers and art, style and editorial directors, while our experienced business and administrative staff consists of over 190 individuals. Our creative staff focuses on developing new content and products to be distributed across our omnimedia and omnimerchandising platforms and presenting our new and existing content and products to our customers. Our business staff focuses on bringing our content and products profitably to market. Many of our creative and business executives have been with us since the launch of Martha Stewart Living magazine in 1991. ORGANIZATIONAL STRUCTURE THAT PROMOTES CREATIVITY AND EFFICIENCY We have no stand-alone business groups in our company. We are organized by creative and business skills in a matrix organization where our business and creative experts render services across our omnimedia and omnimerchandising platforms. For example, our garden editor produces ideas that she and her creative team turn into long-form "how to" stories for the magazines, in-depth treatments for books, short-form questions and answers for the newspaper column, single idea "tips" for radio, video segments for television and product ideas for merchandising. Our business staff provides services, including advertising sales, print production and marketing, that are shared by all of our business segments. For example, the advertising sales group sells advertising for all of our media businesses, including the Internet. We believe this structure provides us with operating efficiencies and ensures brand quality and consistency. STRONG RELATIONSHIPS WITH KEY DISTRIBUTION, FULFILLMENT AND MARKETING VENDORS Our existing alliances with Kmart, Hudson's Bay Company, which operates Zellers, Eyemark Entertainment, Sherwin-Williams, P/Kaufmann and affiliates of Time Publishing Ventures, among others, enable the wide distribution of our content and products across the United States and Canada. These relationships permit us to focus on the design and creation of our content and products rather than the logistics of distribution, fulfillment and manufacturing. These relationships also reduce our exposure to inventory risk. Virtually all aspects of the design, quality, advertising and promotion of our licensed products are subject to our prior approval and ongoing direction. The result is a consistent identity for the Martha Stewart brand name across all of our categories. STRATEGIES Our strategies focus on continuing to create new content and products and leveraging our brands across multiple media and merchandising outlets. The key elements of our strategy include: EXPAND OUR MERCHANDISING ALONG CORE CONTENT LINES We seek to create new branded products throughout our seven core content areas. In the last two years, we have introduced numerous product lines, largely focusing on the home category, in multiple distribution channels. We intend to launch our Martha Stewart Everyday Baby baby collection and our Martha Stewart Home collection of decorative fabrics in fall 1999, and our Martha Stewart Everyday Housewares collection in 2000. Our other content areas provide significant merchandising opportunities, including our Martha Stewart Everyday Garden collection which will be expanded in 2000 to include our live plants program. LEVERAGE THE COST OF DEVELOPING HIGH QUALITY CONTENT OVER MEDIA AND MERCHANDISING PLATFORMS We spread the costs of researching, investing in and producing high quality content across multiple media and merchandising platforms to achieve economies of scale and increased returns on invested capital. This strategy of leveraging the initial costs of developing content also enables us to make substantial investments in producing higher quality content. By leveraging our content across multiple media platforms, we can generate additional profit on this content as it is reused. For example, beginning in September 1999, existing food-related segments from the Martha Stewart Living television series will be adapted to air as a twice-daily half-hour series, From Martha's Kitchen, on the Food Network. 41 45 CAPITALIZE ON REVENUE OPPORTUNITIES CREATED BY THE INTERNET We believe that we can effectively participate in the growth of the Internet by creating a highly personalized user experience that integrates information, electronic commerce and community, all rooted in our library of proprietary content. Our website has already achieved significant consumer acceptance and brand awareness. As of June 1999, marthastewart.com had over 834,000 registered members. We intend to build seven linked channels into our website, each focusing on a core content area, to drive revenues and to use the Internet's electronic commerce capabilities as a medium for expanding our online store business. We believe that by combining the convenience of the Internet with our vast library of content and products and our authority in our core content areas, we will create new opportunities to generate revenue and expand our customer audience. An affiliate of Kleiner Perkins has recently made a strategic investment in our business. We believe Kleiner Perkins' experience in the Internet industry will be advantageous to us as we implement our growth strategies. See "Recent Developments -- Strategic Investment" for further information. CROSS-SELL AND CROSS-PROMOTE OUR BRANDS We cross-sell products to our various customer lists and cross-package advertising among and across our network of media channels. In 1999, we anticipate that most of our top 50 advertisers will purchase advertising space in two or more elements of our omnimedia platform. We also use each media and merchandising platform to cross-promote one or more of our other businesses. For example, -- Martha Stewart Living includes a "Where to find Martha" section and an Omnimedia Guide that promotes upcoming Martha Stewart Living television programs, the askMartha radio program and the askMartha newspaper column, as well as a schedule of online question and answer forums -- the television program often uses our products during "how to" segments, indirectly promotes book launches through "theme weeks" (e.g., Hors d'Oeuvres Week following the release of the book Hors d'Oeuvres), provides subscription "800 numbers" for the magazines and provides daily tag lines for our website -- the newspaper column cross-promotes the television programs, the website, the radio program, Martha by Mail and new book releases We see significant growth opportunities for further cross-promotion of our businesses through our Internet/Direct Commerce business, an effective display medium for our content, an up-to-the-minute source of information on our activities (such as the television program schedule) and a promoter of our products, as well as a further outlet for advertisers seeking association with our brands. EVOLVE OUR BRANDS THROUGH TEAM-BASED CONTENT AND REDUCE DEPENDENCE ON OUR FOUNDER We are seeking to further extend the trust-based relationship consumers share with Martha Stewart, the personality, to our brands. We believe that a reduction in our dependence on Martha Stewart personally and a better balance of personality and brand will provide additional brand durability, increased growth opportunities and a broader recognition of a new generation of Martha Stewart Living experts. We are increasingly focused on team-based content development. Our accomplished team of creative personnel is gaining prominence as MSLO-affiliated experts in their respective fields. Our creative professionals appear on segments of the television program with Martha Stewart, lecture around the country, co-author books with Martha Stewart and write regular columns in the magazines. We have also significantly reduced our reliance on personal images of Martha Stewart. For example, Martha Stewart's picture appeared on the cover of nine of the first ten issues of Martha Stewart Living, as compared to one out of ten covers published in 1998. 42 46 OMNIMEDIA AND OMNIMERCHANDISING PLATFORMS Our omnimedia and omnimerchandising platforms support four principal business segments: -- Publishing -- Television -- Merchandising -- Internet/Direct Commerce These business segments accounted for the following revenues and operating income for 1998, and the three-month period ended March 31, 1999:
REVENUES OPERATING INCOME --------------------------------------- --------------------------------------- THREE MONTHS THREE MONTHS ENDED ENDED % OF MARCH 31, % OF % OF MARCH 31, % OF 1998 TOTAL 1999 TOTAL 1998 TOTAL 1999 TOTAL -------- ----- ------------ ----- -------- ----- ------------ ----- (IN THOUSANDS) Publishing.................. $127,020 70.5% $35,536 66.6% $ 42,669 75.0% $11,475 70.6% Television.................. 23,351 13.0 6,609 12.4 3,924 6.9 410 2.5 Merchandising............... 15,004 8.3 5,679 10.6 15,305 26.9 5,919 36.4 Internet/Direct Commerce.... $ 14,673 8.2 $ 5,555 10.4 $ (4,998) (8.8) $(1,546) (9.5) -------- ----- ------- ----- -------- ----- ------- ----- Total.............. $180,048 100.0% $53,379 100.0% $ 56,900 100.0% $16,258 100.0% ======== ===== ======= ===== ===== ===== Corporate Charges........... (29,515) (8,838) -------- ------- Operating Income............ $ 27,385 $ 7,420 ======== =======
PUBLISHING Our publishing activities currently form the principal component of our omnimedia platform and consist of: -- two magazines, Martha Stewart Living and Martha Stewart Weddings, as well as special interest publications -- books -- the 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. Key advertising and circulation data for Martha Stewart Living, Martha Stewart Weddings and special interest publications are as follows:
SPECIAL INTEREST MARTHA STEWART LIVING MARTHA STEWART WEDDINGS PUBLICATIONS ---------------------------------- ----------------------------------- ------------------------ FREQUENCY AD FREQUENCY AD FREQUENCY PER YEAR RATE BASE PAGES(1) PER YEAR DISTRIBUTION PAGES(1) PER YEAR DISTRIBUTION --------- ----------- -------- --------- ------------ -------- --------- ------------ 1997................. 10 1.9 million 1,069 2 650,000 417 -- -- 1998................. 10 2.1 million 1,253 2 650,000 513 1 750,000
- - - ------------ (1) Ad pages are as reported to Publisher's Information Bureau, or, if unreported, as calculated by the publisher using a similar methodology. 43 47 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. 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. The independently recognized quality of the content in Martha Stewart Living establishes the tone for all of our brands. The magazine has won numerous awards, including: -- Ad Week's annual "Top Ten List" of magazines in 1995, 1996, 1997 and 1998 -- Advertising Age's "Magazine of the Year" for 1995 -- three National Magazine Awards from the American Society of Magazine Editors: for photography, in 1994 and 1999; and for design, in 1995 -- numerous honors from the Society of Publication Designers every year since 1991, including three Gold Awards, 11 Silver Awards and 87 Merit 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 MSLO 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. The editorial content and appearance are enhanced by high-quality printing, paper and graphics. Many readers save and collect the magazine for use as a future reference tool. 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 as of the June 1999 issue had a newsstand distribution of approximately 650,000. Martha Stewart Weddings targets the upscale bride. Martha Stewart Weddings has the same fundamental 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. As with Martha Stewart Living, the editorial and artistic content developed for Martha Stewart Weddings will be used by our other business groups. We believe that the Martha Stewart Weddings component will become an increasingly important element of our content library. Special Interest Publications. We published our first special interest publication, Clotheskeeping, in 1998, which had a distribution of approximately 750,000. We generally expect to publish one special interest publication per year. 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, in the future we intend to use this format to explore additional content areas. Clotheskeeping had a single advertising sponsor, The Gap, which provided a guaranteed minimum level of revenue regardless of circulation. We expect to have both single and multiple sponsors for our future special interest publications. Production. MSLO's current magazine printing contract expires with the December 1999 issue of Martha Stewart Living. This contract will be replaced with a new contract that we expect to result in lower per-unit printing costs in fiscal 2000 and beyond. Our books and magazines are manufactured by outside printers. Magazine Distribution and Fulfillment. Newsstand distribution of the magazines is conducted by an affiliate of Time Publishing Ventures pursuant to a long-term agreement that expires with the December 2004 issue, but which we have the right to cancel effective after the December 2001 issue. Our subscription fulfillment services are provided by another affiliate of Time Publishing Ventures under a long-term agreement that expires in 2002, and is renewable for an additional three-year period at our option. 44 48 Books In 1982, Clarkson N. Potter, Inc., a division of Random House (Bertelsmann AG), published Entertaining, Martha Stewart's first book. Entertaining is currently in its 30th printing. Since 1982, Martha Stewart and MSLO have released a total of 26 additional titles and have sold in the aggregate more than 8.5 million books as of December 1998. Over one million of these were sold in 1998. We own all copyrights with respect to these books. We create two different types of books: Best of Martha Stewart Living books and Martha Stewart-authored books. We create two Best of Martha Stewart Living books and one Christmas with Martha Stewart Living book each year. These books rely both on our extensive library in the seven core content areas and on original material. To the extent we rely on our content library, development costs are dramatically reduced. We sell the hard-cover form of each of these titles through direct marketing methods to consumers, including Martha Stewart Living readers and regular craft and cookbook buyers, and we sell paperback editions at retail book stores. We also have a continuity card program, 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 Time Publishing Ventures, which also handles their distribution through direct marketing and certain retail channels. The Best of Martha Stewart Living books also are distributed through certain retail channels by Clarkson N. Potter under various agreements. Under two overlapping long-term agreements with Clarkson N. Potter, we have created one completely original book approximately every other year and are obligated to write one more such book. We released Martha Stewart's Healthy Quick Cook in 1997 and Martha Stewart's Hors d'Oeuvres Handbook in 1999. The original content also can serve as a foundation for material in the magazines, the television programs and the various other media, enabling us to spread the cost of the editorial content across these various media. These books are generally distributed through retail distribution channels. The following is a list of all of our books by core content area:
FIRST PUBLISHED --------------- COOKING AND ENTERTAINING Entertaining...................................... 1982 Martha Stewart's Quick Cook....................... 1983 Martha Stewart's Hors d'Oeuvres................... 1984 Martha Stewart's Pies and Tarts................... 1985 Martha Stewart's Quick Cook Menus................. 1988 Martha Stewart's Menus for Entertaining........... 1994 Special Occasions*................................ 1995 The Martha Stewart Cookbook....................... 1995 What To Have For Dinner*.......................... 1996 Martha Stewart's Healthy Quick Cook............... 1997 Great Parties*.................................... 1997 Desserts*......................................... 1998 Martha Stewart's Hors d'Oeuvres Handbook.......... 1999 HOME Martha Stewart's New Old House.................... 1992 How To Decorate*.................................. 1996 Decorating Details*............................... 1998 GARDENING Martha Stewart's Gardening........................ 1991 Arranging Flowers*................................ 1999
45 49
FIRST PUBLISHED --------------- CRAFTS Great American Wreaths*........................... 1996 Good Things*...................................... 1997 HOLIDAYS Martha Stewart's Christmas........................ 1989 Holidays*......................................... 1994 Handmade Christmas*............................... 1995 Christmas With Martha Stewart Living Vol. 1*...... 1997 Christmas With Martha Stewart Living Vol. 2*...... 1998 WEDDINGS Weddings.......................................... 1987 The Wedding Planner............................... 1988
- - - ------------ * Martha Stewart Living book The askMartha Radio Program and Newspaper Column 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 are jointly sold by MSLO and 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 270 radio stations across the United States. These stations cover approximately 93% of the total U.S. market, including 29 of the top 30, and 93 out of the top 100 U.S. markets. 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 slots, however, we believe we reach a much broader demographic with the askMartha program than with many of our other omnimedia outlets. Our radio distribution agreement also provides for focused two-hour "call-in" programs relating to selected holidays, through which we intend to introduce other creative experts. 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 233 U.S. and Canadian newspapers. The column generally appears as a one-quarter to one-half page layout that includes at least one high-quality photograph and provides a complementary forum to the longer magazine pieces and television segments. While the revenues generated by the askMartha column are small, it is an important part of our omnimedia platform. The newspapers carrying the askMartha column reach 43 million readers each week, and the column generally includes a reference to marthastewart.com or to our products or other publications. We plan to launch a companion column, askMartha Weddings, in the summer of 1999, which will appear in the wedding announcement section of newspapers. In the future, we may introduce similar columns relating to some or all of our other core content areas. Future Growth Our plans for the Publishing segment include growing our magazine business by producing additional special interest publications. We are also beginning to produce small-size "how to" companion books for sale alongside our merchandising products. Other opportunities include "askMartha" newspaper columns devoted to a particular core content area, starting with askMartha Weddings in the summer of 1999. In addition, we 46 50 are exploring possible international editions of our magazines, foreign editions of our books and expanding radio coverage to include the Canadian market. TELEVISION Our television business segment seeks to reach the widest possible audience by covering a variety of time slots and formats as follows: -- early morning -- a weekly segment on CBS This Morning -- daytime prime -- Martha Stewart Living weekday, a one-hour syndicated program airing Monday through Friday -- evening prime -- From Martha's Kitchen, a daily program on the Food Network commencing in September 1999 and periodic prime-time network specials -- late night -- From Martha's Kitchen, on the Food Network commencing in September 1999 -- weekend -- Martha Stewart Living weekend, a half-hour syndicated program airing on Saturday or Sunday and the upcoming daily program on the Food Network Martha Stewart Living weekdays and weekend 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. Eyemark 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. During the 1998-99 broadcast season, the program could be seen by 91% of all U.S. television households. As of May 1999, the weekday program was viewed by an average of approximately 1.9 million U.S. households every weekday. The weekend program generally consists of excerpts from the weekday program, and, as of May 1999, was viewed by an average of approximately 1.6 million U.S. households per week. The combination of the weekday and weekend programs allows us to reach a broad audience that we believe is particularly suited to our "how to" programming. Under the terms of our agreement with Eyemark, we develop, produce and retain all copyrights in the programs. We produce Martha Stewart Living largely at our state-of-the-art studio facility in Westport, Connecticut, and segments are filmed both in the studio and at various other locations. We staff our studio facility with approximately 70 full-time dedicated television personnel, as well as with freelance production staff and personnel from our core content areas who rotate from our New York headquarters. Our television programs act as both a source from which other business units may draw content and an outlet for content developed in other business units. Additionally, the segmented nature of the programs allows us to repackage segments around a particular core content area and use that repackaged material in our secondary distribution channels such as cable and international. The first of these repackaged programs, a food-focused show, will be launched on the Food Network in September 1999. Under our distribution agreement with Eyemark, we are compensated partially in cash and partially in airtime. We then sell that airtime to advertisers, subject to a distribution fee payable to Eyemark. The airtime we receive from the Eyemark 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. As of June 1999, we sold our television airtime to approximately 60 advertisers, with no one industry accounting for more than 20% of our television advertising revenue. Our Life Network agreement in Canada compensates us with a straight license fee. 47 51 CBS This Morning Martha Stewart is a regular lifestyle correspondent for, and generally appears each Tuesday at 8:30 a.m. on, CBS This Morning. This appearance is seen by approximately 2.4 million viewers each week. In exchange for this appearance, we receive airtime in the form of one 30-second spot adjacent to the segment. Our advertising sales team sells this advertising time using the same methods we employ with respect to our other programming. Food Network Cable Channel Commencing in September 1999, the Food Network cable channel will air a half-hour Martha Stewart branded program twice a day, seven days a week, entitled From Martha's Kitchen. This program will consist primarily of food-related segments repackaged from previous Martha Stewart Living programs. In exchange for the programming, we will receive airtime during the early showing and late night showing, as well as royalty revenue from advertising aired during the late night showing. In addition we have an agreement with the Food Network to develop a series of original programming, primarily featuring experts other than Martha Stewart, which is intended to begin airing in early 2000. Prime Time Specials Periodically, we produce prime time specials that focus on a particular holiday. Prior episodes of Martha Stewart Christmas were watched by over 8.5 million U.S. households in each of 1995 and 1996. We are currently working on a Christmas special that we intend to air in December 1999. Future Growth We intend to grow our Television segment by developing new programming relating to our core content areas that feature experts other than Martha Stewart. Additionally, we will continue to repackage our existing library to create new programming primarily relating to individual core content areas. Finally, we are pursuing the licensing of our programs in new international markets. MERCHANDISING Our merchandising group translates our core content expertise into branded products that are distributed to a wide audience through a broad range of traditional retail channels, from mass market discount to specialty stores. Our retailing strategy is to provide a high-value product relative to its price through the full range of retail distribution channels. We seek to provide a broad product assortment, designed from a single viewpoint, which offers consumers a comprehensive and coordinated system for decorating, gardening, cooking and other activities related to our core content areas. Our retail merchandising business began to grow substantially following the February 1997 acquisition of Martha Stewart Living from Time Publishing Ventures, and we believe expansion of our current product lines, as well as development of products relating to other aspects of our seven core content areas, will provide us with significant growth potential. Our retail product distribution strategy initially targeted the mass market discount channel. Through Kmart, we have achieved substantial sales volume and demonstrated that our products have wide appeal. In 1998, total sales for Martha Stewart-branded retail merchandise were $763 million, providing substantial royalty revenues for MSLO. From this base, we have expanded distribution channels above the mass market discount channel, including national department stores, such as Sears, and specialty stores, such as Janovic Plaza and, with the September 1999 launch of our Martha Stewart Home collection, Calico Corners and Jo-Ann Fabrics and Crafts. The following summarizes our merchandising relationships as of May 1999: 48 52
DISTRIBUTION CHANNEL PRODUCT LINE(S) LAUNCH DATE STRATEGIC PARTNER RETAILER - - - -------------------- --------------- ----------- ----------------- -------- Mass Market Martha Stewart Everyday March 1997/ Kmart/Zellers Kmart/Zellers Discount........... Home June 1998 Martha Stewart Everyday May 1997 Sherwin-Williams Kmart Colors Martha Stewart Everyday January 1999 Kmart/Zellers Kmart/Zellers Garden Martha Stewart Everyday Fall 1999 Kmart Kmart Baby baby (anticipated) Martha Stewart Everyday Fall 2000 Kmart Kmart Housewares (anticipated) National Department Martha Stewart Everyday March 1998/ Sherwin-Williams Sears/Canadian Tire Stores............. Colors May 1999 Specialty Stores..... Martha Stewart Home Fall 1999 P/Kaufmann Specialty fabric Collection (anticipated) stores Araucana Colors and March 1995 Fine Paints of Specialty paint Colors of the Garden Europe, Inc. dealers fine paint collection
A key component of our retail merchandising strategy is to closely control all aesthetic aspects of a product and its sale, including product design, packaging, store display and print and television advertisements. We license the right to use our trademarks only in connection with the sale of products designed and approved by our team of creative professionals. To preserve a consistent brand image that resonates with the materials displayed across our omnimedia platform, the same editorial professionals who develop our "how to" stories write or review all text associated with the sale of a product, including label descriptions, text on packaging, store displays and advertising text. Our artistic professionals similarly participate in all visual aspects of the customer's experience with the product, including product design, advertising and point-of-sale displays. We rely on our merchandising partners for manufacturing and distribution. Our agreements with our merchandising partners include a set of conditions that generally allow us to retain control over the content of the licensed products as well as the rights to the product design in other distribution channels. In addition to royalty payments, these agreements generally require our partners to fund our product development, design and advertising. Mass Market Discount and National Department Store Channels Mass market discount and national department stores offer us access to the widest possible audience, permitting us to offer the basic products and tools that consumers need to implement our ideas in their own homes. Products offered in these channels--currently in the Martha Stewart Everyday collections--provide coordinated essentials that offer easy and affordable results. Martha Stewart Everyday Collections. The Martha Stewart Everyday collections currently include Martha Stewart Everyday Home, Martha Stewart Everyday Garden and Martha Stewart Everyday Colors. These products are sold at over 2,100 Kmart stores and 800 Sears stores in the United States and over 300 Zellers stores, 100 Sears stores and 300 Canadian Tire Stores in Canada. In 1998, sales of the Martha Stewart Everyday collections comprised the substantial majority of our product-related royalties. 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 control all aspects of design (or, for seeds and live plants, selection), packaging, signage and associated collateral materials. We retain all rights in the products 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 61% of the linear feet in a typical Kmart home fashion department. Additionally, Kmart funds a majority of the design and 49 53 development costs for the relevant products. These agreements have varying expiration dates ranging from February 2000 to October 2004, with three-year renewals at Kmart's, and, provided Kmart renews the Bed and Bath agreement, Zellers' option. 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 1,900 SKUs and 27 product lines. Martha Stewart Everyday Garden, Martha Stewart Everyday Housewares and Other New Products. Earlier this year, we introduced our Martha Stewart Everyday Garden program with a line of outdoor furniture and preview assortment of gardening tools. In 2000, we are scheduled to launch the full gardening product line, which will include a wide variety of garden tools, fertilizers, planting pots, bulbs, seeds and live plants. Through the live plants program, we will bring to the mass market discount channel plants that have previously only been available in limited quantities and at higher prices at specialty garden centers. Commencing in Fall 1999, we are scheduled to launch the Martha Stewart Everyday Baby baby collection of infant bedding products at Kmart. 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 certain organizational products relating to our core content area of keeping, all designed to reflect the Martha Stewart aesthetic. Martha Stewart Everyday Colors. Martha Stewart Everyday Colors is a line of interior latex paints introduced in 1997. The colors are developed by MSLO and the paints are manufactured and distributed by Sherwin-Williams. As of June 1999, the Martha Stewart Everyday Colors line, consisting of 256 colors and 69 SKUs, was sold in the United States through Kmart at mass market discount and, in the national department store channel, Sears, and in Canada through Sears and Canadian Tire. Our agreement with Sherwin-Williams expires in December 2000. Specialty Store Channel The higher priced products in the Martha Stewart Home collection and our fine paints collection, offered through the specialty store channel, are generally aimed at "do-it-yourself" customers who want to apply our ideas and suggestions in more individualized ways. 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 2000, we receive guaranteed minimum royalties and reimbursement of certain design costs. Beginning in fall 1999, the Martha Stewart Home collection will be sold 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 products included in the Martha Stewart Home collection. Fine Paints Collection. The Araucana Colors and Colors of the Garden fine paint collections are our oldest licensed merchandise lines, dating back to 1995. These collections include 51 colors of interior oil and acrylic paint sold through specialty paint dealers, such as Janovic Plaza. As of December 1998, these paint products were sold by 67 independent paint dealers. In fall 1999, we anticipate entering into a new agreement that will introduce a collection of 36 new colors. We expect this new agreement to provide for all three paint collections to be sold under the brand "Martha's Fine Paints." Future Growth We intend to grow our merchandising business by core content area and distribution channel. Accordingly, within each of our seven core content areas we intend to offer different products at different distribution channels. For example, we are exploring the development of a product line in our Cooking and Entertaining category to be offered in national supermarket chains, as well as food products that would be offered at higher-end gourmet specialty stores. 50 54 INTERNET/DIRECT COMMERCE Our Internet/Direct Commerce business leverages our content and merchandising capabilities to create a one-stop, user-friendly experience for consumers interested in the domestic arts. Our Internet/Direct Commerce business is still in its introductory phase but has achieved significant online acceptance and viewership, with over 834,000 registered users as of June 1999. We plan to accelerate the expansion of our Internet/Direct Commerce business by introducing seven linked channels, each devoted to one of our core content areas. We believe this effort will transform marthastewart.com into a leading interactive destination by providing content, commerce and community for consumers interested in the domestic arts. We believe we bring several competitive advantages to the web, including: - the strength and identity of our brand name - our extensive library of proprietary content - our diverse and growing assortment of branded products - our core audience of active online members - our omnimedia platform through which we promote marthastewart.com We launched marthastewart.com in September 1997 to complement our existing omnimedia and omnimerchandising platforms by providing an interactive content and commerce experience for our viewers, readers and consumers. As of June 1999, marthastewart.com had 627,000 unique monthly visitors, who on average viewed nine pages for 14 minutes (according to Media Metrix). As of April 1999, our website had more than ten million monthly page views (according to ABC Interactive). Our website currently includes: - Martha Stewart Living television program guide and related content - recent transcripts of the askMartha radio program - a virtual kitchen tour of our state-of-the-art television studio facilities in Westport, Connecticut - weekly moderated askMartha chat forums with Martha Stewart and/or our in-house and guest experts, which generated over 30,000 unique questions over approximately 35 sessions - the online Martha by Mail store Martha by Mail products currently comprise the e-commerce portion of our website. The Martha by Mail catalog 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 products such as patio furniture, laundry appliances, bedding and other home furnishings. Unlike our merchandising business, which exclusively consists of products we design, we include in Martha by Mail selected products consistent with our brand image and "how to" philosophy that typically are not offered through any national retail stores. Martha by Mail was first launched as a Martha Stewart Living magazine insert. When marthastewart.com debuted, we began selling our products over the website and subsequently began stand-alone mailings of our catalog. In 1999, we expect to distribute 11 editions and 15 million copies of our Martha by Mail catalogs. Our catalog mailing list includes customers identified through our omnimedia platform, such as current and past subscribers, gift subscription recipients, continuity card program subscribers and our website registrants, as well as third-party customer lists. While each catalog edition includes approximately 400 product offerings, our online Martha by Mail offerings comprise the entire collection of more than 750 products. 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. In recent periods we have experienced significant growth in our catalog business as well as more rapid growth in online Martha by Mail sales. As our website expands, we expect that online Martha by Mail revenues will exceed offline revenues, allowing us to reduce costs associated with printing and mailing the catalog. 51 55 Future Growth We plan to further expand and upgrade marthastewart.com by focusing on the following key elements to provide a full-service and personalized domestic arts website: - Content: in each of our content areas, we intend to include an "askMartha" service, an interactive "ask and answer" service that will respond to viewer inquiries with relevant audio, video or text and graphics from our content library - Commerce: we intend to expand our online store, which currently features our Martha by Mail products, to include other "best of its kind" products (either developed or sourced by us) in all areas of domestic living - Community: we intend for each of our web channels to include fully moderated and integrated bulletin boards, chat rooms and live online discussions with our experts. We believe these community-related features will produce valuable data about our consumers' preferences, providing us with instant feedback about our content presented on the website and in our other omnimedia platforms. To help us accelerate the expansion of marthastewart.com, we recently sold an equity interest in MSLO LLC to an affiliate of Kleiner Perkins. John Doerr, a general partner of Kleiner Perkins, has become a member of our Board of Directors. See "Recent Developments -- Strategic Investment." We believe that our established brand name, large content library, consumer loyalty and other competitive strengths combined with Kleiner Perkins' experience in the development of Internet-related companies provide us with a distinct advantage in growing our Internet/Direct Commerce business. BUSINESS SERVICE GROUPS We are organized so that the services essential to our business segments can be rendered by the same individuals and leveraged across our omnimedia and omnimerchandising platforms. Advertising sales, consumer marketing and research, and print production services act as internal agencies, providing services on a project by project basis for all of our business endeavors. ADVERTISING SALES Advertising sales and advertising marketing services for all of MSLO's media platforms and business segments are controlled by one central advertising sales and advertising sales marketing services staff. As of June 1999, the advertising sales and marketing group consisted of 33 staff employees and two outside advertising sales representative firms, all of whom sell across all our media platforms. The goal of the advertising sales group is to create an omnimedia advertising platform that: -- develops advertising packages integrating one or more of our media outlets -- provides a diversified advertising base so that we are not dependent on any one advertising category of business -- delivers quality service to all our core content areas and business segments Our advertisers represent a wide range of industries. Therefore, our advertising revenue base is not dependent upon specific industries and/or specific advertisers, providing maximum flexibility in achieving revenue goals and minimizing risk. Top MSLO advertising industries include retail, consumer goods, toiletries and cosmetics, food, automotive and apparel. Our major advertisers include Ace Hardware Corporation, Cosmair, Inc., Daimler-Chrysler, The Estee Lauder Companies, Inc., Hewlett-Packard Co., Kraft Foods, Inc., Polo Ralph Lauren Corporation, Revlon Consumer Products Corporation and S.C. Johnson & Son, Inc. Historically, print-based advertising sales revenues have accounted for the majority of our advertising sales revenues. In 1998, our net advertising revenues were $91.7 million, of which 77% was from magazine advertisers, 21% was from television advertisers and 2% was from other advertisers. In 1999, we expect 52 56 approximately 20% of our total advertisers and most of our top 50 advertisers to purchase advertising through two or more components of our omnimedia platform. For example, we created advertising programs for: -- Ford, which generates revenues for three MSLO business segments: the program consists of advertising pages in Martha Stewart Living, commercials during our Martha Stewart Living television weekday program, including "Good Things" and "Cookie of the Week" television segment sponsorships, and sponsorship segments on the askMartha radio program. -- The Gap, which also includes various media: exclusive sponsorship of a special interest publication, special event marketing that ties to the special interest publication, and magazine, Internet and television advertising. PRINT PRODUCTION SERVICES Our print production services team is responsible for the manufacturing, distribution and quality control of all our printed material, including Martha Stewart Living and Martha Stewart Weddings magazines, the Best of Martha Stewart Living books, and the Martha by Mail catalogs and product inserts. For the Merchandising segment, our print production experts work closely with outside service providers, including strategic partners, to produce product packaging and in-store signage, billboards, kiosks and other related print advertising and materials. This team assures that the print reproduction quality of our content remains consistent across our omnimedia and omnimerchandising platforms and conforms to the overall quality that our consumers expect from our branded products. As of June 1999, our print production group consisted of 12 employees. CONSUMER MARKETING AND RESEARCH Our consumer marketing group is responsible for magazine circulation, direct commerce, and direct marketing, research and customer service for all of our businesses. The group also manages fulfillment, inventory control and sourcing for MSLO's direct to consumer businesses. The primary function of the department is to execute marketing campaigns to promote MSLO products to our customer base and outside lists. The group controls our customer database, uses various MSLO media platforms to cross promote products to our customers, and uses research and testing through direct marketing to help us develop new products and businesses. The group tracks our relationship with consumers to ensure that we are delivering the content, product and value our customers seek. These personnel also analyze industry research and employ third-party research companies to monitor customer reactions through surveys, focus groups and mall intercept testing. As of June 1999, our consumer marketing department comprised 30 employees. 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 and Martha by Mail. These trademarks are the subject of registrations and pending applications throughout the world filed by MSLO for use with a variety of products and other content, and we continue to expand our worldwide usage and registration of related trademarks. We file copyrights regarding our proprietary designs and editorial content on a regular basis. We regard our rights in and to our trademarks and materials as valuable assets in the marketing of our products and vigorously seek to protect them against infringement or denigration by third parties. Upon completion of this offering, we will enter into an intellectual property license and preservation agreement with Martha Stewart that will replace an existing non-perpetual license agreement entered into in February 1997. Under the terms of this new license agreement, Martha Stewart grants us an exclusive, worldwide, perpetual royalty-free license to use her name, likeness, image, voice and signature for our products and services. We are currently the owner of the primary trademarks employed in our business and, under the new license agreement, generally have the right to develop and register in our name trademarks that incorporate "Martha Stewart" (such as Martha Stewart Living) and to use exclusively these marks in our business. If Martha Stewart were to cease being Chairman or Chief Executive Officer and no longer control 53 57 our company, we will continue to have those rights, including the right to use those marks for any new business as long as such new business is substantially consistent with the image, look and goodwill of the licensed marks at the time that Martha Stewart ceased to be such an officer or to control us. The term of the license is perpetual, subject to certain exceptions. In the event that we terminate Martha Stewart's employment without cause or she terminates her employment for good reason, each as defined in her employment agreement with MSLO, the license will cease to be exclusive and we would be limited in our ability to create new marks incorporating her name, likeness, image, publicity and signature. In these circumstances, Martha Stewart would receive the right to use her name in other businesses that could directly compete with us, including our magazine, television and merchandising businesses. In addition, if Martha Stewart's employment terminates under these circumstances, Martha Stewart would receive in perpetuity a royalty of 3% of the revenues derived from any of our products or services bearing any of the licensed marks. The new intellectual property license agreement contains various customary provisions regarding our obligations to preserve the quality of the licensed marks and to protect these marks from infringement by third parties. COMPETITION PUBLISHING 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 team. 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. TELEVISION Television production is also highly competitive. Our television programs compete directly for viewers and advertising dollars with other "how to" television programs, as well as with general daytime programming on other channels. Overall competitive factors in this segment include programming content, quality and distribution and demographics of the programming. Similar to publishing, competition for advertising dollars is primarily based on advertising rates, the demographics of the audience, viewer response to advertisers' products and services and effectiveness of the advertising sales team. MERCHANDISING AND INTERNET/DIRECT COMMERCE Our retail merchandising and Internet/Direct Commerce businesses compete in the consumer products and specialty retail businesses as well as the electronic commerce industry, all of which are highly competitive. The leading competitors of our merchandising business include Target stores, Wal-Mart Stores, Inc., The Home Depot, Inc. and other mass market discount stores. Competitors of our Internet and catalog businesses 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, weddings.com and theknot.com. 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. 54 58 PROPERTIES Certain information concerning our principal facilities, all of which are leased, is set forth below:
APPROXIMATE AREA LOCATION USE IN SQUARE FEET - - - -------- --- ---------------- 11 West 42nd Street............... Principal executive and New York, New York administrative offices; design facilities; and sales offices 71,688 19 Newtown Turnpike............... Executive and administrative Westport, Connecticut offices for television, including the television studio facilities; design facilities; and sales offices for television 30,523 36-38 West 25th Street............ Photography studio used for New York, New York photography shoots for all of MSLO's businesses and for prop storage 17,000
The leases for these offices and facilities expire between October 1999 and April 2010, and certain leases are subject to renewal by MSLO. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We also lease the right to use various properties owned by Martha Stewart for our editorial, creative and product development processes. These "living laboratories" allow us to experiment with new designs and new products, such as garden layouts, and help generate ideas for new content available to all of our media outlets. For a description of the related property rental agreement, we refer you to "Certain Relationships and Related Transactions--Certain Agreements with Martha Stewart--Location Rental Agreement." We believe that our existing facilities are well maintained and in good operating condition. EMPLOYEES As of June 1999, we had approximately 350 employees, all of whom are located in the United States. Of our seven executive vice presidents, five have been with us since the launch of Martha Stewart Living magazine in 1991. None of our employees are represented by unions or guilds, other than Martha Stewart, who is a member of the American Federation of Television and Radio Artists and the Screen Actors Guild. We consider our relations with our employees to be satisfactory and have not experienced any job actions or labor shortages since our inception. 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 the 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 MSLO intends, when appropriate, to vigorously defend in cooperation with Martha Stewart. 55 59 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The persons who will be our directors and executive officers immediately following this offering, as well as their ages and positions, are listed below:
NAME AGE POSITION(S) - - - ---- --- ----------- Martha Stewart............ 57 Chairman of the Board of Directors and Chief Executive Officer Sharon Patrick............ 56 President and Chief Operating Officer and Director Charlotte L. Beers........ 64 Director L. John Doerr............. 48 Director Dora Braschi Cardinale.... 43 Executive Vice President, Print Production Stephen Drucker........... 46 Executive Vice President, Editorial Core and Editor-in- Chief Peter Mark................ 32 Executive Vice President, Corporate Infrastructure Development and Television Operations Suzanne Sobel............. 42 Executive Vice President, Advertising Sales and Marketing, Publisher Lauren Stanich............ 37 Executive Vice President, Consumer Marketing Gael Towey................ 47 Executive Vice President, Art and Style Creative Director Shelley Lewis Waln........ 46 Executive Vice President, Integrated Marketing Gregory R. Blatt.......... 31 Senior Vice President, General Counsel James Follo............... 40 Senior Vice President, Finance and Controller
Martha Stewart is the founder of our company and the author of 14 books on the domestic arts, including Entertaining and Martha Stewart's Gardening. Ms. Stewart has served as Chairman of the Board of Directors and Chief Executive Officer of MSLO LLC since its creation in 1996. Ms. Stewart is the creator and was Editor-in-Chief and Editorial Director of Martha Stewart Living from 1990 until 1997. Ms. Stewart is a member of the board of directors of Revlon, Inc., on the advisory board of drugstore.com, inc. and on the board of trustees of Norwalk Hospital, Norwalk, Connecticut. Sharon Patrick has served as President, Chief Operating Officer and a director of MSLO LLC since 1997. Prior to that, Ms. Patrick served as a strategic consultant to Martha Stewart Living from 1994 until 1997. From 1993 until 1997, Ms. Patrick served as President of The Sharon Patrick Company, a strategic consulting company and Sharon Patrick and Associates, a new media venture firm. From 1990 until 1993, Ms. Patrick was President and Chief Operating Officer of Rainbow Programming Holdings, the programming company of Cablevision Systems Development. Prior to that, Ms. Patrick was a Principal and Partner in charge of Media and Entertainment at McKinsey and Company. Charlotte L. Beers has served as a director of MSLO LLC since March 1998. Ms. Beers has served as Chairman of the Board of Directors of J. Walter Thompson Worldwide, an advertising agency, since March 1999. Prior to that, she was Chairman Emeritus of Ogilvy & Mather Worldwide, Inc. from April 1997 to March 1999. She was Chairman of Ogilvy & Mather from April 1992 to April 1997 and Chief Executive Officer from April 1992 to September 1996. She is also a director of Gulfstream Aerospace Corporation, J. Crew Group, Inc. and Women First Healthcare, Inc. L. John Doerr has served as a director of MSLO LLC since July 1999. Mr. Doerr has been a general partner of Kleiner Perkins Caufield & Byers, a private venture capital firm, since September 1980. In 1974, he jointed Intel Corporation and held various engineering, marketing and management assignments. Mr. Doerr is also a director of Amazon.com, At Home Corporation, drugstore.com, inc., Healtheon Corporation, Intuit, Inc., Platinum Software, Inc., and SunMicrosystems, as well as several private companies. Dora Braschi Cardinale has served as Executive Vice President, Print Production since May 1999 and prior to that as Senior Vice President, Print Production from 1997 until 1999. Prior to that, Ms. Cardinale 56 60 served as Production Director of Martha Stewart Living from 1992 until 1997. Ms. Cardinale has an additional 15 years of experience in the publishing industry, including positions with Art & Antiques, Geo, Viva and Omni magazines. Stephen Drucker has served as Editor-in-Chief of MSLO since 1997, as Executive Vice President, Editorial Core since January 1999 and prior to that, as Senior Vice President, Editorial from 1997 to 1999. Mr. Drucker served as the Editor of Martha Stewart Living from 1996 to 1997. Mr. Drucker served as a Contributing Editor from 1995 to 1996 to Travel & Leisure and Architectural Digest, and as the Executive Editor of Travel & Leisure from 1994 to 1995. Mr. Drucker has an additional 16 years of experience in the publishing industry with The New York Times and The Conde Nast Publications, Inc. Peter Mark has served as Executive Vice President, Corporate Infrastructure Development and Television Operations since April 1999 and prior to that as Senior Vice President, Television Operations from 1997 to 1999. Prior to that, Mr. Mark served as Television Development Director from 1994 to 1997, as Business Development Director from 1993 to 1994 and as Business Manager from 1991 to 1994, for Martha Stewart Living. Mr. Mark has an additional four years of experience in the publishing and entertainment industries, including with Time Warner. Suzanne Sobel has served as Executive Vice President, Advertising Sales and Publisher of MSLO since January 1999. Prior to that, Ms. Sobel served as Senior Vice President, Advertising Sales & Marketing and Publisher during 1998 and as Publisher of MSLO from 1997 until 1998. Ms. Sobel served as Associate Publisher of Martha Stewart Living from 1996 to 1997, as Advertising Director from 1995 to 1996, as New York Advertising Sales Manager from 1993 to 1995 and as Advertising Sales Manager from 1991 to 1993. Ms. Sobel has an additional 14 years of experience in advertising sales, including with Town & Country magazine, Bob Bernbach & Associates and Ogilvy & Mather. Lauren Stanich has served as Executive Vice President, Consumer Marketing of MSLO since January 1999. Prior to that, Ms. Stanich was Senior Vice President, Consumer Marketing of MSLO from 1997 until 1999. Ms. Stanich worked as Consumer Marketing Director and Book Publisher from 1995 to 1997, and as Consumer Marketing Director from 1991 to 1995, for Martha Stewart Living. Ms. Stanich has an additional seven years of experience in marketing and publishing with Time. Gael Towey has served as Executive Vice President, Art and Style Creative Director of MSLO since February 1997. Prior to that, Ms. Towey worked for Martha Stewart Living as the Design Director from 1996 to 1997, and as Art Director from 1990 to 1996. Ms. Towey also has an additional 15 years of experience in the publishing industry, including with House & Garden magazine, Clarkson N. Potter and Viking Press, Inc. Shelley Lewis Waln has served as Executive Vice President, Integrated Marketing of MSLO since April 1998. Prior to that, Ms. Waln was Executive Vice President, Advertising Sales & Marketing of MSLO from 1997 until 1998. From 1995 to 1997, Ms. Waln was Publisher of Martha Stewart Living, and from 1994 to 1995 was its Director, Sales & Marketing. Ms. Waln has an additional 16 years of experience in marketing and publishing, including with Time Warner Entertainment Marketing, Life magazine, People magazine, Ziff-Davis Publishing, Inc. and Adweek magazine. Gregory R. Blatt has served as Senior Vice President, General Counsel of MSLO since May 1999. Prior to that, Mr. Blatt was an associate with Grubman Indursky & Schindler, P.C., the New York entertainment and media law firm, from 1997 to May 1999 and an associate at Wachtell, Lipton, Rosen & Katz, the New York law firm, from 1995 to 1997. James Follo has served as Senior Vice President, Finance and Controller of MSLO since March 1999 and, prior to that, as Vice President, Finance and Controller from July 1998. Prior to that, Mr. Follo held various financial positions at General Media International, Inc., a magazine publisher, from 1994 to July 1998, most recently as Vice President, Chief Financial Officer and Treasurer. 57 61 KEY CREATIVE PERSONNEL In addition to Martha Stewart, Stephen Drucker and Gael Towey, our other key creative personnel include:
NAME AGE POSITION(S) - - - ---- --- ----------- Eric A. Pike............................. 37 Senior Vice President, Design Director Margaret Roach........................... 45 Senior Vice President, Garden Editor Susan J. Spungen......................... 39 Senior Vice President, Food Editor Stephen A. Earle......................... 38 Vice President, Style Director Frederick Karch.......................... 42 Vice President, Style Director Darcy S. Miller.......................... 30 Vice President, Weddings Editor Hannah Carpenter Milman.................. 40 Vice President, Crafts Editor
Eric A. Pike has served as Senior Vice President, Design Director of MSLO since January 1999. Prior to that, Mr. Pike served as Vice President, Design Director of MSLO from 1998 to 1999. Mr. Pike was Art Director from 1995 to 1998, Deputy Art Director from 1994 to 1995 and Associate Art Director from 1992 to 1994, of Martha Stewart Living. Mr. Pike has an additional ten years of experience in art direction and design. Margaret Roach has served as Senior Vice President, Garden Editor of MSLO since January 1, 1999. Prior to that, Ms. Roach served as Vice President, Gardening from 1998 until 1999. From 1995 to 1998, Ms. Roach was Garden Editor of Martha Stewart Living, and a contributing editor for Martha Stewart Living from 1993 to 1994. Ms. Roach was Fashion and Garden Editor of New York Newsday from 1985 to 1995, and also has an additional 12 years of experience in the publishing business, including with The New York Times. Ms. Roach won the 1998 Best Written Book Of The Year award from the Garden Writers of America for A Way to Garden. Susan J. Spungen has served as Senior Vice President, Food Editor of MSLO since March 1999. Prior to that, Ms. Spungen served as Vice President, Food Editor of MSLO from 1997 until 1999. From 1991 to 1997, Ms. Spungen was Food Editor of Martha Stewart Living. Ms. Spungen has an additional 15 years of experience in the food and restaurant industries. Stephen A. Earle has served as Vice President, Style Director of MSLO since 1997. Prior to that, Mr. Earle was Style Director of Martha Stewart Living from 1995 until 1997. From 1992 to 1995, Mr. Earle was a freelance stylist and contributor to Martha Stewart Living. From 1989 to 1992, Mr. Earle was Creative Director for Polo Ralph Lauren. Mr. Earle has an additional ten years of experience in art and style direction, including positions with Polo Ralph Lauren. Frederick Karch has served as Vice President, Style Director of MSLO since January 1999. Prior to that, Mr. Karch was Style Director of MSLO from 1997 until 1999. From 1992 to 1997, Mr. Karch was a Stylist for Martha Stewart Living, and also worked during that time as an independent stylist for clients, such as the Pottery Barn Catalogs, Bergdorf Goodman, Macy's and Bloomingdale's. Mr. Karch has an additional ten years of experience in art and style direction. Darcy S. Miller has served as Vice President, Weddings Editor of MSLO since January 1, 1998. During 1997, Ms. Miller was Weddings Editor of MSLO. Prior to that, Ms. Miller was Weddings Editor from July 1996 to 1997, Associate Editor, from 1994 to 1996, Assistant Editor in 1994 and an Editorial Assistant from 1992 to 1994, for Martha Stewart Living. Hannah Carpenter Milman has served as Vice President, Crafts Editor of MSLO since February 1999. Prior to that, Ms. Milman was Style Editor for MSLO from 1997 until 1998, and for Martha Stewart Living from 1996 to 1998. Ms. Milman was also Senior Editor from 1992 to 1996 and a Contributing Editor from 1991 to 1992 for Martha Stewart Living. 58 62 BOARD OF DIRECTORS When this offering is completed, we expect to have a Board of Directors comprised of six individuals. Our Board of Directors is currently comprised of four individuals. Our Board of Directors intends to appoint two additional directors who are neither officers nor employees of MSLO or our affiliates. Directors who are our employees will receive no compensation for their service as members of our Board of Directors or its committees. Directors who are not our employees will receive compensation and stock options under plans we describe below. We reimburse all directors for expenses incurred in connection with attendance at meetings. See "Management--Compensation of Outside Directors" and "--The Non-Employee Director Stock and Option Compensation Plan." COMMITTEES OF THE BOARD OF DIRECTORS Upon completion of this offering, our Board of Directors will establish an Audit Committee and a Compensation Committee. The functions of the Audit Committee will be to: -- recommend annually to our Board of Directors the appointment of our independent auditors -- discuss and review in advance the scope and the fees of our annual audit and review the results thereof with our independent auditors -- review and approve non-audit services of our independent auditors -- review compliance with our existing major accounting and financial reporting policies -- review the adequacy of major accounting and financial reporting policies -- review our management's procedures and policies relating to the adequacy of our internal accounting controls and compliance with applicable laws relating to accounting practices We anticipate the Audit Committee will consist solely of directors who are not otherwise our employees. The functions of the Compensation Committee will be to review and approve annual salaries, bonuses, and grants of stock options under our 1999 Stock Incentive Plan for all executive officers and key members of our creative teams and management staff, and to review and approve the terms and conditions of all employee benefit plans or changes to these plans. We anticipate the Compensation Committee will consist of directors who are not otherwise our employees. In addition, our Board of Directors will form an Executive Committee, which would have the authority to exercise the powers of our Board of Directors (other than those reserved to the Audit Committee and the Compensation Committee or to our full Board of Directors) between meetings of our full Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As noted above, our Board of Directors does not currently have a Compensation Committee, but our Board of Directors anticipates establishing one as described above. Prior to this offering, our principals and senior management were directly involved in setting compensation for our executives. 59 63 EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid to our Chief Executive Officer and our other four most highly compensated executive officers for the fiscal year ended December 31, 1998: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------------- 1998 1998 NAME AND SALARY BONUS OTHER ANNUAL ALL OTHER PRINCIPAL POSITION ($) ($) COMPENSATION ($) COMPENSATION ($) - - - ----------------------------------------- ---------- ---------- ---------------- ---------------- Martha Stewart........................... $2,975,000 $1,995,717 -- -- Chairman and Chief Executive Officer(1) Sharon Patrick........................... 493,755 518,443 -- -- President and Chief Operating Officer Gael Towey............................... 300,000 275,000 -- -- Executive Vice President--Art and Style Creative Director Stephen Drucker.......................... 265,000 198,750 -- -- Executive Vice President--Editorial Core and Editor-in-Chief Suzanne Sobel............................ 239,000 225,855 -- -- Executive Vice President--Advertising Sales and Marketing, Publisher
- - - ------------ (1) See also "Certain Relationships and Related Transactions -- Certain Agreements with Martha Stewart -- Pre-Offering Agreements" for additional amounts paid by us to Martha Stewart in 1998. OPTION EXERCISES AND HOLDINGS The following table provides information regarding exercises and holdings of stock options by our Chief Executive Officer and our other four most highly compensated executive officers for the fiscal year ended December 31, 1998: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
SHARES OF NUMBER OF SECURITIES VALUE(1) OF UNEXERCISED CLASS A UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS COMMON STOCK OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($) ACQUIRED ON VALUE ------------------------------ --------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - - --------------------- ------------ ------------ -------------- ------------- ----------- ------------- Martha Stewart....... -- -- -- -- -- Sharon Patrick....... -- -- -- 34,563 -- Gael Towey........... -- -- -- 97,709 -- Stephen Drucker...... -- -- -- 8,333 -- Suzanne Sobel........ -- -- -- 16,667 --
- - - ------------ (1) Based on the midpoint of the offering range, $ per share. (2) Upon completion of this offering, 10% of the unexercisable options will become exercisable, except for Gail Towey's options with respect to which 50% will become exercisable. These numbers will be adjusted to reflect the exchange ratio in the reorganization pursuant to which MSLO LLC will be converted into a C corporation. This ratio has not yet been determined. 60 64 The following summary descriptions of our compensation plans are qualified in their entirety by reference to those plans, copies of which we have filed as exhibits to the registration statement of which this prospectus is a part. EMPLOYMENT AGREEMENT WITH MARTHA STEWART Prior to completion of the offering, we will enter into an employment agreement with Martha Stewart. The employment agreement will replace Martha Stewart's existing employment agreement with MSLO. The employment agreement provides for Martha Stewart's employment as our Chairman of the Board and Chief Executive Officer, and is for a term of five years, commencing upon completion of the offering. Under the employment agreement, Martha Stewart's annual base salary is $900,000, and she will receive annual bonus payments based upon our performance, with a minimum annual bonus of $300,000. Our Compensation Committee will determine the performance goals, which will include targets based on our operating income as well as other performance measures. During the employment period, Martha Stewart will receive employee benefits no less favorable than those provided to the other executive officers of the Company and will continue to receive perquisites and fringe benefits consistent with past practice. The employment agreement provides that if Martha Stewart resigns with "Good Reason" or if we terminate her employment other than for "Cause" or disability, then she will be entitled to receive an immediate lump sum cash payment equal to the sum of: (1) accrued, but unpaid, base salary and vacation through the date of termination, (2) three times her annual base salary and (3) the higher of $5,000,000 or three times the highest annual bonus paid for any fiscal year during the employment period. She will also receive continued welfare benefits and perquisites for three years. If Martha Stewart's employment is terminated due to disability, or in the event of death, Martha Stewart (or her estate) will receive continued payments of the base salary for the remainder of the scheduled term of the employment agreement. If Martha Stewart's employment is terminated for any other reason, she will be entitled to receive her accrued, but unpaid, base salary and vacation through the date of termination. Under the employment agreement, "Good Reason" generally means the occurrence of any of the following events without Martha Stewart's written consent: (1) an assignment of duties or responsibilities, or a change in title or authority, inconsistent with her position as Chairman and Chief Executive Officer, (2) any failure by the Company to comply with the employment agreement's compensation provisions, (3) a requirement for Martha Stewart to relocate, (4) the failure of a successor entity to assume the employment agreement or (5) any other material breach of the employment agreement. "Cause," for purposes of the employment agreement, means (x) Martha Stewart's willful and continued failure to perform her duties after written notice from the Board of Directors specifying the actions to be performed, unless such failure is due to her good faith belief that to take such action would be materially harmful to the Company, or (y) Martha Stewart's conviction of a felony or gross misconduct, which in either case results in material and demonstrable damage to our business or reputation. Pursuant to the employment agreement, Martha Stewart cannot compete with us (or solicit our employees) during her term of employment. In addition, if Martha Stewart terminates employment without Good Reason during the employment period or is terminated by us for Cause, the noncompetition and nonsolicitation restrictions continue for 12 months after the termination of employment. COMPENSATION OF OUTSIDE DIRECTORS Each of our non-employee directors will receive a single annual retainer fee of $20,000 for serving on our Board of Directors. These directors each will also receive a meeting fee of $1,000 for each in-person meeting of our Board of Directors that they attend and a fee of $500 for each telephonic meeting of our Board of Directors in which they participate and each meeting of any Board committee. The chairman of a Board committee will receive an additional annual retainer of $5,000. Directors who also are our employees or those of any of our subsidiaries will not receive additional compensation for their service as a director. Twenty-five percent of directors' fees will be paid in shares of Class A common stock, and the remaining 75% of such fees 61 65 may be paid either in shares of Class A common stock or in cash, at the election of the non-employee director, pursuant to the Non-Employee Director Stock and Option Plan described below. All directors will receive reimbursement of expenses incurred in connection with participation in Board of Directors meetings. THE NON-EMPLOYEE DIRECTOR STOCK AND OPTION COMPENSATION PLAN Before this offering, we will adopt and approve the Non-Employee Director Stock and Option Compensation Plan, which will be effective immediately before the pricing of this offering. The purpose of this plan is to promote a greater identity of interests between our non-employee directors and our stockholders and to attract and retain individuals to serve as directors. GENERAL The plan will be administered by our Board of Directors or a committee of our Board of Directors designated for this purpose. Our non-employee directors will be eligible to participate in the plan as of the date of the pricing of this offering. A total of shares of Class A common stock will be reserved for issuance and available for grants under the plan. Our Board of Directors or its designated committee may adjust the awards under the plan if there is any change in corporate capitalization, such as a stock split, or a corporate transaction, such as a merger, consolidation, separation, including a spin-off, or other distribution of our stock or property, any reorganization or any partial or complete liquidation. COMMON STOCK Each non-employee director will receive 25% of his or her annual retainer and meeting fees in shares of Class A common stock. In addition, non-employee directors may make an annual irrevocable election to receive shares of Class A common stock in lieu of all, or a portion, of such director's remaining fees, in 25% increments. The number of shares of Class A common stock granted to a director will be equal to the appropriate percentage of fees payable to the director in each calendar quarter, divided by the fair market value of a share of Class A common stock on the last business day of the calendar quarter. We will round the number of shares granted to the director down to the nearest whole share of Class A common stock and pay cash for the value of any fractional share. Each director may defer the receipt of his or her cash payments into an interest-bearing cash account and/or his or her elected or mandatory shares of Class A common stock into a share account which will be credited with additional shares having a value equal to the dividends that would be paid on the shares credited to the share account, if they were outstanding. When the director leaves our Board of Directors or, if earlier, upon a change of control, the amount of cash in his or her cash account, plus a number of shares of Class A common stock equal to the number of shares in his or her share account will be delivered to the director (with cash being paid in lieu of any fractional shares). OPTIONS On the day of the pricing of this offering, each director will be granted options for 5,000 shares of Class A common stock with an exercise price per share equal to the initial public offering price. After each annual meeting of stockholders, each continuing director will be granted options for 2,000 shares of Class A common stock. Each new director will be granted options for 5,000 shares of Class A common stock upon being elected or appointed to our Board of Directors. The exercise price for all options will be 100% of the fair market value of a share of Class A common stock on the date of the grant of such option, except that options granted before or upon consummation of this offering will be granted at the initial public offering price. Each option will become vested and exercisable on the first anniversary of the date of grant of such option, if the director remains a member of our Board of Directors at that time. Each vested option will terminate one year after the director's service on our Board of Directors ceases for any reason, other than for cause. If a director is removed for cause, all vested and unvested options will be forfeited. However, the options will expire no later than the tenth anniversary of the date of grant. Any unvested options will terminate and be canceled as of the date a 62 66 director's service on our Board of Directors ceases for any reason. All options become fully vested and exercisable upon a change in control. TRANSFERABILITY Grants and awards under the plan are nontransferable other than by will or the laws of descent and distribution, or at the discretion of our Board of Directors or the designated committee, pursuant to a written beneficiary designation and, in the case of an option, pursuant to a gift to the director's immediate family. This gift may be made directly to an immediate family member, or by means of a trust or partnership or limited liability company. During the director's lifetime, a director's option may be exercised only by the director, any such permitted transferee or a guardian, legal representative or beneficiary. AMENDMENTS Our Board of Directors may at any time terminate or amend the plan, except that no termination or amendment may impair the rights of directors relating to outstanding options or awards. To the extent required by law or stock exchange rule, no amendment will be made without the approval of our stockholders. MSLO PHANTOM PERFORMANCE UNIT PLAN We established a phantom performance unit plan in November 1997, under which, under certain circumstances, participants would receive shares of common stock upon an initial public offering. Awards were made under the plan as of January 1, 1998 and January 1, 1999. No awards will be granted under the plan following the offering. All employees who had been employed by MSLO for at least one year at the time of an award received awards. Our Board of Directors has determined to pay out these awards at certain levels effective upon completion of this offering. These payments will be made in shares of Class A common stock. The number of shares of Class A common stock a participant will receive under the plan will be equal to the number of phantom units held by the participant, multiplied by the value of a unit upon consummation of the offering as determined by our Board of Directors, and divided by the offering price. Approximately 85 MSLO employees participate in the 1998 grants, and each participant's interest will be deemed to have a $5,000 value as of the offering. Approximately 157 employees participate in the 1999 grants, and each participant's interest will be deemed to have a $6,000 value as of the offering. Up to an aggregate shares of Class A common stock will be delivered to participants upon completion of this offering. EMPLOYEE INCENTIVE COMPENSATION PLANS Our philosophy is to compensate employees based on individual, departmental and our overall company performance. Two main principles guiding this philosophy are to pay competitive compensation and to provide long-term employee stock ownership. We consider equity ownership by employees to be critical to our long- term success. Following completion of this offering, when calculating total compensation, we will consider both cash compensation and awards of restricted stock or options that vest over time based on the achievement of specified performance goals. We anticipate that following the completion of this offering, the Compensation Committee of our Board of Directors will review all plans, policies and arrangements affecting our employees and will consider what changes are appropriate, if any, for recommendation to our full Board of Directors. MSLO LLC NONQUALIFIED CLASS A LLC UNIT/STOCK OPTION PLAN MSLO LLC adopted the Nonqualified Class A LLC Unit/Stock Option Plan in November 1997, under which options for 539,564 MSLO LLC units were outstanding as of December 31, 1998, based on an assumed 10 million outstanding LLC Units. Pursuant to the merger, outstanding options for approximately 509,841 LLC units (based upon option holdings as of December 31, 1998) will be converted into options for shares of Class A common stock. Options granted under the plan generally vested 10% on December 31, 1998, 63 67 and will vest 10%, 20%, 20% and 40% on December 31 of each of the next four years if the optionee continues to be employed by, or perform services for, MSLO. Each option has a scheduled ten-year term, subject to earlier termination upon termination of employment. Options granted under the plan are not assignable or transferable by the optionee, other than by will or the laws of descent and distribution. Upon a change in control of MSLO, each outstanding option will become immediately and fully exercisable, and will either remain exercisable under the terms of the plan or be terminated upon no less than 30 days' written notice. This offering is not a change of control under the plan. No additional options will be granted under this plan. Martha Stewart has agreed with us that she will return, on a net treasury basis, to us shares of Class B common stock owned by the Martha Stewart Family Limited Partnership, or another entity controlled by her, upon each exercise of options under this plan. Under the net treasury method, we will calculate the number of shares of Class A common stock issued upon an option exercise, and subtract from that number the number of shares of our Class A common stock we could purchase (at the then-current market price) with the option proceeds. Martha Stewart has agreed to return to us a number of shares of Class B common stock equal to the result of this calculation. We may or may not use the option proceeds to repurchase shares of our Class A common stock in the market. If we do so, the net effect will be no change in the number of shares of Class A common stock outstanding before and after an exercise of an option under this plan. THE 1999 STOCK INCENTIVE PLAN Before this offering, we intend to adopt and approve our 1999 Stock Incentive Plan, which will be effective immediately before the pricing of this offering. This plan is designed to promote our success and enhance our value by linking the interests of certain of our officers, employees and consultants to those of our stockholders and by providing participants with an incentive for outstanding performance. This plan is further intended to provide flexibility in its ability to motivate, attract and retain employees upon whose judgment, interest and special efforts our business is largely dependent. Our officers, employees and consultants, including employees who are members of our Board of Directors, and officers, employees and consultants of our subsidiaries and affiliates are eligible to participate in this plan. Non-employee directors are not eligible to participate in the 1999 plan. This plan is intended to remain in effect until 2009. The description below summarizes the material terms of this plan. GENERAL The 1999 plan will be administered by the Compensation Committee of our Board of Directors, or another committee designated by our Board of Directors, and provides for the grant of stock options, both non-qualified and incentive stock options and other types of equity-based awards. The 1999 plan provides that the maximum number of shares of Class A common stock available for grant under the 1999 plan is . The term of options granted under the 1999 plan may not exceed 10 years. Unless otherwise determined by our Compensation Committee, options will vest ratably on each of the first four anniversaries after the grant date and will have an exercise price equal to the fair market value of the Class A common stock on the date of grant. A participant exercising an option may pay the exercise price in cash or, if approved by our Compensation Committee, with previously acquired shares of Class A common stock or in a combination of cash and stock. Our Compensation Committee, in its discretion, may allow the cashless exercise of options. Options are nontransferable other than by will or the laws of descent and distribution or, at the discretion of our Compensation Committee, pursuant to a written beneficiary designation and, in the case of a nonqualified option, pursuant to a gift to members of the holder's immediate family. The gift may be made directly or indirectly or by means of a trust or partnership or limited liability company and, during the participant's lifetime, may be exercised only by the participant, any such permitted transferee or a guardian, legal representative or beneficiary. 64 68 At the time of this offering, we expect to grant options to purchase shares of Class A common stock under the 1999 plan at an exercise price equal to the initial public offering price. OTHER AWARDS A stock appreciation right (or SAR) permits a participant to receive cash or shares of Class A common stock, or a combination thereof, as determined by our Board of Directors or our Compensation Committee. The amount of cash or the value of the shares is equal to the excess of the fair market value of a share of Class A common stock on the date of exercise over the SAR exercise price, multiplied by the number of shares with respect to which the SAR is exercised. Restricted stock may be granted subject to performance or service-based goals upon which restrictions will lapse. Performance units or restricted units may be granted subject to performance goals and/or service-based restrictions, and will be payable in cash or shares of Class A common stock or a combination as determined by our Board of Directors or our Compensation Committee. Dividend and interest equivalents with respect to awards and other awards based on the value of Class A common stock may also be granted. CHANGE IN CONTROL In the event of a change in control, any option or SAR that is not then exercisable and vested will become fully exercisable and vested, restrictions on restricted stock will lapse and performance units will be deemed earned. Change in control generally means (1) the acquisition of an amount of common stock greater than the amount held by Martha Stewart and representing at least 30% of the outstanding common stock or voting securities; (2) a change in the majority of the members of the Board of Directors, unless approved by the incumbent directors; (3) the consummation of certain mergers involving MSLO; or (4) approval by our stockholders of a liquidation, dissolution or sale of substantially all of our assets. AMENDMENTS Our Board of Directors may at any time amend or terminate the 1999 plan and may amend the terms of any outstanding option or other award, except that no termination or amendment may impair the rights of the participants as they relate to outstanding options or awards. However, no such amendment to the 1999 plan will be made without the approval of our stockholders to the extent such approval is required by law or stock exchange rule. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS As permitted by applicable Delaware law, we have included in our certificate of incorporation a provision to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, our by-laws provide that we are required to indemnify our officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and we are required to advance expenses to our officers and directors as incurred in connection with proceedings against them for which they may be indemnified. At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of ours in which indemnification would be required or permitted. We believe that these indemnification provisions are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be granted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC this indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. The employment agreement and the license agreement to be entered into with Martha Stewart provide that we will indemnify Martha Stewart against all charges and expenses that Martha Stewart may incur or be compelled to pay for or by reason of actions of MSLO or our officers, employees or agents in connection with certain matters relating to our business and Martha Stewart's performance of her obligations under the employment agreement, including matters relating to our predecessor businesses and sole proprietorships previously owned by Martha Stewart. 65 69 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following summary descriptions of agreements to which we are a party are qualified in their entirety by reference to the agreement to which each summary description relates, each of which we have filed as an exhibit to the registration statement of which this prospectus is a part. TRANSACTIONS WITH TIME PUBLISHING VENTURES AND ITS AFFILIATES AGREEMENTS RELATING TO THE 1997 ACQUISITION In 1991, Time Publishing Ventures (a subsidiary of Time Warner, Inc.), in cooperation with Martha Stewart, launched the magazine Martha Stewart Living. Subsequently, Time Publishing Ventures became involved in other Martha Stewart-related businesses, including television, books and mail-order merchandising. In February 1997, Time Publishing Ventures agreed to contribute all of its assets that primarily related to its Martha Stewart-related businesses to MSLO LLC, which was a recently formed entity controlled by Martha Stewart. MSLO LLC had already been capitalized with various businesses Martha Stewart conducted personally or through entities controlled by her. Under the terms of the February 1997 agreement, MSLO LLC also assumed all liabilities from Time Publishing Ventures relating to the conduct of Time Publishing Ventures' Martha Stewart-related businesses. In exchange for its contributions, Time Publishing Ventures received an interest-bearing four-year promissory note in the principal amount of $30.0 million and a 6.27% equity interest in MSLO LLC. In addition, pursuant to the operating agreement of MSLO LLC, which we describe below, Time Publishing Ventures received the right to a special distribution from us of an aggregate $18 million in cash, which amount we paid in February 1997. The LLC operating agreement also expressly permits Time Publishing Ventures and its affiliates to compete with MSLO LLC and eliminates any obligation that Time Publishing Ventures offer corporate opportunities to MSLO LLC. Incident to its equity interest, Time Publishing Ventures received certain rights with respect to our ongoing management, and the right to require us to purchase its equity interests on the seventh anniversary of the transaction, or in certain circumstances at an earlier date. In March 1999, we prepaid in full the Time Publishing Ventures note. See "--LLC Operating Agreement" for additional information on Time Publishing Ventures' rights. ONGOING SERVICE AGREEMENTS In 1997, Time Publishing Ventures and certain affiliates also entered into agreements with us to provide us with various services. These agreements included: -- newsstand distribution services for our magazines and to perform certain marketing and merchandising services for our magazine -- fulfillment services for the magazine -- fulfillment services for Martha by Mail -- an Oxmoor House agreement for publication of Martha Stewart Living books Each of these agreements is currently in effect and will continue in effect after the offering. We believe the terms of these agreements are at least as favorable to us as the terms that could have been obtained from another party. Under our newsstand distribution agreement, an affiliate of Time Publishing Ventures provides newsstand distribution services with respect to our magazines. We compensate our counterparty on the basis of net sales. This agreement expires in December 2004, but we have the right to terminate effective December 2001 on one year's notice. The fulfillment agreements with another affiliate of Time Publishing Ventures provide for inventory management, "back-office processing" and processing of mail and phone orders for our magazines and our 66 70 Internet/Direct Commerce businesses. The fulfillment agreement for our magazines expires in December 2002, but will be renewed automatically for an additional three-year term unless terminated by either party upon one year's notice. The fulfillment agreement with respect to our catalog and Internet businesses continues until either party provides one year's notice of termination to the other. Under our agreement with Oxmoor House, also an affiliate of Time Publishing Ventures, we granted Oxmoor House an exclusive license to use the mark Martha Stewart Living in connection with books and continuity card and binder programs for two Best of Martha Stewart Living books per year and one Christmas with Martha Stewart Living book each year. Oxmoor House also has the right to publish other materials bearing the mark Martha Stewart Living as mutually agreed by us and Oxmoor House. We receive production grants on a per page basis for each of these publications, an annual payment to cover staff costs and also receive royalties. This agreement terminates in December 2001, and Oxmoor House has the right to renew the agreement for an additional three year term. Since February 1997, Don Logan, President and Chief Executive Officer of Time, has been a member of the Board of Directors of MSLO LLC. Mr. Logan will not be a director of MSLO. LLC OPERATING AGREEMENT In connection with our acquisition of Time Publishing Ventures' Martha Stewart-related businesses in February 1997, the members in MSLO LLC, our predecessor company, consisting of Martha Stewart, Time Publishing Ventures, Sharon Patrick and Grubman, Indursky & Schindler, P.C. entered into an agreement governing the operation of MSLO LLC and the rights of its members. Among the various rights that this agreement afforded MSLO LLC was the right to make an offer to purchase the membership interests held by Time Publishing Ventures for a price of $37.0 million plus 5% interest, compounding semi-annually, from February 3, 1997 (the target price). The target price will be reduced by any pre-offering distributions to Time Publishing Ventures, other than for taxes and similar matters. Upon Time Publishing Ventures' rejection of this offer to purchase or the completion of a sale to us of Time Publishing Ventures' interests, most of Time Publishing Ventures' specific rights under this agreement terminate. The members also agreed that MSLO LLC could be converted into a corporation in the event it desired to effect an initial public offering of its equity securities if the expected gross proceeds of the offering exceeded $25 million. At the time of this offering, we will make an irrevocable offer to purchase Time Publishing Ventures' membership interests at the target price. Time Publishing Ventures has not indicated whether it will accept or reject our offer to purchase. Time Publishing Ventures has until 120 days following the date of our offer, or it will be deemed to have rejected the offer to purchase. If Time Publishing Ventures rejects our offer, its registration rights will continue. If Time Publishing Ventures accepts our offer to purchase its shares of common stock, Time Publishing Ventures will also have the right to receive a payment from us if (1) we sell any of our equity or all or substantially all of our assets within one year of the completion of our purchase of Time Publishing Ventures' shares, and (2) the per share price received by us for our equity or assets is higher than that paid to Time Publishing Ventures. Time Publishing Ventures also has the right to receive a payment from Martha Stewart if she completes any private sales of her equity or sells over 15% of her equity in the public trading market, in each case, at a higher price per share during the same period. These payments would be in an amount equal to the excess of (1) the per share price received by MSLO or Martha Stewart over (2) 100% of the per share price paid to Time Publishing Ventures, which percentage increases ratably to 140% over the one year term of Time Publishing Ventures' right. The total amount of Time Publishing Ventures' adjustment cannot be greater than the product of (x) the total number of shares sold in the subsequent transaction and (y) the difference between the per share amount we or Martha Stewart received in the subsequent transaction and the per share amount Time Publishing Ventures received from us. 67 71 TAX INDEMNIFICATION Under the merger agreement providing for the conversion of MSLO LLC into a corporation for purposes of effecting this initial public offering, MSLO will make distributions in an aggregate amount of $3.0 million (as of March 31, 1999) in respect of taxes paid by the members relating to the profits of MSLO LLC. We also agree to indemnify the members of MSLO LLC for any taxes relating to periods during which MSLO was a limited liability company. The members of MSLO LLC are The Martha Stewart Family Limited Partnership, an entity controlled by Martha Stewart, Sharon Patrick, MSLO's President, Time Publishing Ventures, KPCB Holdings, Inc. and Grubman Indursky & Schindler, P.C., which provides certain legal services to MSLO. See "Reorganization Transactions Occurring Prior to This Offering." REGISTRATION RIGHTS Under the registration rights provided for in the LLC operating agreement, Time Publishing Ventures, which will own an aggregate of shares of Class A common stock at the time of this offering, Kleiner Perkins, which will own an aggregate of shares of Class A Common Stock and Martha Stewart, who owns an aggregate of shares of Class B common stock, have the right to require us to register shares of Class A common stock owned by them, subject to certain customary terms and minimum amounts. Neither Time Publishing Ventures, KPCB Holdings, Inc. nor Martha Stewart may require us to register any shares within 180 days of the date of this prospectus. Registration of these shares of common stock will result in such shares becoming freely tradable without restriction under the Securities Act of 1933. All registration expenses, other than any underwriting discounts, incurred in connection with the above registrations will be borne by MSLO. Notwithstanding any rejection by Time Publishing Ventures of our offer to purchase, Time Publishing Ventures' registration rights will continue as long as it continues to hold any of our common stock that it received in the merger of MSLO LLC into a corporation. CERTAIN AGREEMENTS WITH MARTHA STEWART LOCATION RENTAL AGREEMENT In addition to the employment and license agreements we will enter into with Martha Stewart, we will also enter into a location rental agreement with Martha Stewart relating to our use of various properties owned by Martha Stewart. The agreement has a five-year term, provides for annual payments of $2.0 million to Martha Stewart and permits us to use the properties currently owned by Martha Stewart for any purpose relating to our businesses. We make extensive use of these properties for television filming, photography, research and development of context and products and various other commercial purposes. This location rental agreement will replace an agreement we have with Martha Stewart, except that the rental fee will be increased. The increased fee reflects the access to additional properties, as well as our significantly increased usage of these properties since the acquisition from Time Publishing Ventures in February 1997. We believe this rate is significantly lower than what we would have to pay to use similar properties owned by a third party. In the event that Martha Stewart's employment is terminated without cause, or she terminates employment for good reason, we will be obligated to pay the remaining amount due under the location rental agreement and we will lose our access to these properties. PRE-OFFERING AGREEMENTS Upon completion of this offering, the current employment, services and non-competition agreements and separate license and non-competition agreements we have entered into with Martha Stewart will be terminated, and the new employment agreement, royalty-free license agreement and location rental agreement will become effective. See "Business--Intellectual Property" for more information on the license agreement. The prior employment and services agreements provided for the payment to Martha Stewart of certain compensation, benefits and expense reimbursement. Under a 1997 location fee agreement, we paid Martha Stewart an aggregate of $1.5 million for the use of properties owned by her in connection with operating our 68 72 business. Martha Stewart did not receive any compensation with respect to, or payments for, the license and non-competition agreements. In addition, as a member of MSLO LLC, Martha Stewart is entitled to certain registration rights, which we describe above. We will assume these obligations effective as of the completion of this offering. OTHER RELATIONSHIPS We periodically use the services of Emery Cuti Brinckerhoff & Abady, a law firm of which Martha Stewart's son-in-law is a partner. In 1998, MSLO paid an aggregate of approximately $92,000 in fees and expenses in respect of such services. Ms. Margaret Christiansen, Martha Stewart's sister-in-law, is a Senior Vice President, Business Manager of MSLO. Mr. Randy Plimpton, Martha Stewart's brother-in-law, is the MSLO property manager, responsible for property management and support services. 69 73 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of Class A and Class B common stock, including the percent of the total voting power, as of 1999, and as adjusted to reflect completion of this offering, by -- each of our five most highly compensated officers -- each director -- each holder of more than 5% of either class of common stock -- all current directors and executive officers as a group Except as indicated in the footnotes to this table, the individuals named in this table have sole voting and investment power with respect to all shares of Class A common stock and Class B common stock shown as beneficially owned by them, subject to community property laws where applicable.
BENEFICIAL OWNERSHIP BEFORE OFFERING BENEFICIAL OWNERSHIP ---------------------------- --------------------------- CLASS A CLASS B % TOTAL CLASS A CLASS B % TOTAL COMMON COMMON VOTING COMMON COMMON VOTING STOCK STOCK POWER STOCK STOCK POWER ------------- ------------ ------- ------------ ------------ ------- NAME SHARES % SHARES % SHARES % SHARES % - - - ---- ------ ---- ------ --- ------ --- ------ --- Martha Stewart(1)....... -- -- 100% 97.6% -- -- 100% Time Inc.(2)............ 36.4% -- -- * -- 1271 Avenue of the Americas New York, New York 10020 Kleiner Perkins Caufield & Byers(3)............ 29.0 -- -- * -- -- 2750 Sand Hill Road Menlo Park, California 94025 L. John Doerr(3)........ 29.0 -- -- * -- Charlotte Beers(4)...... * -- -- * * -- -- Sharon Patrick(5)....... 32.9 -- -- * -- -- Gael Towey(6)........... * -- -- * * -- -- Stephen Drucker(7)...... * -- -- * * -- Suzanne Sobel(8)........ * -- -- * * -- All directors and executive officers as a group (13 persons)(9)........... 98.3% 100% 100% 100%
- - - ------------ * The percentage of shares or voting power beneficially owned does not exceed 1% of the class. (1) Consists of shares held by The Martha Stewart Family Limited Partnership. (2) Consists of shares held by Time Publishing Ventures, Inc., a wholly owned subsidiary of Time Inc. (3) Consists of shares held by KPCB Holdings, Inc., a California corporation affiliated with KPCB IX Associates, LLC. L. John Doerr, a general partner of KPCB IX Associates, LLC, is a director of MSLO. Mr. Doerr disclaims beneficial ownership of shares held by KPCB Holdings, Inc. except to the extent of his pecuniary interest in those shares through KPCB IX Associates, LLC. (4) Does not include unvested options to acquire shares of Class A common stock. 70 74 (5) Includes vested options to acquire shares of Class A common stock. Does not include unvested options to acquire shares of Class A common stock. (6) Includes vested options to acquire shares of Class A common stock. Does not include unvested options to acquire shares of Class A common stock. (7) Includes vested options to acquire shares of Class A common stock. Does not include unvested options to acquire shares of Class A common stock. (8) Includes vested options to acquire shares of Class A common stock. Does not include unvested options to acquire shares of Class A common stock. (9) Includes vested options to acquire shares of Class A common stock. Does not include unvested options to acquire shares of Class A common stock. 71 75 DESCRIPTION OF CAPITAL STOCK The following summary description of provisions in our certificate of incorporation and by-laws is qualified in its entirety by reference to our certificate of incorporation and by-laws, which we have filed as exhibits to the registration statement of which this prospectus is a part. Our authorized capital stock consists of 350,000,000 shares of Class A common stock, par value $0.01 per share, 150,000,000 shares of Class B common stock, par value $0.01 per share, and 150,000,000 shares of preferred stock, par value $0.01 per share. As of , 1999, we had shares of Class A common stock, shares of Class B common stock and no shares of preferred stock outstanding. After this offering, there will be shares of Class A common stock outstanding. COMMON STOCK Subject to the rights of the holders of any preferred stock that may be outstanding, holders of Class A common stock are entitled to receive, share for share with holders of Class B common stock, dividends as may be declared by our Board of Directors out of funds legally available to pay dividends, and, in the event of liquidation, to share pro rata with the holders of Class A common stock in any distribution of our assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding preferred stock. Except as required by Delaware law, Class A common stock and Class B common stock will vote together as a single class on all matters presented to a vote of stockholders, including the election of directors. Each holder of Class A common stock is entitled to one vote for each share held of record on the applicable record date for all of these matters. Holders of Class A common stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities, and there are no conversion rights or redemption or sinking fund provisions with respect to Class A common stock. All outstanding shares of Class A common stock are, and the shares of Class A common stock offered hereby will be when issued, fully paid and nonassessable. Additionally, our certificate of incorporation requires that we reserve and keep available out of authorized but unissued Class A common stock, solely for effecting conversion of Class B common stock, sufficient shares to effect conversion of all outstanding shares of Class B common stock. Class B common stock is identical in all respects to Class A common stock, except with respect to voting and conversion rights. Class A common stock and Class B common stock will vote together as a single class on all matters presented to a vote of stockholders, including the election of directors. Each holder of Class B common stock is entitled to ten votes for each share held of record on the applicable record date for all of these matters. Martha Stewart will be the only initial holder of shares of Class B common stock. Each share of Class B common stock will be automatically converted into one share of Class A common stock upon transfer of any share of Class B common stock, whether or not for value, by any initial registered holder of that share, except transfers by that holder to: -- a nominee of that holder (without any change in beneficial ownership, within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended); or -- another person who, at the time of the transfer, beneficially owns shares of Class B common stock or a nominee of that person. Further, any transfer by any initial holder without consideration to any of the following will not result in conversion: -- any controlled affiliate of that initial holder who remains a controlled affiliate -- any active or retired partner of that initial holder -- the estate of that initial holder or a trust established for the benefit of the descendants or any relatives or spouse of that initial holder -- a parent corporation or wholly owned subsidiary of that initial holder or to a wholly owned subsidiary of that parent unless and until the transferee ceases to be a parent or wholly owned subsidiary of the initial holder or a wholly owned subsidiary of any parent 72 76 -- the spouse of any initial holder Lastly, any bona fide pledge by an initial holder to a financial institution in connection with a borrowing will not result in any conversion. If any transfer does not give rise to automatic conversion under these provisions, then any subsequent transfer by the holder (other than any transfer by such holder to a nominee of such holder (without any change in beneficial ownership, as such term is defined under Section 13(d) of the Securities Exchange Act of 1934, as amended)) or the pledgor, as the case may be, will be subject to automatic conversion upon these terms and conditions. In addition, each share of Class B common stock may be converted at any time into one share of Class A common stock at the option of the holder. The one-to-one conversion ratio will be equitably preserved in the event of any stock dividend, stock split or combination or merger, consolidation or other reorganization of MSLO with another corporation. PREFERRED STOCK Our certificate of incorporation authorizes 150,000,000 shares of preferred stock. Our Board of Directors has the authority to issue shares of preferred stock in one or more class or series and to fix, by resolution, the powers, designations, preferences, rights and qualifications, limitations and restrictions thereof, if any, including the number of shares in each series (which our Board of Directors may increase or decrease as permitted by Delaware law), liquidation preferences, dividend rates, conversion rights and redemption provisions of the shares constituting any class or series, without any further vote or action by the stockholders. Any shares of preferred stock so issued would have priority over the common stock with respect to dividend or liquidation rights or both. As of the time of this offering, we will have no shares of preferred stock outstanding. ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS Our certificate of incorporation and by-laws contain several provisions that could delay or make more difficult the acquisition of MSLO by means of a hostile tender offer, open market purchases, a proxy contest or otherwise. We also refer you to "Risk Factors--Martha Stewart will control our company." STOCKHOLDERS MEETINGS Subject to the rights of holders of preferred stock, of whom there are currently none, only our Chairman of the Board of Directors or a majority of our Board of Directors may call a special meeting of stockholders. REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATION AND PROPOSALS Our by-laws establish advance notice procedures with regard to stockholder proposals and the nomination, other than by or at the direction of our Board of Directors or a committee thereof, of candidates for election as directors. EFFECT OF DELAWARE ANTI-TAKEOVER STATUTE We are subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. Section 203 prevents certain Delaware corporations, including those with securities listed on the New York Stock Exchange, from engaging under certain circumstances in a business combination with any interested stockholder for three years following the date that the stockholder became an interested stockholder. For purposes of Section 203, a "business combination" includes, among other things, a merger or consolidation involving MSLO and the interested stockholder and a sale of more than 10% of our assets. In general, the anti-takeover law defines an "interested stockholder" as any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by that entity or person. A Delaware corporation may "opt out" of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from amendments approved by holders of at least a majority of a corporation's outstanding voting shares. We have not "opted out" of the provisions of Section 203. 73 77 ACTION BY WRITTEN CONSENT Under the Delaware General Corporation Law, unless the certificate of incorporation expressly prohibits action by the written consent of stockholders, any action required or permitted to be taken by our stockholders at a duly called annual or special meeting of stockholders may be taken by a consent in writing executed by stockholders possessing the requisite votes for the action to be taken. Our certificate of incorporation does not expressly prohibit action by the written consent of stockholders. As a result, Martha Stewart, as holder of % of our total voting power after this offering, will be able to take any action to be taken by stockholders without the necessity of holding a stockholder meeting. We intend, however, to hold annual meetings of stockholders. TRANSFER AGENT AND REGISTRAR The transfer agent for Class A common stock is . LISTING We expect our Class A common stock to trade on the New York Stock Exchange under the symbol " ." 74 78 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for either our Class A common stock or Class B common stock. Future sales of substantial amounts of our Class A common stock in the public market could adversely affect prevailing market prices. Upon the closing of this offering, we will have shares of Class A common stock outstanding, of which the shares offered hereby will be freely tradable, unless purchased by our affiliates (as defined in Rule 144 under the Securities Act of 1933). All other shares, including all shares of Class B common stock outstanding, will be "restricted shares" for purposes of the Securities Act of 1933 and subject to the volume and other limitations set forth in Rule 144. In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year (including the holding period of any prior owner, except an affiliate from whom these shares were purchased) is entitled to sell in "brokers' transactions" or to market makers, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of -- 1% of the then outstanding shares of Class A common stock ( shares immediately after this offering, without giving effect to the over-allotment option) or -- the average weekly trading volume of our common stock during the four calendar weeks preceding the required filing of a Form 144 with respect to this sale. Sales under Rule 144 are generally subject to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner other than an affiliate from whom these shares were purchased), is entitled to sell these shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Immediately after the offering, Martha Stewart and entities controlled by her will own shares of Class B common stock, Time Publishing Ventures will own shares of Class A common stock, and KPCB Holdings, Inc. will own shares of Class A common stock. We have granted to these entities the right to demand registration under the Securities Act of 1933 at our expense of all or a portion of the shares of Class A common stock they own prior to the offering (or into which Martha Stewart's shares of Class B common stock are convertible). See "Certain Relationships and Related Transactions--Registration Rights" for a fuller description of these registration rights. All of our existing stockholders have entered into lock-up agreements with the Representatives of the underwriters wherein they have agreed not to sell any of their shares within 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters. These agreements have certain exceptions, including the call by MSLO of Time Publishing Venture's shares. For more information, see "Underwriters." 75 79 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS The following is a general discussion of certain U.S. federal income and estate tax considerations with respect to the ownership and disposition of Class A common stock applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is any holder other than (1) a citizen or resident of the United States; (2) a corporation created or organized in the United States or under the laws of the United States or of any state; (3) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or (4) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and (b) one or more U.S. persons have the authority to control all substantial decisions of the trust. This discussion is based on current provisions of the Internal Revenue Code, Treasury Regulations promulgated thereunder, judicial opinions, published positions of the Internal Revenue Service, and all other applicable authorities, all of which are subject to change (possibly with retroactive effect). This discussion does not address all aspects of income and estate taxation or any aspects of state, local, or non-U.S. taxes, nor does it consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder that may be subject to special treatment under the U.S. federal income tax laws (such as insurance companies, tax-exempt organizations, financial institutions, brokers, dealers in securities, and certain U.S. expatriates). Accordingly, prospective investors are urged to consult their tax advisors regarding the U.S. federal, state, local and non-U.S. income and other tax considerations of acquiring, holding and disposing of shares of common stock. Holders of Class B common stock are urged to consult such holders' own tax advisors. DIVIDENDS In general, dividends paid to a Non-U.S. Holder will be subject to U.S. withholding tax at a 30% rate of the gross amount (or a lower rate prescribed by an applicable income tax treaty) unless the dividends are effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States. Dividends effectively connected with such a U.S. trade or business generally will not be subject to U.S. withholding tax if the Non-U.S. Holder files certain forms, including Internal Revenue Service Form 4224 (or any successor form), with the payor of the dividend, and generally will be subject to U.S. federal income tax on a net income basis, in the same manner as if the Non-U.S. Holder were a resident of the United States. A Non-U.S. Holder that is a corporation may be subject to an additional branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on the repatriation from the United States of its "effectively connected earnings and profits," subject to certain adjustments. To determine the applicability of a tax treaty providing for a lower rate of withholding under the currently effective Treasury Regulations (the "Current Regulations") and published Internal Revenue Service positions, dividends paid to an address in a foreign country are presumed to be paid to a resident of that country absent knowledge to the contrary. Under Treasury Regulations issued on October 6, 1997 (the "Final Regulations"), and generally effective for payments made after December 31, 2000, however, a Non-U.S. Holder (including, in certain cases of Non-U.S. Holders that are entities, the owner or owners of such entities) will be required to satisfy certain certification requirements in order to claim a reduced rate of withholding pursuant to an applicable income tax treaty. GAIN OR SALE OR OTHER DISPOSITION OF COMMON STOCK In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of the holder's shares of Class A common stock unless (1) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States (in which case the branch profits tax discussed above may also apply if the Non-U.S. Holder is a corporation); (2) the Non-U.S. Holder is an individual who holds shares of Class A common stock as a capital asset and is present in the United States for 183 days or more in the taxable year of disposition and certain other tests are met; (3) the Non-U.S. Holder is subject to tax pursuant to the provisions of the Internal Revenue Code regarding the taxation of U.S. expatriates; or (4) MSLO is or has been a U.S. real property holding corporation (a "USRPHC") for U.S. federal income tax purposes (which MSLO does not believe that it has been, currently 76 80 is, or will become) at any time within the shorter of the five-year period preceding such disposition and such Non-U.S. Holder's holding period. If MSLO were or were to become a USRPHC at any time during this period, gains realized upon a disposition of Class A common stock by a Non-U.S. Holder that did not directly or indirectly own more than 5% of the Class A common stock during this period generally would not be subject to U.S. federal income tax, provided that Class A common stock is "regularly traded on an established securities market (within the meaning of Section 897(c)(3) of the Code)." ESTATE TAX Class A common stock owned or treated as owned by an individual who is not a citizen or resident (as defined for U.S. federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provided otherwise, and therefore may be subject to U.S. federal estate tax. BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS MSLO must report annually to the Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of this information also may be made available under the provisions of a specific treaty or agreement with the tax authorities in the country in which the Non-U.S Holder resides or is established. Under the Current Regulations, U.S backup withholding tax (which generally is imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the U.S. information reporting requirements) and information reporting requirements (other than those discussed in the previous paragraph) generally will not apply to dividends paid on Class A common stock to a Non-U.S. Holder at an address outside the United States. Backup withholding and information reporting generally will apply, however, to dividends paid on shares of Class A common stock to a Non-U.S. Holder at an address in the United States if the holder fails to establish an exemption or to provide certain other information to the payor. Under the Current Regulations, the payment of proceeds from the disposition of Class A common stock to or through a U.S. office of a broker will be subject to information reporting and backup withholding, unless the beneficial owner, under penalties of perjury, certifies, among other things, its status as a Non-U.S. Holder or otherwise establishes an exemption. The payment of proceeds from the disposition of Class A common stock to or through a Non-U.S. office of a broker generally will not be subject to backup withholding and information reporting, except as noted below. In the case of proceeds from a disposition of Class A common stock paid to or though a non-U.S. office of a broker that is (1) a U.S. person; (2) a "controlled foreign corporation" for U.S. federal income tax purposes; or (3) a foreign person 50% or more of whose gross income from certain periods is effectively connected with a U.S. trade or business, information reporting (but not backup withholding) will apply unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and certain other conditions are satisfied, or the beneficial owner otherwise establishes an exemption (and the broker has no actual knowledge to the contrary). Under the Final Regulations, generally effective for payments made after December 31, 2000, the payment of dividends or the payment of proceeds from the disposition of our Class A common stock to a Non-U.S. Holder may be subject to information reporting and backup withholding unless the recipient satisfies the certification requirements of the Final Regulations or otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder can be refunded or credited against the Non-U.S. Holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service in a timely manner. The foregoing discussion of certain U.S. federal income tax considerations is for general information only and is not tax advice. Accordingly, each prospective Non-U.S. Holder of Class A common stock should consult that holder's own tax adviser with respect to the federal, state, local and foreign tax consequences of the acquisition, ownership and disposition of common stock. 77 81 UNDERWRITERS Under the terms and subject to the conditions contained in the underwriting agreement, dated the date of this prospectus, the U.S. underwriters named below, for which Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Banc of America Securities LLC are acting as U.S. representatives, and the international underwriters named below for whom Morgan Stanley & Co. International Limited, Merrill Lynch International, Bear, Stearns International Limited, Donaldson, Lufkin & Jenrette International and Banc of America International Limited are acting as international representatives, have severally agreed to purchase, and we have agreed to sell to them, the respective number of shares of Class A common stock set forth opposite the names of these underwriters below:
NUMBER OF NAME SHARES - - - ---- --------- U.S. Underwriters: Morgan Stanley & Co. Incorporated......................... Merrill Lynch, Pierce, Fenner & Smith Incorporated................................ Bear, Stearns & Co. Inc................................... Donaldson, Lufkin & Jenrette Securities Corporation....... Banc of America Securities LLC............................ ------- Subtotal............................................. ------- International Underwriters: Morgan Stanley & Co. International Limited................ Merrill Lynch International............................... Bear, Stearns International Limited....................... Donaldson, Lufkin & Jenrette International................ Banc of America International Limited..................... ------- Subtotal............................................. ------- Total............................................. =======
The U.S. underwriters and the international underwriters, and the U.S. representatives and the international representatives, are collectively referred to as the underwriters and the representatives, respectively. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of Class A common stock offered hereby are subject to the approval of certain legal matters by their counsel and to other conditions. The underwriters are obligated to take and pay for all of the shares of Class A common stock offered hereby, except those shares covered by the U.S. underwriters' over-allotment option described below, if any shares are taken. In the agreement between the U.S. and international underwriters, each U.S. underwriter has represented and agreed that, with certain exceptions: -- it is not purchasing any shares for the account of anyone other than a U.S. or Canadian person -- it has not offered or sold, and will not offer or sell, directly or indirectly, any shares or distribute any prospectus relating to the shares outside the United States or Canada or to anyone other than a U.S. or Canadian person 78 82 In the agreement between the U.S. and international underwriters, each international underwriter has represented and agreed that, with certain exceptions: -- it is not purchasing any shares for the account of any U.S. or Canadian person -- it has not offered or sold, and will not offer or sell, directly or indirectly, any shares or distribute any prospectus relating to the shares in the United States or Canada or to any U.S. or Canadian person For any underwriter that is both a U.S. underwriter and an international underwriter, these representations and agreements made by it in its capacity as a U.S. underwriter apply only to it in its capacity as a U.S. underwriter and made by it in its capacity as an international underwriter apply only to it in its capacity as an international underwriter. The limitations described above do not apply to stabilization transactions or to other transactions specified in the agreement between U.S. and international underwriters. As used in this prospectus, U.S. or Canadian person means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof, other than a branch located outside the United States and Canada or any U.S. or Canadian person. U.S. or Canadian person includes any U.S. or Canadian branch of a person that is otherwise not a U.S. or Canadian person. All shares of common stock to be purchased by the underwriters under the underwriting agreement are referred to as shares. In the agreement between the U.S. and international underwriters, sales of shares may be made between the U.S. underwriters and international underwriters. The price of any shares so sold will be the public offering price set forth on the cover page of this prospectus, in U.S. dollars, less an amount not greater than $ a share. In the agreement between the U.S. and international underwriters, each U.S. underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws of Canada. Each U.S. underwriter has represented that any offer or sale of shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which the offer or sale is made. Each U.S. underwriter has further agreed to send to any dealer who purchases from it any of the shares a notice stating in substance that, by purchasing the shares, the dealer agrees that any offer or sale of shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which the offer or sale is made. Each dealer will deliver to any other dealer to whom it sells any of the shares a notice containing substantially the same Canadian selling restrictions. In the agreement between the U.S. and international underwriters, each international underwriter has represented and agreed that: -- it has not offered or sold and, prior to the date six months after the closing date for the sale of the shares to the international underwriters, will not offer or sell, any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the public offers of Securities Regulations 1995 -- it has complied and will comply with all applicable provisions of the Financial Services Act 1986 -- it has and will distribute any document relating to the shares in the United Kingdom only to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom such document may otherwise lawfully be distributed In the agreement between the U.S. and international underwriters, each international underwriter has further represented that it has not offered or sold, and has agreed not to offer or sell in Japan or to or for the account of any resident of Japan, any of the shares. This limitation does not apply to Japanese international underwriters or dealers and offers or sales pursuant to any exemption form the registration requirements of the 79 83 Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each international underwriter has further agreed to send to any dealer who purchases form it any of the shares a notice stating that, by purchasing the shares, the dealer agrees that any offer or sale of the shares in Japan will be made only to Japanese international underwriters or dealers or under an exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each dealer will send to any other dealer to whom it sells any of the shares a notice containing substantially the same Japanese selling restrictions. The underwriters initially propose to offer a portion of the shares of Class A common stock directly to the public at the public offering price set forth on the cover page of this prospectus and a portion to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. Any underwriter may allow, and these dealers may reallow, a concession not in excess of $ per share to other underwriters or to certain other dealers. After the initial offering of the shares of Class A common stock, the offering price and other selling terms may from time to time be varied by the representatives. We have granted to the U.S. underwriters an option, exercisable for 30 days from the date of this prospectus to purchase up to an aggregate of additional shares at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The U.S. underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares offered pursuant to this prospectus. To the extent this option is exercised, each U.S. underwriter will become obligated, subject to specified conditions, to purchase about the same percentage of additional shares as the number set forth next to the U.S. underwriter's name in the preceding table bears to the total number of shares set forth next to the names of all U.S. underwriters in the preceding table. If the U.S. underwriters' option is exercised in full, the total price to the public for this offering would be $ , the total underwriters' discounts and commissions would be $ . The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of Class A common stock offered by them. At our request, the underwriters have reserved up to shares of Class A common stock offered hereby for sale at the initial public offering price to certain of our employees and to certain other persons. The number of shares available for sale to the general public will be reduced to the extent that these persons purchase these reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares of our Class A common stock offered hereby. We expect the Class A common stock to be approved for listing on the New York Stock Exchange under the symbol " ." The underwriters intend to sell shares to a minimum of beneficial owners in lots of or more so as to meet the distribution requirements of this listing. Each of MSLO and our directors, executive officers and current stockholders has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not, during the period ending 180 days after the date of this prospectus: -- offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock -- enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock, whether any of these transactions described above is to be settled by delivery of common stock or any other securities, in cash or otherwise or 80 84 -- file a registration statement (in the case of MSLO) other than a registration statement on Form S-8 covering shares of common stock subject to outstanding options or options to be issued under our stock option plans The restrictions described in the preceding list do not apply to certain circumstances, including: -- the sale of the shares of Class A common stock to the underwriters -- the issuance by us of restricted stock awards under our existing employee benefit plans or of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus -- the completion of MSLO's call of Time Publishing Ventures' equity interest pursuant to the LLC operating agreement -- the exchange of shares of Class B common stock for shares of Class A common stock pursuant to our certificate of incorporation -- the grant of options to officers, directors, employees or consultants, provided that these options are not generally exercisable prior to the end of the lock-up period or -- the sale or other transfer of any shares of common stock by certain of the foregoing persons to any associate (as this term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) if this person agrees to be bound by the foregoing provisions In addition, our stockholders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, neither they nor any of their affiliates will, during the period ending 180 days after the date of this prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock. In order to facilitate our offering of Class A common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in Class A common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Class A common stock, the underwriters may bid for, and purchase, shares of Class A common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing Class A common stock in the offering, if the syndicate repurchases previously distributed Class A common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of Class A common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. Certain of the underwriters engage in transactions with, and perform services for, our company in the ordinary course of business and have engaged and may in the future engage in commercial banking and investment banking transactions with us, for which they receive customary compensation. In addition, Bank of America, the parent of Banc of America Securities LLC, one of the underwriters, is a lender under our credit facility. We have agreed with the underwriters to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. PRICING OF THIS OFFERING Prior to this offering, there has been no public market for the Class A common stock. We will determine the initial public offering price by negotiations between the U.S. representatives and us. Among the numerous factors we and the U.S. representatives will consider in determining the initial public offering price are our future prospects and our industry in general, our sales, earnings and certain other financial and operating 81 85 information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. LEGAL MATTERS Certain legal matters will be passed upon for us by Wachtell, Lipton, Rosen & Katz, New York, New York and for the underwriters by Davis Polk & Wardwell, New York, New York. Each of these firms has in the past represented and continues to represent certain of the underwriters and MSLO on a regular basis and in a variety of matters other than this offering. EXPERTS The audited financial statements and schedule of Martha Stewart Living Omnimedia LLC included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. Ernst & Young LLP, independent auditors, have audited the combined financial statements of Martha Stewart Living (a wholly owned operation of Time Inc.) at December 31, 1996 and for the year then ended, as set forth in their report. We have included the combined financial statements of Martha Stewart Living in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, a registration statement on Form S-1 under the Securities Act of 1933 with respect to the Class A common stock offered in this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to that registration statement. For further information with respect to us and the Class A common stock, we refer you to this registration statement and its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of that contract or document filed as an exhibit to the registration statement, each of these statements being qualified in all respects by that reference. The registration statement, including exhibits thereto, may be inspected and copied at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of these materials may be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC also maintains a world wide web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants such as us which file electronically with the SEC. The registration statement, including all exhibits thereto and amendments thereof, is available on that website. Upon completion of this offering, we will be subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, will file reports, proxy and information statements with the SEC. You may inspect and copy these reports, proxy and information statements and other information at the addresses set forth above. We intend to furnish to our stockholders our annual reports containing consolidated financial statements audited by our independent auditors and quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year. 82 86 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- MARTHA STEWART LIVING OMNIMEDIA LLC Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited).................... F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 (unaudited)....... F-4 Consolidated Statements of Members' Equity for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1999 (unaudited).......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 (unaudited)....... F-6 Notes to Consolidated Financial Statements................ F-7 MARTHA STEWART LIVING Report of Independent Public Auditors....................... F-15 Combined Balance Sheet as of December 31, 1996............ F-16 Combined Statement of Operations and Accumulated Deficit for the year ended December 31, 1996................... F-17 Combined Statement of Cash Flows for the year ended December 31, 1996...................................... F-18 Notes to Combined Financial Statements.................... F-19
F-1 87 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of Martha Stewart Living Omnimedia LLC: We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia LLC (a Delaware limited liability company) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, members' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements 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 generally accepted auditing standards. 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 LLC and subsidiary as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York February 15, 1999 F-2 88 MARTHA STEWART LIVING OMNIMEDIA LLC CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED) (000'S OMITTED)
DECEMBER 31, -------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents............................... $ 9,971 $ 24,578 $ 17,363 Accounts receivable, net................................ 17,947 25,260 29,738 Inventories............................................. 3,427 6,522 8,088 Deferred television production costs.................... 3,805 3,038 2,216 Other current assets.................................... 606 275 1,003 -------- -------- -------- Total current assets............................ 35,756 59,673 58,408 -------- -------- -------- PROPERTY, PLANT AND EQUIPMENT, net........................ 13,852 11,468 11,380 -------- -------- -------- INTANGIBLE ASSETS, net.................................... 55,183 53,108 52,370 -------- -------- -------- OTHER NONCURRENT ASSETS................................... 915 1,123 1,309 -------- -------- -------- Total assets.................................... $105,706 $125,372 $123,467 ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities................ $ 16,650 $ 21,242 $ 24,471 Accrued payroll and related costs....................... 2,056 4,056 3,773 Accrued interest payable................................ 2,581 1,581 -- Current maturities of long term debt.................... -- -- 3,000 Current portion of deferred subscription income......... 23,444 26,756 28,138 -------- -------- -------- Total current liabilities....................... 44,731 53,635 59,382 -------- -------- -------- DEFERRED ROYALTY INCOME................................... 13,203 1,782 2,878 -------- -------- -------- DEFERRED SUBSCRIPTION INCOME.............................. 4,137 4,722 4,965 -------- -------- -------- LONG TERM DEBT, less current maturities................... 30,000 27,650 12,000 -------- -------- -------- OTHER NONCURRENT LIABILITIES.............................. 400 768 808 -------- -------- -------- COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY........................................... 13,235 36,815 43,434 -------- -------- -------- Total liabilities and members' equity........... $105,706 $125,372 $123,467 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 89 MARTHA STEWART LIVING OMNIMEDIA LLC CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED) (000'S OMITTED)
FOR THE THREE FOR THE YEARS MONTHS ENDED ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------ 1996 1997 1998 1998 1999 ------ -------- -------- ------- ------- (UNAUDITED) Revenues Publishing............................ $3,899 $108,694 $127,020 $32,509 $35,536 Television............................ -- 12,396 23,351 5,387 6,609 Merchandising......................... -- 6,919 15,004 3,056 5,679 Internet/Direct Commerce.............. -- 4,812 14,673 1,348 5,555 ------ -------- -------- ------- ------- Total revenues................ 3,899 132,821 180,048 42,300 53,379 ------ -------- -------- ------- ------- Operating costs and expenses Production, distribution and editorial.......................... -- 59,148 82,930 18,052 26,312 Selling and promotion................. -- 31,973 34,540 8,774 9,856 General and administrative............ 99 21,182 29,659 7,396 8,449 Depreciation and amortization......... -- 3,927 5,534 1,126 1,342 ------ -------- -------- ------- ------- Total operating costs and expenses.................... 99 116,230 152,663 35,348 45,959 ------ -------- -------- ------- ------- Income from operations.................. 3,800 16,591 27,385 6,952 7,420 ------ -------- -------- ------- ------- Other expenses Interest expense, net................. 165 2,195 2,243 607 457 Income tax provision.................. -- 467 1,336 328 344 ------ -------- -------- ------- ------- Total other expenses.......... 165 2,662 3,579 935 801 ------ -------- -------- ------- ------- Net income.............................. $3,635 $ 13,929 $ 23,806 $ 6,017 $ 6,619 ====== ======== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 90 MARTHA STEWART LIVING OMNIMEDIA LLC CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) (000'S OMITTED) BALANCE, January 1, 1996.................................... $ (436) Net income................................................ 3,635 Capital distributions, net................................ (2,610) -------- BALANCE, December 31, 1996.................................. 589 Net income................................................ 13,929 Issuance of equity interest............................... 20,508 Capital distributions..................................... (21,791) -------- BALANCE, December 31, 1997.................................. 13,235 Net income................................................ 23,806 Capital distributions..................................... (226) -------- BALANCE, December 31, 1998.................................. 36,815 Net income................................................ 6,619 -------- BALANCE, March 31, 1999 (unaudited)......................... $ 43,434 ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 91 MARTHA STEWART LIVING OMNIMEDIA LLC CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED) (000'S OMITTED)
FOR THE THREE FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------- 1996 1997 1998 1998 1999 ------ ------- ------- ------- -------- (UNAUDITED) Cash flows from operating activities Net income............................. $3,635 $13,929 $23,806 $ 6,017 $ 6,619 ------ ------- ------- ------- -------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization....... -- 3,927 5,534 1,455 1,342 Changes in operating assets and liabilities, net of assets acquired-- Accounts receivable, net.......... (1,192) 341 (7,314) (2,725) (4,478) Inventories....................... -- (1,077) (3,561) (196) (2,216) Other current assets.............. -- 4,983 333 679 (728) Deferred television production costs.......................... -- -- 767 1,082 822 Other noncurrent assets........... (18) (838) (209) (129) (184) Accounts payable and accrued liabilities.................... 164 12,075 4,942 (3,683) 2,014 Deferred royalty income........... 99 12,454 (11,420) (2,808) 1,096 Deferred subscription income...... -- (1,621) 4,278 3,600 1,625 Other noncurrent liabilities...... -- 400 368 -- 40 ------ ------- ------- ------- -------- (947) 30,644 (6,282) (2,725) (667) ------ ------- ------- ------- -------- Net cash provided by operating activities................... 2,688 44,573 17,524 3,292 5,952 ------ ------- ------- ------- -------- Cash flows from investing activities Purchase of business-- Working capital, other than cash....... -- (19,645) -- -- -- Property, plant and equipment, net............................... -- (3,847) -- -- -- Cost in excess of tangible assets of acquired company.................. -- (58,087) -- -- -- Note payable to Seller.............. -- 30,000 -- -- -- Issuance of equity interest......... -- 20,508 -- -- -- Other noncurrent liabilities........ -- 29,202 -- -- -- Capital expenditures................... -- (11,027) (2,730) (1,572) (517) Proceeds from sale leaseback transaction......................... -- -- 2,389 -- -- ------ ------- ------- ------- -------- Net cash used in investing activities................... -- (12,896) (341) (1,572) (517) ------ ------- ------- ------- -------- Cash flows from financing activities Principal repayment of long term debt................................ -- -- (2,350) -- (27,650) Long term debt borrowings.............. -- -- -- -- 15,000 Distributions to members............... (2,610) (21,791) (226) -- -- ------ ------- ------- ------- -------- Net cash used in financing activities................... (2,610) (21,791) (2,576) -- (12,650) ------ ------- ------- ------- -------- Net increase (decrease) in cash......................... 78 9,886 14,607 1,720 (7,215) Cash and cash equivalents, beginning of period................................. 7 85 9,971 9,971 24,578 ------ ------- ------- ------- -------- Cash and cash equivalents, end of period................................. $ 85 $ 9,971 $24,578 $11,691 $ 17,363 ====== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 92 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE DATA) 1. THE COMPANY Martha Stewart Living Omnimedia LLC (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 98% 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 the CBS This Morning program. The Merchandising segment consists 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. The Company was formed in 1996, through the combination of various interests controlled by Martha Stewart. This transaction has been 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. ("Time Publishing Ventures") and purchased Martha Stewart Living magazine as well as the rights to any Martha Stewart publications (and any publishing, marketing, or distributing functions that may result), television programs related to Martha Stewart and Martha by Mail and related liabilities for approximately $53,276, including related acquisition costs (the "MSL acquisition"). Time Publishing Ventures received an equity interest in MSLO and was owed a promissory note for $30,000. 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. 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 on hand and in bank, as well as all short term securities held for the primary purpose of general liquidity. Such securities mature within three months from the date of acquisition. 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. F-7 93 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) 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. 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: Studios and studio equipment................... 3-10 years Furniture, fixtures and equipment.............. 3-5 years Leasehold improvements......................... Life of lease
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. INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements of the Company are unaudited but in the opinion of management reflect all adjustments consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim period. F-8 94 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) 3. ACCOUNTS RECEIVABLE The components of accounts receivable are as follows:
DECEMBER 31, ------------------ 1997 1998 ------- ------- Advertising.............................................. $15,975 $23,123 Newsstand................................................ 715 1,698 Licensing................................................ 157 2,585 Other.................................................... 3,657 3,859 ------- ------- 20,504 31,265 Less: reserve for credits and uncollectible accounts..... 2,557 6,005 ------- ------- $17,947 $25,260 ======= =======
4. INVENTORIES The components of inventories are as follows:
DECEMBER 31, ----------------- 1997 1998 ------ ------ Paper.................................................... $3,061 $4,621 Catalog products......................................... 366 1,901 ------ ------ $3,427 $6,522 ====== ======
5. PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment are as follows:
DECEMBER 31, ------------------ 1997 1998 ------- ------- Studios and equipment.................................... $ 6,383 $ 6,971 Furniture, fixtures and equipment........................ 5,276 4,691 Leasehold improvements................................... 3,212 3,362 ------- ------- 14,871 15,024 Less: accumulated depreciation and amortization.......... 1,019 3,556 ------- ------- $13,852 $11,468 ======= =======
Depreciation expense was $0, $1,019, and $2,537 for the years ended December 31, 1996, 1997 and 1998, respectively. 6. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS Martha Stewart Inc., a wholly-owned subsidiary, sponsored a defined benefit pension plan which was frozen in 1995. As of December 31, 1997 and 1998, the accumulated benefit obligation was $723 and $781, respectively, and the fair value of the plan assets was $1,369 and $1,887, respectively. The actuarial valuation F-9 95 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) utilized a 7.5% discount rate for 1997 and 1998. A prepaid pension asset of $54 and $179 is included in other noncurrent assets as of December 31, 1997 and 1998, respectively. 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 ($9.5 and $10 in 1997 and 1998, respectively), whichever is less. In 1997, the Company matched 100% of the first 6% of compensation contributed, and, subsequent to 1997, the Company matched 50% 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 $207 and $259 for the years ended December 31, 1997 and 1998, respectively. The Company does not sponsor any postretirement and/or postemployment benefits. EQUITY COMPENSATION PLANS Effective November 12, 1997, the Company established two equity-based compensation plans, the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (the "1997 Option Plan") and the Phantom Performance Unit Plan (the "Phantom Plan"). The Company accounts for these 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 LLC units granted to employees. The 1997 Option Plan provides for the grant of options to acquire LLC units (or following an initial public offering ("IPO"), shares of common stock) to officers, directors and key employees of, and consultants to, the Company. Pursuant to the 1997 Option Plan, the Company granted options to purchase 539,564 units (approximately 5% of the LLC's equity) (477,811 to employees and 61,753 to outside consultants), with an exercise price of $2.35 per unit. At December 31, 1997 and 1998, none of the options were exercisable. At December 31, 1998, 509,841 options were outstanding. For options granted to outside consultants, the Company, as prescribed by APB Opinion No. 25, has recognized expense of $37 for the year ended December 31, 1997. No expense is required to be recognized in any subsequent year. Had compensation cost for the options granted to employees been determined consistent with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation," the effect on the Company's net income would have been immaterial in 1997 and 1998 ($6 and $53, respectively). The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1997: risk-free interest rate of 5.78%, expected lives of 5 years, expected dividend rate of zero, discount rate of 15% and expected volatility of zero. The weighted average fair value of options granted in 1997 was $0.58 per option. The Phantom Plan provides for the grant of performance units to all employees of the Company with at least one year of service, other than officers. On January 1, 1998, the Company granted 10,000 performance units to certain officers and employees who qualified under the terms of the Phantom Plan. These performance units vest at the earlier of the completion of an IPO or December 31, 2002. The value of a plan participant's units will be determined based on achieving predetermined growth targets in Earnings Before Interest, Taxes and Amortization (EBITA) at the earlier of the IPO or December 31, 2002. If an IPO occurs, the number of shares of Company stock a participant receives is determined by the number of units received upon award, multiplied by the value of each unit at the date of the IPO, divided by the fair market value of a share of the Company's common stock on the date of the IPO. Alternatively, if an IPO does not occur within the five-year term of this plan, units will be settled in cash as of December 31, 2002. The Company has recognized compensation expense of $125 for the year ended December 31, 1998 in connection with the Phantom Plan. F-10 96 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) 7. INCOME TAXES Except with respect to the income of Martha Stewart, Inc., no provision has been made in the accompanying consolidated financial statements for federal income taxes since, pursuant to provisions of the Internal Revenue Code, the results of operations are reportable by the members on their individual tax returns. However, the Company is subject to certain foreign, state and city income taxes. The provision for income taxes consists of the following for the years ended December 31, 1997 and 1998:
1997 1998 ---- ------ Current state and foreign income taxes...................... $ 75 $1,069 Deferred federal income taxes............................... (65) -- Deferred state income taxes................................. 457 267 ---- ------ $467 $1,336 ==== ======
8. RELATED PARTY TRANSACTIONS During 1997, the Company entered into a services agreement with Time Inc. ("Time"), an affiliate of Time Publishing Ventures, 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 $16,340 and $26,595 in 1997 and 1998, respectively, including $15,265 and $26,010 of paper purchases. The Company also entered into an agreement with Time Customer Services, Inc. ("TCS"), an affiliate of Time Publishing Ventures, whereby TCS provides fulfillment services for Martha by Mail products and the Company's magazine. The fees for these services amounted to approximately $9,960 and $11,264 in 1997 and 1998, respectively. The Company also entered into an agreement with Time Distribution Services Inc. ("TDS"), an affiliate of Time Publishing Ventures, whereby TDS provides newsstand distribution services for the Company's magazine. The fees for these services amounted to approximately $1,262 and $1,384 in 1997 and 1998, respectively. The aggregate amounts due to Time, TDS and TCS, included in accounts payable and accrued liabilities, were $4,340 and $5,431 as of December 31, 1997 and 1998, respectively. Oxmoor House Inc. ("Oxmoor House"), a subsidiary of Southern Progress Corporation, which is a wholly owned subsidiary of Time Publishing Ventures, currently publishes all of the Martha Stewart Living series of books. Prior to February 3, 1997, Martha Stewart received royalty payments directly from Oxmoor House based on a percentage of cash receipts. As of February 3, 1997, the Company entered into a contract directly with Oxmoor House whereby the Company and Oxmoor House split net profits, as defined in the contract. Income recognized under these agreements was approximately $958, $2,567 and $1,995, in 1996, 1997 and 1998, respectively. 9. NOTE PAYABLE AND LINE OF CREDIT The Company had a note payable (since repaid -- see Note 13) aggregating $27,650 to Time Publishing Ventures at December 31, 1998. The note was due on February 3, 2001 and bore interest at the current prime rate (7.75% at December 31, 1998, 8.5% at December 31, 1997) plus 1%. Interest was payable semiannually on the last business day of each June and December beginning June 1998. Interest for the period from February 3, 1997 through February 2, 1998, however, accrued unpaid and compounded on a semiannual basis F-11 97 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) until August 3, 1998 when one half of the accrued amount was payable and February 3, 1999 when the remaining balance was due in full. The note was secured by certain of the Company's insurance policies, and all accounts receivable, equipment and inventory. As of December 31, 1997 and 1998, accrued interest on this note was approximately $2,581 and $1,581, respectively. The terms of the note required maintenance of certain nonfinancial covenants. The Company has an agreement with Bank of America, N.A., formerly known as NationsBank, 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. This agreement also contains certain financial and nonfinancial covenants, including the maintenance of a minimum debt service coverage ratio and a quick ratio, and a limitation on capital expenditures and investments. The Company was in compliance with all such covenants as of December 31, 1998. As of December 31, 1997 and 1998, the Company did not have any amounts outstanding under this agreement. 10. 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 $0, $3,000 and $4,100 for the years ended December 31, 1996, 1997 and 1998, respectively. Future minimum lease payments under these noncancellable operating leases at December 31, 1998 are as follows: 1999............................................. $ 4,252 2000............................................. 3,453 2001............................................. 2,973 2002............................................. 2,479 2003............................................. 1,778 Thereafter....................................... 10,411 ------- $25,346 =======
Certain of the leases provide for free rent periods as well as rent escalations. The rental commitments above represent actual rental payments to be made. The consolidated financial statements reflect rent expense on a straight-line basis over the terms of the leases. An obligation, of $400 and $743, representing accrued pro rata future payments, is included in the accompanying consolidated balance sheets as of December 31, 1997 and 1998, respectively. The Company has an outstanding letter of credit for $473 as security for certain leases. In 1998, the Company entered into an agreement for the sale and leaseback of certain television studio equipment. The book value of the equipment aggregating $2,389 has been removed from the consolidated balance sheet. No gain or loss was realized on the sale transaction, as the assets were sold at net book value. Rentals on this equipment will be $513 annually. 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. F-12 98 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) 11. 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 $2,904 and $5,901 at December 31, 1997 and 1998, respectively. Amortization expense was $0, $2,904 and $2,997 for the years ended December 31, 1996, 1997 and 1998, respectively. Advertising expense for the years ended December 31, 1996, 1997 and 1998 was $0, $10,440 and $11,654, respectively. Interest paid was $0, $0, $3,962, $0 and $2,197 for the years ended December 31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999, respectively. Income taxes paid were $0, $458, $502, $148 and $354 for the years ended December 31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999, respectively. 12. INDUSTRY SEGMENTS Segment information for the years ended December 31, 1998, 1997 and 1996 was as follows:
INTERNET/DIRECT CORPORATE PUBLISHING TELEVISION MERCHANDISING COMMERCE CHARGES CONSOLIDATED ---------- ---------- ------------- --------------- --------- ------------ 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............... 43,903 16,021 2,309 8,223 54,916 125,372 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............... 35,290 8,413 1,175 3,849 56,979 105,706 Capital expenditures....... -- 8,530 -- -- 2,497 11,027 1996 Revenues................... 3,899 -- -- -- -- 3,899 Income from operations..... 3,800 -- -- -- -- 3,800 Total assets............... 4,074 -- -- -- -- 4,074
13. SUBSEQUENT EVENTS (UNAUDITED) 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 loan bears interest at 2% above the London Interbank Offered Rate (LIBOR) and principal of $750 plus interest is payable quarterly through March 2004. The agreement contains certain financial and nonfinancial covenants, including the maintenance of minimum debt service ratio, a quick ratio, and a limitation on capital expenditures and investments. The F-13 99 MARTHA STEWART LIVING OMNIMEDIA LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) covenants in the existing line of credit agreement were amended to conform to the terms of the loan agreement. 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. On July 27, 1999, Kleiner Perkins, 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 case of a business combination relating to 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. noted above. F-14 100 REPORT OF INDEPENDENT AUDITORS The Board of Directors of Time Inc. We have audited the accompanying combined balance sheet of Martha Stewart Living (a wholly owned operation of Time Inc.) as of December 31, 1996 and the related combined statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Martha Stewart Living as of December 31, 1996 and the combined results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New York, New York August 1, 1997 F-15 101 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) COMBINED BALANCE SHEET DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) ASSETS Current assets: Accounts receivable, net.................................. $ 13,532 Paper inventory........................................... 2,350 Television production costs, net.......................... 4,335 Prepaid commission expense................................ 2,999 Other current assets...................................... 1,348 -------- Total current assets.............................. 24,564 Fixed assets, net........................................... 3,847 Noncurrent television production costs, net................. 522 Other assets................................................ 306 -------- Total assets...................................... $ 29,239 ======== LIABILITIES AND ACCUMULATED DEFICIT Current liabilities: Accounts payable and accrued expenses..................... $ 4,339 Payable to Parent, net.................................... 6,013 Accrued compensation and benefits......................... 1,206 -------- Total current liabilities......................... 11,558 Unearned subscription revenues, net......................... 29,972 Due to affiliated party, net................................ 78 Other liabilities........................................... 1,143 -------- Total liabilities................................. 42,751 Accumulated deficit......................................... (13,512) -------- Total liabilities and accumulated deficit......... $ 29,239 ========
See accompanying notes to combined financial statements. F-16 102 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) COMBINED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) Net revenues: Circulation............................................... $ 34,130 Advertising............................................... 33,858 Television................................................ 8,420 Royalties................................................. 1,308 Direct mail............................................... 3,292 -------- 81,008 -------- Costs and expenses: Production and distribution............................... 20,696 Editorial................................................. 7,638 Circulation............................................... 18,403 Advertising............................................... 6,081 Television................................................ 8,035 Direct mail............................................... 4,241 General and administrative................................ 8,180 -------- 73,274 -------- Operating income............................................ 7,734 Other income, net........................................... 951 -------- Net income.................................................. 8,685 Accumulated deficit at beginning of year.................... (22,197) -------- Accumulated deficit at end of year.......................... $(13,512) ========
See accompanying notes to combined financial statements. F-17 103 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) COMBINED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 8,685 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 467 Changes in operating assets and liabilities: Increase in accounts receivable, net................... (4,344) Increase in paper inventory............................ (1,161) Increase in television production costs, net........... (778) Increase in prepaid commission expense................. (2,869) Decrease in due from affiliated party, net............. 1,063 Increase in other assets............................... (562) Decrease in accounts payable and accrued expenses...... (2,195) Increase in accrued compensation and benefits.......... 431 Increase in unearned subscription revenues, net........ 11,733 Increase in due to affiliated party, net............... 78 Increase in other liabilities.......................... 372 ------- Net cash provided by operating activities................... 10,920 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets.................................... (1,714) Disposal of fixed assets.................................... 85 ------- Net cash used in investing activities....................... (1,629) CASH FLOWS FROM FINANCING ACTIVITIES Payable to Parent, net...................................... (9,291) ------- Net cash used in financing activities....................... (9,291) ------- Net change in cash.......................................... -- Cash at beginning of year................................... -- ------- Cash at end of year......................................... $ -- =======
See accompanying notes to combined financial statements. F-18 104 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) A. BASIS OF PRESENTATION AND NATURE OF OPERATIONS The combined financial statements of Martha Stewart Living (the "Combined Operations") include the operations of Martha Stewart Living ("MSL"), various television production entities as they relate to MSL and Martha by Mail, Inc. MSL was formed in 1991 and is a division of Time Publishing Ventures, Inc. ("Time Publishing Ventures"). Martha by Mail, Inc., a wholly-owned subsidiary of Time Publishing Ventures, was formed in 1995. Time Publishing Ventures is a wholly-owned subsidiary of Time Inc. Ventures ("TIV"), which is a wholly-owned subsidiary of Time Inc. (the "Parent"). The Parent is a wholly owned subsidiary of Time Warner, Inc. ("Time Warner"). All significant intercompany balances and transactions have been eliminated in combination. The Combined Operations publish two magazines which are sold through newsstands and subscriptions. They also publish books and produce a weekly television show and network specials. Martha by Mail, Inc. sells Martha Stewart products through telemarketing and advertisements in MSL's magazine; its revenues and expenses are reflected in the combined financial statements as "Direct mail." The Combined Operations' revenue is generated primarily in the United States and Canada. The accompanying combined financial statements have been prepared as if the Combined Operations had operated as an independent, stand-alone entity for all periods presented. Such combined financial statements have been prepared using the historical basis of accounting and include all of the assets, liabilities, revenues and expenses of the Combined Operations previously included in the Parent's consolidated financial statements, excluding any interest charges relating to the use of the Parent's capital. In addition, the financial statements reflect the cost of paper inventory used by the Combined Operations, which is included in the Parent's consolidated paper inventory balance. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Magazine revenue is recognized on the issue date of the magazine and television revenue is recognized as aired. TELEVISION PRODUCTION COSTS Television production costs are capitalized and expensed as the television season's revenue is realized. Each season represents the broadcast year from mid-September through mid-September. If a total net profit is anticipated, this profit is recognized ratably over the period of total expected revenue. However, if a total net loss is projected for a particular season, television production costs are written down to net realizable value. A portion of the television production costs incurred is not amortized over the season, but remains in the prepaid balance and is amortized as future revenues are received in accordance with FASB Statement No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films." Future revenues are a result of sales of the series to cable TV and foreign television stations. PAPER INVENTORY Paper inventory is recorded using the FIFO method and is recorded at lower of cost or market. F-19 105 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) FIXED ASSETS Fixed assets are recorded at cost, net of accumulated depreciation and amortization. Depreciation is computed on the straight-line method based on the estimated useful lives of the assets, ranging from 3 to 14 years. UNEARNED SUBSCRIPTION REVENUES Sales of subscriptions are deferred over the life of the subscription, generally 12 months, and are included in revenues based upon the issue date of the magazine. The receivables relating to these subscriptions are netted against this liability and amounted to $4,326 as of December 31, 1996. Costs incurred in connection with the procurement of subscriptions are expensed as incurred. ADVERTISING COSTS Advertising costs are expensed as incurred. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions, in particular with regard to sales returns, that affect the amounts reported in the combined financial statements and accompanying notes. Actual results could differ from those estimates. INCOME TAXES Income taxes have been calculated on a separate-company basis consistent with the liability method prescribed by FASB Statement No. 109, "Accounting for Income Taxes" ("FAS 109"). Under the liability method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. On an historical basis, the operating results of the Combined Operations have been included in the consolidated U.S. federal, state and local income tax returns of Time Warner or subsidiaries of Time Warner. Prior to 1996, all net operating tax losses generated by the Combined Operations were utilized by Time Warner or subsidiaries of Time Warner. On a stand-alone basis, the carryforward of such losses would have fully offset the taxable income of the Combined Operations generated in 1996. During 1996, no income tax benefit for net operating loss tax carryforwards and deferred tax assets was recorded in the accompanying financial statements since the Combined Operations would not have been able to recognize deferred tax assets for these items on a separate-company basis under FAS 109. F-20 106 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) C. ACCOUNTS RECEIVABLE The components of accounts receivable as of December 31, 1996 are as follows: Advertising........................................... $ 6,623 Newsstand............................................. 4,184 Television............................................ 3,785 Other................................................. 1,785 ------- 16,377 Less allowance for doubtful accounts and returns...... (2,845) ------- $13,532 =======
D. FIXED ASSETS The components of fixed assets as of December 31, 1996 are as follows: Furniture, fixtures and equipment...................... $1,997 Leasehold improvements................................. 2,359 Construction in progress............................... 285 ------ 4,641 Less accumulated depreciation and amortization......... (794) ------ $3,847 ======
E. ACCOUNTS PAYABLE AND ACCRUED EXPENSES The components of accounts payable and accrued expenses as of December 31, 1996 are as follows: Advertising............................................ $ 337 Production............................................. 1,202 Television............................................. 2,052 Circulation............................................ 748 ------ $4,339 ======
F. RELATED PARTY TRANSACTIONS The amount payable to Parent represents a net amount due to various entities of the Parent for services provided or expenses paid by the Parent on behalf of the Combined Operations offset by the net cash generated by the Combined Operations transferred to the Parent. The average balance due to Parent was approximately $9,000 during 1996. Time Warner and several of its subsidiaries provide substantial services to the Combined Operations, including treasury, tax, financial audit, financial reporting, legal, payroll, paper purchasing, printing, fulfillment, newsstand distribution, accounts payable, receivable and credit functions. Time Warner and its subsidiaries have historically charged the Combined Operations for these services at amounts which approximate cost. In addition, certain employees of the Parent work exclusively for the Combined Operations. As a result, the payroll and related benefits for these employees are rebilled through the Payable to Parent account. F-21 107 MARTHA STEWART LIVING (A WHOLLY OWNED OPERATION OF TIME INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Management believes that the basis used for allocating these services is reasonable. However, the terms of these transactions may differ from those that would result from transactions among unrelated parties. The Combined Operations have a long-term contract with Martha Stewart to provide editorial services for the magazine through December 31, 2000, and a letter agreement to host a television series, unless terminated earlier pursuant to terms in the contract. Martha Stewart received a signing bonus in 1991 upon execution of this contract. The Combined Operations pay Martha Stewart a yearly salary to provide the editorial services, and a fee for each television program produced, in addition to other expenses outlined in the contract. Martha Stewart also has profit participation rights and a bonus plan. G. BOOK ROYALTY AGREEMENT Oxmoor House, a subsidiary of Southern Progress Corporation, which is a wholly-owned subsidiary of Time Publishing Ventures, currently publishes all of the MSL series of books. Previously, the Combined Operations did not record any of the revenues or expenses for those books sold by Oxmoor House relating to Martha Stewart. However, Martha Stewart received royalty payments directly from Oxmoor House based on 5% of cash receipts. In conjunction with the sale of the Combined Operations as described in Note I, the Combined Operations has entered into a contract directly with Oxmoor House whereby the Combined Operations and Oxmoor House will split net profits, as defined in the contact, and the Combined Operations will then be responsible for remitting royalties to Martha Stewart. These financial statements reflect net royalty revenues as if this arrangement had been in place beginning January 1, 1994, which include royalties earned by Martha Stewart in the amount of $951 in 1996. H. LEASES Time Publishing Ventures leases office facilities on behalf of the Combined Operations for periods up to 15 years under operating lease agreements. These leases are subject to price escalations for certain costs. Total rent expense for all such leases was $1,225 for the year ended December 31, 1996. The rent expense is charged to the Combined Operations through the Payable to Parent account. Under the sale agreement as described in Note I, these leases have been assigned to the Combined Operations. Future minimum lease payments under these noncancellable operating leases at December 31, 1996 are as follows: 1997..................................................... $ 1,291 1998..................................................... 1,334 1999..................................................... 1,366 2000..................................................... 1,406 2001..................................................... 1,262 Thereafter............................................... 9,214 ------- $15,873 =======
I. SUBSEQUENT EVENTS On February 3, 1997, Martha Stewart Living Omnimedia LLC ("MSLO"), controlled by Martha Stewart, purchased from Time Publishing Ventures substantially all of the assets and assumed substantially all of the liabilities of the Combined Operations. As part of this transaction, Martha Stewart entered into new agreements with MSLO which superseded the principal agreements that were in place with Time Publishing Ventures. F-22 108 [MSLO LOGO] 109 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale of common stock being registered, all of which will be paid by the Registrant:
AMOUNT -------- SEC registration fee........................................ $ 27,800 NASD filing fee............................................. 10,500 New York Stock Exchange listing fee......................... * Printing expenses........................................... 150,000 Legal fees and expenses..................................... * Accounting fees and expenses................................ * Blue sky fees and expenses.................................. 2,500 Transfer agent and registrar fees and expenses.............. 25,000 Miscellaneous............................................... * -------- Total............................................. $ * ========
- - - ------------ * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware provides as follows: A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of II-1 110 all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. As permitted by the DGCL, the Registrant has included in the MSLO certificate of incorporation a provision to eliminate the personal liability of its directors for monetary damages for breach of their fiduciary duties as directors, subject to certain exceptions. In addition, the MSLO certificate of incorporation and by-laws provide that the Registrant is required to indemnify its officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Registrant is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Underwriting Agreement is expected to provide that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Registrant against certain liabilities, including liabilities under the Securities Act of 1933. Reference is made to the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto. The Registrant maintains directors and officers liability insurance for the benefit of its directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of the transactions by the Registrant during the past three years involving sales of the Registrant's securities that were not registered under the Securities Act of 1933: Immediately prior to the offering contemplated hereby, the Registrant will issue an aggregate of shares of the Registrant's Class A common stock, par value $.01 per share, and shares of the Registrant's Class B common stock, par value $.01 per share, in exchange for all of the outstanding membership interests of Martha Stewart Living Omnimedia LLC, a Delaware limited liability company ("MSLO LLC"), pursuant to a merger of MSLO LLC with and into the Registrant. There were no underwriters, brokers or finders employed in connection with these transactions. The sales of the above securities were deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of 1933, as transactions by an issuer not involving a public offering. The merger agreement is filed as an exhibit to this Registration Statement. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE - - - ------- ------------- 1.1 -- Form of Underwriting Agreement.* 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.*
II-2 111
EXHIBIT NUMBER EXHIBIT TITLE - - - ------- ------------- 5.1 -- Form of Opinion of Wachtell, Lipton, Rosen & Katz.* 10.1 -- Form of Stockholders' Agreement.* 10.2 -- 1999 Stock Incentive Plan.* 10.3 -- 1999 Non-Employee Director Stock and Option Compensation Plan.* 10.4 -- Martha Stewart Living Omnimedia LLC Phantom Performance Unit Plan. 10.5 -- Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan. 10.6 -- Employment Agreement, by and between Registrant and Martha Stewart.* 10.7 -- Intellectual Property License and Preservation Agreement, by and between Registrant and Martha Stewart.* 10.8 -- Location Rental Agreement, by and between Registrant and Martha Stewart.* 10.9 -- 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.* 10.10 -- Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.11 -- Occupancy Agreement, dated September 28, 1998, between MediaAmerica, Inc. and Martha Stewart Living Omnimedia LLC.* 10.12 -- Lease, dated as of March 6, 1996, as amended, between Newtown Group Properties Limited Partnership and Time Publishing Ventures, Inc.* 10.13 -- Lease, dated as of August 1, 1996, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.14 -- Lease, dated as of August 14, 1997, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 11.1 -- Computation of Per Share Earnings.* 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ernst & Young LLP. 23.3 -- Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 5.1). 24.1 -- Powers of Attorney. 27.1 -- Financial Data Schedule.
- - - ------------ * To be provided by amendment. (B) FINANCIAL STATEMENT SCHEDULES INDEX TO SCHEDULES MARTHA STEWART LIVING OMNIMEDIA LLC FINANCIAL STATEMENT SCHEDULE FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
PAGE ---- Schedule II -- Valuation and Qualifying Accounts............ S-1 Report of Independent Public Accountants.................... S-2
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. II-3 112 ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-4 113 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 29th day of July 1999. 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 Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE --------- ----- * Chairman of the Board and Chief Executive Officer - - - --------------------------------------------------- (Principal Executive Officer) Martha Stewart * President, Chief Operating Officer and Director - - - --------------------------------------------------- Sharon Patrick * Senior Vice President, Finance and Controller - - - --------------------------------------------------- (Principal Financial and Accounting Officer) James Follo * Director - - - --------------------------------------------------- Charlotte Beers * Director - - - --------------------------------------------------- L. John Doerr *By: /s/ GREGORY R. BLATT --------------------------------------------- Gregory R. Blatt (Attorney-in-Fact) July 29, 1999
II-5 114 MARTHA STEWART LIVING OMNIMEDIA LLC SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (000'S OMITTED)
ADDITIONS BALANCE, CHARGED TO BALANCE, BEGINNING COSTS AND END OF DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR ----------- --------- ---------- ---------- -------- Allowance for doubtful accounts: Years ended December 31- 1998............................................. $1,123 $ 293 $ 214 $1,202 1997............................................. 500(a) 787 164 1,123 1996............................................. -- -- -- -- Reserve for audience under delivery: Years ended December 31- 1998............................................. $1,434 $5,724 $2,355 $4,803 1997............................................. 605(a) 1,525 696 1,434 1996............................................. -- -- -- --
- - - --------------- (a) balance at acquisition. S-1 115 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of Martha Stewart Living Omnimedia LLC: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Martha Stewart Living Omnimedia LLC and subsidiary included in this registration statement and have issued our report thereon dated February 15, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index above is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, 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 15, 1999 S-2 116 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - - - ------- ------------- 1.1 -- Form of Underwriting Agreement.* 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.* 5.1 -- Form of Opinion of Wachtell, Lipton, Rosen & Katz.* 10.1 -- Form of Stockholders' Agreement.* 10.2 -- 1999 Stock Incentive Plan.* 10.3 -- 1999 Non-Employee Director Stock and Option Compensation Plan.* 10.4 -- Martha Stewart Living Omnimedia LLC Phantom Performance Unit Plan. 10.5 -- Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan. 10.6 -- Employment Agreement, by and between Registrant and Martha Stewart.* 10.7 -- Intellectual Property License and Preservation Agreement, by and between Registrant and Martha Stewart.* 10.8 -- Location Rental Agreement, by and between Registrant and Martha Stewart.* 10.9 -- 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.* 10.10 -- Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.11 -- Occupancy Agreement, dated September 28, 1998, between MediaAmerica, Inc. and Martha Stewart Living Omnimedia LLC.* 10.12 -- Lease, dated as of March 6, 1996, as amended, between Newtown Group Properties Limited Partnership and Time Publishing Ventures, Inc.* 10.13 -- Lease, dated as of August 1, 1996, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 10.14 -- Lease, dated as of August 14, 1997, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia LLC.* 11.1 -- Computation of Per Share Earnings.* 23.1 -- Consent of Arthur Andersen LLP.
117
EXHIBIT NUMBER EXHIBIT TITLE - - - ------- ------------- 23.2 -- Consent of Ernst & Young LLP. 23.3 -- Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 5.1). 24.1 -- Powers of Attorney. 27.1 -- Financial Data Schedule.
- - - ------------ * To be provided by amendment. EX-3.1 2 REGISTRANT'S CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF MARTHA STEWART LIVING OMNIMEDIA, INC. I, the undersigned, for the purpose of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, do hereby execute this Certificate of Incorporation and do hereby certify as follows: ARTICLE I The name of the Corporation is Martha Stewart Living Omnimedia, Inc. (the "Corporation") ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The Corporation shall have the authority to issue 350,000,000 shares of $.01 par value Class A Common Stock (the "Class A Common Stock"), 150,000,000 shares of $.01 par value Class B Common Stock (the "Class B Common Stock," and together with the Class A Common Stock, the "Common Stock"), and 150,000,000 shares of $.01 par value Preferred Stock (the "Preferred Stock"). The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of the stock of the corporation entitled to vote, irrespective of Del. Code Ann. tit. 8, Section 242(b)(2). A statement of the designations of each class and the powers, preferences and rights, and qualifications, limitations or restrictions thereof is as follows: A. Class A Common Stock (1) Dividends. The holders of the Class A Common Stock shall be entitled to receive, share for share with the holders of shares of Class B Common Stock, such dividends if, as and when declared from time to time by the Board of Directors. In the event that such dividend is paid in the form of shares of Common Stock, holders of Class A Common Stock 2 shall receive Class A Common Stock and holders of Class B Common Stock shall receive Class B Common Stock. (2) Liquidation. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Corporation, the holders of the Class A Common Stock shall be entitled to receive, share for share with the holders of shares of Class B Common Stock, all the assets of the Corporation of whatever kind available for distribution to stockholders, after the rights of the holders of the Preferred Stock have been satisfied. (3) Voting. Each holder of Class A Common Stock shall be entitled to one vote for each share of Class A Common Stock held as of the applicable date on any matter that is submitted to a vote or for the consent of the stockholders of the Corporation. Except as otherwise provided herein or by the General Corporation Law of the State of Delaware, the holders of Class A Common Stock and the holders of Class B Common Stock shall at all times vote on all matters (including the election of directors) together as one class. B. Class B Common Stock (1) Dividends. The holders of the Class B Common Stock shall be entitled to receive, share for share with the holders of shares of Class A Common Stock, such dividends if, as and when declared from time to time by the Board of Directors. In the event that such dividend is paid in the form of shares of Common Stock, holders of Class A Common Stock shall receive Class A Common Stock and holders of Class B Common Stock shall receive Class B Common Stock. (2) Liquidation. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Corporation, the holders of the Class B Common Stock shall be entitled to receive, share for share with the holders of shares of Class A Common Stock, all the assets of the Corporation of whatever kind available for distribution to stockholders, after the rights of the holders of the Preferred Stock have been satisfied. (3) Voting. Each holder of Class B Common Stock shall be entitled to ten votes for each share of Class B Common Stock held as of the applicable date on any matter that is submitted to a vote or for the consent of the stockholders of the Corporation. Except as otherwise provided herein or by the General Corporation Law of the State of Delaware, the holders of Class A Common Stock and the holders of Class B Common Stock shall at all times vote on all matters (including the election of directors) together as one class. (4) Conversion. (a) Each share of Class B Common Stock shall be convertible into one fully paid and nonassessable share of Class A Common Stock at the option of the holder thereof at any time. (b) Each share of Class B Common Stock shall automatically be converted into one fully paid and nonassessable share of Class A Common Stock upon any sale, pledge, conveyance, hypothecation, assignment or other transfer (a "Transfer") of such share, -2- 3 whether or not for value, by the initial registered holder (the "Initial Holder") thereof, other than any such Transfer by such holder to (i) a nominee of such holder (without any change in beneficial ownership, as such term is defined under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or (ii) another person that, at the time of such Transfer, beneficially owns shares of Class B Common Stock or a nominee thereof; provided that, notwithstanding the foregoing, (A) any Transfer by the Initial Holder without consideration to (1) any controlled affiliate of such Initial Holder which remains such, (2) a partner, active or retired, of such Initial Holder, (3) the estate of any such Initial Holder or a trust established for the benefit of the descendants or any relatives or spouse of such Initial Holder, (4) a parent corporation or wholly-owned subsidiary of such Initial Holder or to a wholly-owned subsidiary of such parent unless and until such transferee ceases to be a parent or wholly-owned subsidiary of the Initial Holder or a wholly-owned subsidiary of such parent, or (5) the spouse of such Initial Holder, in each case, shall not result in such conversion or (B) any bona fide pledge by the Initial Holder to any financial institution in connection with a borrowing shall not result in such conversion; and provided, further, that in the event any Transfer shall not give rise to automatic conversion hereunder, then any subsequent Transfer by the holder (other than any such Transfer by such holder to a nominee of such holder (without any change in beneficial ownership)) or the pledgor, as the case may be, shall be subject to automatic conversion upon the terms and conditions set forth herein. For purposes of this provision, the Initial Holder of shares of Class B Common Stock owned of record by The Martha Stewart Family Limited Partnership or similar entity controlled by Martha Stewart shall be deemed to be such entity as well as Martha Stewart. (c) The one-to-one conversion ratio for the conversion of the Class B Common Stock into Class A Common Stock in accordance with Section 4(a) and 4(b) of this Article IV shall in all events be equitably adjusted in the event of any recapitalization of the Corporation by means of a stock dividend on, or a stock split or combination of, outstanding Class A Common Stock or Class B Common Stock, or in the event of any merger, consolidation or other reorganization of the Corporation with another corporation. (d) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of effecting the conversion of the shares of Class B Common Stock, such number of its shares of Class A Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Class B Common Stock. (e) If any shares of Class B Common Stock shall be converted pursuant to this Section 4, the shares so converted shall be retired and returned to the authorized but unissued shares of Class B Common Stock. C. Other Matters Affecting Shareholders of Class A Common Stock and Class B Common Stock In no event shall any stock dividends or stock splits or combinations of stock be declared or made on Class A Common Stock or Class B Common Stock unless the shares of Class A Common Stock and Class B Common Stock at the time outstanding are treated equally and identically, except that such dividends or stock splits or combinations shall be made in -3- 4 respect of shares of Class A Common Stock and Class B Common Stock in the form of shares of Class A Common Stock or Class B Common Stock, respectively. D. Preferred Stock The Board of Directors shall, by resolution, fix the powers, designations, preferences, rights and qualifications, limitations and restrictions of any class or series of the Preferred Stock which shall not have been fixed by the Certificate of Incorporation. ARTICLE V The Board of Directors of the Corporation is expressly authorized to make, alter or repeal the By-Laws of the Corporation, but the stockholders may make additional By-Laws and may alter or repeal any By-Law whether adopted by them or otherwise. ARTICLE VI Elections of directors need not be by written ballot except and to the extent provided in the By-Laws of the Corporation. ARTICLE VII The Corporation is to have perpetual existence. ARTICLE VIII Each person who is or was or had agreed to become a director or officer of the Corporation, or each such person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer of the Corporation as an employee or agent of the Corporation or as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified by the Corporation, in accordance with the By-Laws of the Corporation, to the full extent permitted from time to time by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereinafter in effect. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person that provide for indemnification greater or different than that provided in this Article VIII. Any amendment or repeal of this Article VIII shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal. ARTICLE IX A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, -4- 5 (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of this Article IX shall not adversely affect any right or protection of a director of the Corporation existing immediately prior to such amendment or repeal. The liability of a director shall be further eliminated or limited to the full extent permitted by Delaware law, as it may hereafter be amended. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as determined by the Board of Directors. The books of the Corporation may be kept (subject to any provision contained in the Delaware General Corporation Law) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation. ARTICLE XI The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by the Delaware General Corporation Law, and all rights conferred upon stockholders herein are granted subject to this reservation except that under no circumstances may such amendment be adopted except as prescribed by Article IV, above, and provided further that the rights of the Class B Common Stock may not be amended, altered, changed or repealed without the approval of the holders of the requisite number of said shares of Class B Common Stock. ARTICLE XII The number of directors of the Corporation shall be such number as shall be determined from time to time by resolution of the Board of Directors. A director may be removed, at any time, either with or without cause, by the affirmative vote of holders of a majority of the voting power of shares of stock then entitled to vote with respect to the election of such director. -5- 6 The name and address of the incorporator is Gregory R. Blatt, Senior Vice President and General Counsel, Martha Stewart Living Omnimedia LLC, 20 West 43rd Street, New York, New York 10036. IN WITNESS WHEREOF, I, the undersigned, being the incorporator hereinbefore named, do hereby further certify that the facts hereinabove stated are truly set forth and, accordingly, I have hereunto set my hand this 26th day of July, 1999. /s/ Gregory R. Blatt --------------------- Gregory R. Blatt Incorporator -6- EX-3.2 3 REGISTRANT'S B-LAWS 1 EXHIBIT 3.2 BY-LAWS OF MARTHA STEWART LIVING OMNIMEDIA, INC. Incorporated under the Laws of the State of Delaware (As in effect as of July 26, 1999) ====================================================== ARTICLE I OFFICES AND RECORDS SECTION 1.1. Delaware Office. The principal office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle, and the name and address of its registered agent is The Corporation Trust Company, The Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware. SECTION 1.2. Other Offices. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require. SECTION 1.3. Books and Records. The books and records of the Corporation may be kept outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors. ARTICLE II STOCKHOLDERS SECTION 2.1. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date and at such place and time as may be fixed by resolution of the Board of Directors. SECTION 2.2. Special Meeting. Subject to the rights, if any, of the holders of any series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation ("Preferred Stock") with respect to such series of Preferred Stock, special meetings of the stockholders may be called only by the Chairman of the Board or by the Board of Directors or a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board"). 2 SECTION 2.3. Place of Meeting. The Board of Directors or the Chairman of the Board, as the case may be, may designate the place of meeting for any annual meeting or for any special meeting of the stockholders called by the Board of Directors or the Chairman of the Board. If no designation is so made, the place of meeting shall be the principal office of the Corporation. SECTION 2.4. Notice of Meeting. Written or printed notice, stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less than 10 days nor more than 60 days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 6.4 of these By-Laws. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. SECTION 2.5. Quorum and Adjournment. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the voting power of the outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on separately by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 2.6. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware) by the stockholder, or by his duly authorized attorney in fact. SECTION 2.7. Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in -2- 3 this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to -3- 4 the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. SECTION 2.8. Procedure for Election of Directors; Required Vote. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Certificate of Incorporation, or these By-Laws, in all matters -4- 5 other than the election of directors, the affirmative vote of the holders of a majority of the voting power represented by the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders. SECTION 2.9. Inspectors of Elections; Opening and Closing the Polls. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging such inspector's duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector's ability. The inspectors shall have the duties prescribed by law. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. SECTION 2.10. Record Date for Action by Written Consent. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. SECTION 2.11. Inspectors of Written Consent. In the event of the delivery, in the manner provided by Section 2.10, to the Corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the Corporation -5- 6 shall engage nationally recognized independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the Corporation that the consents delivered to the Corporation in accordance with Section 2.10 represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this paragraph shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). SECTION 2.12. Effectiveness of Written Consent. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated written consent received in accordance with Section 2.10, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the Corporation in the manner prescribed in Section 2.10. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. General Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authorities by these By-Laws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders. SECTION 3.2. Number and Tenure. Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, the business and affairs of the Corporation shall be managed by the Board of Directors, the number thereof to be determined from time to time by resolution of the Board of Directors. Each director shall serve for a term of one year from the date of his election and until his successor is elected. Directors need not be stockholders. SECTION 3.3. Chairman of the Board. The Chairman of the Board shall be chosen from among the Directors. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board shall not be an officer of the Corporation. The Chairman of the Board shall perform all duties incidental to his office which may be required by law and all such other duties as are properly required of him by the Board of Directors. -6- 7 SECTION 3.4. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-Law immediately after, and at the same place as, the Annual Meeting of Stockholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution. SECTION 3.5. Special Meetings. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. SECTION 3.6. Notice. Notice of any special meeting of directors shall be given to each director at the director's business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least 24 hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least 12 hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least 12 hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these By-Laws, as provided under Section 8.1. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in accordance with Section 6.4 of these By-Laws. SECTION 3.7. Action by Consent of Board of Directors. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.8. Conference Telephone Meetings. Members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.9. Quorum. Subject to Section 3.9, a whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The directors present at a duly organized -7- 8 meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 3.10. Vacancies. Subject to applicable law and the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director. SECTION 3.11. Executive and Other Committees. The Board of Directors may, by resolution adopted by a majority of the Whole Board, designate an Executive Committee to exercise, subject to and to the full extent of applicable provisions of law, all the powers of the Board in the management of the business and affairs of the Corporation when the Board is not in session and may, by resolution similarly adopted, designate one or more other committees. The Executive Committee may not, however (i) approve or adopt, or recommend to the stockholders of the Corporation, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to stockholders for approval, or (ii) adopt, amend or repeal any By-Law of the Corporation. The Executive Committee and each such other committee shall consist of two or more directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, other than the Executive Committee (the powers of which are expressly provided for herein), may to the extent permitted by law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Each committee shall keep written minutes of its proceedings and shall report such proceedings to the Board when required. A majority of any committee may determine its action and fix the time and place of its meetings, unless the Board shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 3.6 of these By-Laws. The Board shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board. -8- 9 SECTION 3.12. Removal. Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, either with or without cause, by the affirmative vote of holders of a majority of the voting power of shares of Voting Stock SECTION 3.13. Records. The Board of Directors shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board and of the stockholders, appropriate stock books and registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Corporation. ARTICLE IV OFFICERS SECTION 4.1. Elected Officers. The elected officers of the Corporation shall be a Chief Executive Officer, a President, a Secretary, a Treasurer, and such other officers (including, without limitation, a Chief Financial Officer) as the Board of Directors from time to time may deem proper. All officers elected by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. The Board or any committee thereof may from time to time elect, or the Chief Executive Officer may appoint, such other officers (including one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents, as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these By-Laws or as may be prescribed by the Board or such committee or by the Chief Executive Officer, as the case may be. SECTION 4.2. Election and Term of Office. The elected officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after the annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each officer shall hold office until his successor shall have been duly elected and shall have been qualified or until his death or until he shall resign, but any officer may be removed from office at any time by the affirmative vote of a majority of the Whole Board or, except in the case of an officer or agent elected by the Board, by the Chief Executive Officer. Such removal shall be without prejudice to the contractual rights, if any, of the person so removed. SECTION 4.3. Chief Executive Officer. The Chief Executive Officer shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to this office which may be required by law and all such other duties as are properly required of this officer by the Board of Directors. The Chief Executive Officer shall make reports to the Board of Directors and the stockholders, and shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. The Chief Executive Officer may also serve as President, if so elected by the Board. -9- 10 SECTION 4.4. President. The President shall act in a general executive capacity and shall assist the Chief Executive Officer in the administration and operation of the Corporation's business and general supervision of its policies and affairs. The President shall, in the absence of or because of the inability to act of the Chief Executive Officer, perform all duties of the Chief Executive Officer. SECTION 4.5. Vice-Presidents. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him by the Board of Directors or the Chief Executive Officer. SECTION 4.6. Chief Financial Officer. The Chief Financial Officer (if any) shall be a Vice President and act in an executive financial capacity. He shall assist the Chief Executive Officer and the President in the general supervision of the Corporation's financial policies and affairs. SECTION 4.7. Treasurer. The Treasurer shall exercise general supervision over the receipt, custody and disbursement of corporate funds. The Treasurer shall cause the funds of the Corporation to be deposited in such banks as may be authorized by the Board of Directors, or in such banks as may be designated as depositaries in the manner provided by resolution of the Board of Directors. He shall have such further powers and duties and shall be subject to such directions as may be granted or imposed upon him from time to time by the Board of Directors or the Chief Executive Officer. SECTION 4.8. Secretary. The Secretary shall keep or cause to be kept in one or more books provided for that purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; he shall see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; he shall be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; and he shall see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and in general, he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the Chief Executive Officer. SECTION 4.9. Removal. Any officer elected, or agent appointed, by the Board of Directors may be removed by the affirmative vote of a majority of the Whole Board whenever, in their judgment, the best interests of the Corporation would be served thereby. Any officer or agent appointed by the Chief Executive Officer may be removed by such officer whenever, in judgment of such officer, the best interests of the Corporation would be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan. -10- 11 SECTION 4.10. Vacancies. A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. Any vacancy in an office appointed by the Chief Executive Officer because of death, resignation, or removal may be filled by the Chief Executive Officer. ARTICLE V STOCK CERTIFICATES AND TRANSFERS SECTION 5.1. Stock Certificates and Transfers. The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe. The shares of the stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney, upon surrender for cancellation of certificates for at least the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. The certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 5.2. Lost, Stolen or Destroyed Certificates. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any financial officer may in its or his discretion require. ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.1. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January and end on the 31st day of December of each year. SECTION 6.2. Dividends. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation. -11- 12 SECTION 6.3. Seal. The corporate seal shall have enscribed thereon the words "Corporate Seal", the year of incorporation and around the margin thereof the words "Martha Stewart Living Omnimedia, Inc. - Delaware." SECTION 6.4. Waiver of Notice. Whenever any notice is required to be given to any stockholder or director of the Corporation under the provisions of the General Corporation Law of the State of Delaware or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting. SECTION 6.5. Audits. The accounts, books and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be done annually. SECTION 6.6. Resignations. Any director or any officer, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chief Executive Officer, the President, or the Secretary, and such resignation shall be deemed to be effective as of the close of business on the date said notice is received by the Chief Executive Officer, the President, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. SECTION 6.7. Indemnification and Insurance. (A) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that such person or a person of whom such person is the legal representative is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Corporation, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators; provided, however, that except as provided in paragraph (C) of this By-Law, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by -12- 13 such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this By-Law shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, such advances to be paid by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in such person's capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this By-Law or otherwise. (B) To obtain indemnification under this By-Law, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification pursuant to the first sentence of this paragraph (B), a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (i) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (ii) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the claimant, or (iii) if a quorum of Disinterested Directors so directs, by the stockholders of the Corporation. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. (C) If a claim under paragraph (A) of this By-Law is not paid in full by the Corporation within 30 days after a written claim pursuant to paragraph (B) of this By-Law has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because such claimant has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or stockholders) that the -13- 14 claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (D) If a determination shall have been made pursuant to paragraph (B) of this By-Law that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to paragraph (C) of this By-Law. (E) The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to paragraph (C) of this By-Law that the procedures and presumptions of this By-Law are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this By-Law. (F) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this By-Law shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Disinterested Directors or otherwise. No repeal or modification of this By-Law shall in any way diminish or adversely affect the rights of any director, officer, employee or agent of the Corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. (G) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Corporation maintains any policy or policies providing such insurance, each such director or officer, and each such agent or employee to which rights to indemnification have been granted as provided in paragraph (H) of this By-Law, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. (H) The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this By-Law with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. (I) If any provision or provisions of this By-Law shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this By-Law (including, without limitation, each portion of any paragraph of this By-Law containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this By-Law (including, without limitation, each such portion of any paragraph of this By-Law -14- 15 containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. (J) For purposes of this By-Law: (1) "Disinterested Director" means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. (2) "Independent Counsel" means a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this By-Law. (K) Any notice, request or other communication required or permitted to be given to the Corporation under this By-Law shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary. ARTICLE VII CONTRACTS, PROXIES, ETC. SECTION 7.1. Contracts. Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the Corporation by such officer or officers of the Corporation as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chief Executive Officer, the President or any Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the Corporation. Subject to any restrictions imposed by the Board of Directors or the Chief Executive Officer, the President or any Vice President of the Corporation may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. SECTION 7.2. Proxies. Unless otherwise provided by resolution adopted by the Board of Directors, the Chief Executive Officer, the President or any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or -15- 16 cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. ARTICLE VIII AMENDMENTS SECTION 8.1. Amendments. Except as expressly provided otherwise by the Delaware General Corporation Law, the Certificate of Incorporation of the Corporation, or other provisions of these By-Laws, these By-Laws may be altered, amended or repealed and new By-Laws adopted at any regular or special meeting of the Board of Directors by an affirmative vote of a majority of the Whole Board. -16- EX-4.2 4 LOAN AGREEMENT 1 EXHIBIT 4.2 LOAN AGREEMENT BETWEEN NATIONSBANK, N.A. AND MARTHA STEWART LIVING OMNIMEDIA LLC February 3, 1997 2 TABLE OF CONTENTS
Page ---- I. DEFINITIONS AND REFERENCE TERMS.................................... 1 II. LOANS.............................................................. 10 A. Loan......................................................... 10 B. Note......................................................... 10 C. Interest Rate and Repayment.................................. 11 D. Use of Proceeds.............................................. 11 E. Clean-Up Period.............................................. 11 F. Reduction of Commitment...................................... 11 G. Extension of Maturity Date................................... 11 H. Prepayments.................................................. 11 (1) Mandatory Prepayments.................................. 11 (2) Optional Prepayment.................................... 12 I. Commitment Fee............................................... 12 J. Payment...................................................... 12 K. Computations of Interest; Business Day....................... 12 L. Increased Costs, Etc......................................... 13 M. Letters of Credit............................................ 13 III. CONDITIONS TO LOANS................................................ 14 A. Conditions to All Loans...................................... 14 B. Conditions to Initial Loan................................... 15 IV. REPRESENTATIONS AND WARRANTIES..................................... 18 A. Good Standing................................................ 18 B. Authorization................................................ 18 C. No Conflicts................................................. 18 D. Approvals.................................................... 19 E. Binding Agreement............................................ 19 F. Litigation................................................... 19 G. Compliance with Laws......................................... 19 H. Taxes........................................................ 19 I. Accuracy of Information...................................... 19 J. Use of Proceeds.............................................. 19 K. Ownership of Properties...................................... 20 L. ERISA........................................................ 20 M. Environmental................................................ 20 N. Purchase Documents........................................... 20 O. Solvency..................................................... 21
i 3 P. Investment Company Act; Public Utility Holding Company Act................................................ 21 V. AFFIRMATIVE COVENANTS.............................................. 21 A. Financial Statements and Other Information................... 21 B. Insurance.................................................... 23 C. Existence and Compliance..................................... 24 D. Taxes........................................................ 24 E. Use of Proceeds.............................................. 24 F. Maintenance.................................................. 24 G. Environmental................................................ 24 H. ERISA........................................................ 25 I. Obligations under Loan Documents............................. 25 J. Other Obligations............................................ 25 K. Maintaining Records; Access to Properties and Inspections; Right to Audit................................ 25 L. Maintenance of Accounts...................................... 26 M. Assignment of Life and Disability Insurance; Copyright and Trademark Filings............................ 26 N. Further Assurances........................................... 26 VI. NEGATIVE COVENANTS................................................. 26 A. Liens........................................................ 26 B. Debt......................................................... 27 C. Investments.................................................. 27 D. Capital Expenditures......................................... 27 E. Dividends, Distributions and Payments........................ 28 F. Consolidations, Mergers and Sales of Assets.................. 28 G. Sale and Lease-Back Transactions............................. 28 H. Sales of Receivables......................................... 28 I. Quick Ratio.................................................. 28 J. Debt Service Coverage Ratio.................................. 28 K. Character of Business........................................ 29 L. Subsidiaries................................................. 29 M. Accounting Change............................................ 29 N. Transactions with Affiliates................................. 29 O. ERISA........................................................ 29 P. Prepayment or Modification of Indebtedness; Modification of Agreements................................. 30 Q. Negative Pledges, Etc........................................ 30 VII. REMEDIES UPON DEFAULT.............................................. 31 VIII. NOTICES............................................................ 31 IX. COSTS, EXPENSES AND ATTORNEYS' FEES................................ 32
ii 4 X. MISCELLANEOUS...................................................... 33 A. Cumulative Rights and No Waiver.............................. 33 B. Applicable Law............................................... 33 C. Amendment.................................................... 33 D. Right to Setoff.............................................. 34 E. Documents.................................................... 34 F. Partial Invalidity........................................... 34 G. Survivability................................................ 34 H. Headings..................................................... 34 I. Counterparts................................................. 34 XI. ARBITRATION........................................................ 34 A. SPECIAL RULES................................................ 35 B. RESERVATION OF RIGHTS........................................ 35 XII. NO ORAL AGREEMENT.................................................. 36
Exhibits Exhibit A - Borrower Security Agreement Exhibit B - Form of Borrowing Base Certificate Exhibit C - Guaranty Exhibit D - Kmart Consent Exhibit E - Lifetime Consent Exhibit F - Note Exhibit G - Partnership Guaranty Exhibit H - Partnership Security Agreement Exhibit I - Sherwin-Williams Consent Exhibit J - Stewart Security Agreement Exhibit K - Subordination Agreement iii 5 NATIONSBANK, N.A. LOAN AGREEMENT This Loan Agreement (the "Agreement"), dated as of February 3, 1997, by and between NationsBank, N.A., a national banking association (the "Bank"), and the Borrower described below. In consideration of the Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the Bank and the Borrower agree as follows: I. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: A. "AFFILIATE" of any Person means any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person and, without limiting the generality of the foregoing, includes (i) any Person which beneficially owns or holds 10% or more of any class of voting securities of such Person or 10% or more of the equity interest in such Person, (ii) any Person of which such Person beneficially owns or holds 10% or more of any class of voting securities or in which such Person beneficially owns or holds 10% or more of the equity interest in such Person and (iii) any director, officer, member or partner of such Person. B. "AVAILABILITY" means, at any time, an amount equal to (i) the lesser of (A) the Commitment and (B) the Borrowing Base, minus (ii) the sum of (A) the aggregate principal amount of all Loans outstanding at such time and (B) an amount equal to all reserves which the Bank establishes in accordance with the provisions of this Agreement. C. "BANKRUPTCY CODE" means Title 11 of the United States Code, as amended. D. "BORROWER SECURITY AGREEMENT" means the Security Agreement dated as of the Closing Date between the Borrower and the Bank in the form of Exhibit A hereto, as the same may be amended, modified or supplemented from time to time. E. "BORROWER" means Martha Stewart Living Omnimedia LLC, a Delaware limited liability company. F. "BORROWER'S ADDRESS" means 20 West 43rd Street, 25th Floor, New York, New York 10036. 6 G. "BORROWING BASE" means, at any date of determination, an amount equal to the product of (i) seventy-five percent (75%) and (ii) the sum of (A) Eligible Receivables on such date plus (B) the product of (i) fifty percent (50%) and (ii) the Eligible Subscription Receivables on such date. The amount of Eligible Receivables and Eligible Subscription Receivables shall be determined by the Bank by reference to the Borrowing Base Certificate then most recently delivered to it; provided that the information contained in any such Borrowing Base Certificate shall not be conclusive in calculating the amount of Eligible Receivables and Eligible Subscription Receivables on any date and the resulting Borrowing Base and, after consultation with the Borrower, the Bank shall be entitled to adjust the amount of Eligible Receivables on such date and the resulting Borrowing Base by establishing reserves and otherwise adjusting the amounts and other information contained therein to the extent that the Bank believes in its reasonable credit judgment that such adjustments are necessary or appropriate to cause the Borrowing Base (as so adjusted) to reflect the standards set forth in the definition of the term "Eligible Receivables" in light of any factor which the Bank reasonably believes could adversely affect the value of the Eligible Receivables or the enforceability or the priority of the Bank's Liens therein, materially increase the likelihood of a bankruptcy, insolvency or other similar proceeding involving Borrower or cause a Default or an Event of Default. H. "BORROWING BASE CERTIFICATE" means a certificate, substantially in the form of Exhibit B hereto. I. "BUSINESS DAY" means any day, other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. J. "CAPITAL EXPENDITURES" means for any period, the aggregate of all amounts which, in accordance with GAAP, would be added as a debit to the fixed asset account of such person, including, without limitation, all amounts paid or payable with respect to Capital Lease Obligations and interest which is required to be capitalized in accordance with GAAP. K. "CAPITAL LEASE OBLIGATION" means any obligation to pay rent or other amounts under any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease. L. "CLOSING DATE" means the date on which the initial Loan is made hereunder after all of the conditions precedent set forth in Section III.B. have been satisfied or, at the sole discretion of the Bank, waived. M. "CODE" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and the rulings issued thereunder, as in effect from time to time. N. "COLLATERAL" means all property and interests therein (real and personal, tangible and intangible) in which a Lien is now or hereafter granted to the Bank by any Loan Party as security for the Obligations, including the property in which a Lien is purported to be 2 7 granted to the Bank pursuant to the Borrower Security Agreement, the Partnership Security Agreement and the Stewart Security Agreement. O. "COMMITMENT" means the commitment of the Bank to make Loans pursuant to Section II.A. in an aggregate principal amount at any time outstanding not to exceed $10,000,000, as such commitment may be reduced or terminated in accordance with the provisions of this Agreement. P. "COMMITMENT FEE" has the meaning assigned to such term in Section II.I. Q. "CONTEMPLATED TRANSACTIONS" means the transactions contemplated by this Agreement and the other Loan Documents. R. "CURRENT ASSETS" means, at any time, with respect to the Borrower and the Subsidiaries, (i) the aggregate amount of all assets which would, in accordance with GAAP, properly be defined as current assets at such time minus (ii) the aggregate amount of all assets which would, in accordance with GAAP, properly be defined as inventory. S. "CURRENT LIABILITIES" means, at any time, with respect to the Borrower and the Subsidiaries, (i) the aggregate amount of all liabilities which would, in accordance with GAAP, properly be defined as current liabilities, but in any event shall include all liabilities except those having a maturity date at such time which is more than one year from the date as of which such computation is being made minus (ii) the aggregate amount of all liabilities which would, in accordance with GAAP, properly be defined as deferred income. T. "CUSTOMER" means and includes the account debtor or obligor with respect to any Receivable. U. "DEBT SERVICE COVERAGE RATIO" means the aggregate of net income after taxes plus depreciation, amortization and other non-cash expenses, divided by the aggregate of the current portion of principal and interest on long-term debt and Capital Lease Obligations. V. "DEFAULT" means any condition, act or event which, with notice or lapse of time or both, would constitute an Event of Default. W. "ELIGIBLE RECEIVABLES" means, at any date, the sum of (A) the Lifetime Receivables on such date and (B) the amount equal to the aggregate amount of those Receivables which then conform to the following criteria: (i) such Receivable is created by the Borrower in the ordinary course of its business arising from the sale for cash of advertising time or space to a Customer that is a Person resident in, or whose principal executive office is located in, the United States, (ii) such Receivable has not remained unpaid later than ninety (90) days past the original invoice date, (iii) such Receivable is not due from a Customer whose obligations to the Borrower on Receivables which were due more than 90 days past the original invoice date exceeds 50% of such Customer's total obligations for Receivables, (iv) such Receivable is not evidenced by chattel paper or an instrument or security of any kind, (v) (a) the Bank holds a perfected, first priority security interest in such Receivable and (b) such Receivable is not subject to any other Lien whatsoever (other than a Lien in favor of Time Publishing that is subordinate to the Lien of 3 8 the Bank therein in accordance with the terms of the Subordination Agreement), (vi) such Receivable is denominated in United States dollars, (vii) the Customer or account party with respect to such Receivable is not the subject of any bankruptcy or insolvency proceeding of any kind and, to the knowledge of the Borrower, is Solvent or is not unable to pay its obligations in respect of such Receivable, (viii) such Receivable is net of (a) any returns, discounts, claims, credits or allowances and (b) any obligations owing under "make-good" contracts or arrangements, (ix) the Customer or account party with respect to such Receivable is not an Affiliate of any Loan Party or any Governmental Authority, (x) such Receivable is not subject to any setoff, net-out contract, offset, deduction, dispute, credit, counterclaim or other defense arising out of the transactions represented by the Receivable or independently thereof, (xi) such Receivable is one upon which the Borrower's right to receive payment is absolute and is not contingent upon the fulfillment of any condition whatsoever and the Borrower is able to bring suit or otherwise enforce its remedies against the Customer or account party through judicial process and (xii) such Receivable is neither an Eligible Subscription Receivable nor arises from a subscription to any magazine or other publication. X. "ELIGIBLE SUBSCRIPTION RECEIVABLES" mean all Receivables of the Borrower that would otherwise constitute Eligible Receivables but that arise from a subscription to a magazine or other publication, but shall not include any such Receivable (or portion thereof) to the extent that the portion of the Borrowing Base attributable to such Receivables exceeds twenty-five percent (25%) of the total Borrowing Base on such date. Y. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. Z. "ERISA AFFILIATE" of any Person means any other Person that for purposes of Title IV of ERISA is a member of such Person's controlled group, or under common control with such Person, within the meaning of Section 414 of the Code. AA. "EVENT OF DEFAULT" has the meaning assigned to such term in the Note. BB. "FISCAL YEAR" means the fiscal year of the Borrower for accounting purposes, which ends on December 31 of each year. CC. "GOVERNMENTAL AUTHORITY" means any nation or government, any federal, state, city, town, municipality, county, local or other political subdivision thereof or thereto and any department, commission, board, bureau, instrumentality, agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. DD. "GUARANTOR" means Martha Stewart, an individual. EE. "GUARANTY" means the Continuing and Unconditional Guaranty dated as of the Closing Date executed by the Guarantor for the benefit of the Bank, in the form of Exhibit C hereto, as the same may be amended, modified or supplemented from time to time. 4 9 FF. "HAZARDOUS MATERIALS" include all materials defined as hazardous materials or substances, or which form the basis of liability, under any local, state or federal environmental laws, rules or regulations, including, without limitation, petroleum, petroleum products, oil, polychlorinated biphenyls, radioactive substances and asbestos. GG. "INDEBTEDNESS" means, with respect to any Person, (i) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services, (ii) all obligations of such Person under direct or indirect guaranties in respect of, and contingent or other obligations of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services, (iii) all indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any lien, security interest or other charge or encumbrance upon or in property owned by such Person, (iv) all obligations of such Person to make reimbursement or payment in respect of letters of credit and bankers' acceptances, and (v) the net liabilities of such Person under all interest rate swap, interest rate collar, interest rate cap, interest rate floor, forward rate agreements, commodity swaps or other agreements or arrangements designed to protect against fluctuations in interest rates or currency, commodity or equity values, each calculated in good faith in the reasonable discretion of the Bank. HH. "INDEMNIFIED PARTY" has the meaning assigned to such term in Section IX.B. II. "INSURANCE ASSIGNMENTS" means (i) the collateral assignment to the Bank by the Borrower of a keyman life insurance policy issued by an insurance company satisfactory to the Bank insuring the life of the Guarantor in a minimum policy amount of $10,000,000 pursuant to an assignment agreement acceptable in form and substance to the Bank and delivered to the Bank pursuant to Section V.M. and (ii) the collateral assignment to the Bank by the Borrower of a disability policy issued by an insurance company satisfactory to the Bank insuring the Guarantor in a minimum policy amount of $10,000,000 pursuant to an assignment agreement acceptable in form and substance to the Bank and delivered to the Bank pursuant to Section V.M. JJ. "INVESTMENT" in any Person means (i) the acquisition (whether for cash, property, services, assumption of Indebtedness, securities or otherwise) of shares of capital stock, bonds, notes, debentures, partnership, joint venture or other ownership interests or other securities of such Person, (ii) any deposit with, or advance, loan or other extension of credit to, such Person (other than deposits made in connection with the purchase of equipment or other assets in the ordinary course of business) or (iii) any other investment in such Person, including, without limitation, any guaranty incurred for the benefit of such Person. KK. "KMART CONSENT" means the Consent and Agreement, dated as of the date hereof, among Kmart Corporation, the Borrower and the Bank, substantially in the form of Exhibit D hereto, as the same may be amended, modified or supplemented from time to time. 5 10 LL. "LETTERS OF CREDIT" has the meaning specified in Section II.M. MM. "LIEN" means, with respect to any asset, (i) any mortgage, lien, pledge, encumbrance, charge or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset, (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities or (iv) any other right of or arrangement with any creditor to be entitled to receive any such mortgage, lien, pledge, encumbrance, charge, or security interest on or to have such creditor's claim satisfied out of such assets, or the proceeds therefrom, prior to the general creditors of the owner thereof. NN. "LIFETIME CONSENT" means the Consent and Agreement, dated as of the date hereof, among Lifetime Entertainment Services, the Borrower and the Bank, substantially in the form of Exhibit E hereto, as the same may be amended, modified or supplemented from time to time. OO. "LIFETIME RECEIVABLE" means a Receivable that arises from the agreement, dated as of April 19, 1996, by and between Lifetime Entertainment Services and assumed by the Borrower and has not remained unpaid later than ninety (90) days past the original date such payment is required to be made under such agreement. PP. "LLC AGREEMENT" means the Second Amended and Restated Limited Liability Company Agreement of the Borrower, dated as of February 3, 1997, as the same may be amended, modified or supplemented from time to time. QQ. "LOAN DOCUMENT" means any of this Agreement, the Note, the Security Documents, the Guaranty, the Partnership Guaranty, the Kmart Consent, the Lifetime Consent, the Sherwin-Williams Consent, the Subordination Agreement, any Letter of Credit Application and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by the Borrower, the Guarantor, the Stewart Partnership or any third party in connection with any Loan. RR. "LOAN PARTIES" means, collectively, the Borrower, the Guarantor and the Stewart Partnership. SS. "LOANS" mean the loans made by the Bank to the Borrower pursuant to Section II.A and the issuance by the Bank of Letters of Credit for the account of the Borrower pursuant to Section II.M. At any time and for all purposes of this Agreement, each Letter of Credit issued by the Bank shall be deemed to be a Loan in a principal amount equal to the sum of (i) the undrawn amount of such Letter of Credit at such time and (ii) the aggregate unpaid principal amount of all Reimbursement Obligations of the Borrower at such time in respect of all drawings under such Letter of Credit. TT. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business, assets, liabilities, properties, prospects, operations or financial or other condition of the Borrower, or the other Loan Parties taken as a whole, (ii) the ability of any Loan Party to perform 6 11 or pay the Obligations in accordance with the terms hereof or of any other Loan Document or to perform its other obligations thereunder or (iii) the value of the Collateral or the amount which the Bank could receive in the liquidation of the Collateral. UU. "MATURITY DATE" means June 30, 1998 or such later date that is established pursuant to Section II.F. VV. "MULTIEMPLOYER PLAN" means a Plan (other than a Welfare Plan) which is a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. WW. "NOTE" means the promissory note of the Borrower, in the form of Exhibit F hereto, evidencing the Obligations of the Borrower with respect to the Loans and delivered to the Bank pursuant to Section III.B.(2), as such promissory note may be modified or extended from time to time, and any promissory note or notes issued in exchange or replacement thereof. XX. "NOTICE OF BORROWING" has the meaning assigned to such term in Section II.A. YY. "OBLIGATIONS" means (i) the obligations of any Loan Party to pay, as and when due and payable (by mandatory prepayment, by scheduled maturity or otherwise), all amounts from time to time owing by it pursuant to any Loan Document, whether for principal, interest, fees or otherwise and (ii) the obligations of any Loan Party to perform or observe all of such Loan Party's other obligations from time to time existing under any Loan Document. ZZ. "PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership of the Stewart Partnership, dated as of December 19, 1996, as the same may be amended, modified or supplemented from time to time. AAA. "PARTNERSHIP GUARANTY" means the Continuing and Unconditional Guaranty dated as of the Closing Date executed by the Stewart Partnership for the benefit of the Bank, in the form of Exhibit G hereto, as the same may be amended, modified or supplemented from time to time. BBB. "PARTNERSHIP SECURITY AGREEMENT" means the Security Agreement dated as of the Closing Date between the Stewart Partnership and the Bank in the form of Exhibit H hereto, as the same may be amended, modified or supplemented from time to time. CCC. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor agency or entity performing substantially the same functions. DDD. "PERMITTED LIENS" has the meaning assigned to such term in Section VI.A. EEE. "PERSON" means an individual, limited liability company, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or Governmental Authority. 7 12 FFF. "PLAN" means, at any particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or an ERISA Affiliate is an "employer" as defined in Section 3(5) of ERISA. GGG. "PURCHASE AGREEMENT" means the Asset Purchase Agreement dated as of February 3, 1997 between the Borrower and Time Publishing, as the same may be amended, modified or supplemented from time to time solely as permitted by the terms of this Agreement. HHH. "PURCHASE DOCUMENTS" means the Purchase Agreement and all other documents, instruments, certificates and agreements executed and/or delivered in connection therewith (other than the Time Publishing Agreements), as the same may be amended, modified or supplemented from time to time solely as permitted by the terms of this Agreement. III. "PURCHASE TRANSACTIONS" means the transactions contemplated by the Purchase Agreement and the other Purchase Documents. JJJ. "REIMBURSEMENT OBLIGATION" means the obligation of the Borrower to reimburse amounts paid by the Bank in respect of any drawings under a Letter of Credit issued for the account of the Borrower. KKK. "RECEIVABLES" means and includes all of the Accounts Receivable (as defined in the Borrower Security Agreement) of the Borrower. LLL. "REPORTABLE EVENT" means any of the events set forth in Section 4043 of ERISA, other than those events as to which the 30-day notice period is waived under PBGC regulations. MMM. "SECURITY DOCUMENTS" means the Borrower Security Agreement, the Partnership Security Agreement, the Stewart Security Agreement, the Insurance Assignments and each other agreement now existing or hereafter created providing collateral security for, or in furtherance of the enforcement of, the payment or performance of any Obligations. NNN. "SHERWIN-WILLIAMS CONSENT" means the Consent and Agreement, dated as of the date hereof, among The Sherwin-Williams Company, the Borrower and the Bank, substantially in the form of Exhibit I hereto, as the same may be amended, modified or supplemented from time to time. OOO. "SOLVENT" means, with respect to any Person as of a particular date, that on such date (i) such Person is able to pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (ii) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature in their ordinary course, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person's assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged or is to engage, (iv) the fair value of the assets of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person and (v) the present 8 13 fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. PPP. "STEWART PARTNERSHIP" means The Martha Stewart Family Limited Partnership, a Connecticut limited partnership. QQQ. "STEWART SECURITY AGREEMENT" means the Security Agreement dated as of the Closing Date between the Guarantor and the Bank in the form of Exhibit J hereto, as the same may be amended, modified or supplemented from time to time. RRR. "SUBORDINATION AGREEMENT" means the Subordination Agreement dated as of the Closing Date among the Bank, the Borrower and Time Publishing in the form of Exhibit K hereto, as the same may be amended, modified or supplemented from time to time. SSS. "SUBSIDIARY" means, with respect to the Borrower, (i) any corporation of which securities or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled, directly or indirectly, by the Borrower and/or one or more subsidiaries of the Borrower and (ii) any partnership, association, joint venture or other entity in which the Borrower has more than a 50% equity interest. TTT. "TERMINATION DATE" means the earlier of (i) the Maturity Date and (ii) the date on which the Bank terminates the Commitment following an Event of Default. UUU. "TIME PUBLISHING" means Time Publishing Ventures, Inc., a Delaware corporation. VVV. "TIME PUBLISHING AGREEMENTS" means, collectively, (i) the Note dated February 3, 1997 made by the Borrower in favor of Time Publishing in the principal amount of $30,000,000, (ii) the Security Agreement dated as of February 3, 1997 between the Borrower and Time Publishing and (iii) all other documents, instruments, guaranties, certificates and agreements executed and/or delivered in connection therewith, as each may be amended, modified or supplemented from time to time solely as permitted by the provisions of this Agreement. WWW. "TIME PUBLISHING INDEBTEDNESS" means the Indebtedness of the Borrower under the Time Publishing Agreements. XXX. "WELFARE PLAN" means a Plan which is a "welfare plan" as defined in Section 3(1) of ERISA. All accounting terms not specifically defined or specified herein shall have the meanings attributed to such terms under United States generally accepted accounting principles ("GAAP"), 9 14 as in effect from time to time, consistently applied. All calculations made for the purposes of determining compliance with this Loan Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section V.A. hereof; provided, however, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Bank shall so object in writing within 30 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Borrower to the Bank as to which no such objection shall have been made. II. LOANS. A. LOAN. The Bank hereby agrees, on the terms and conditions hereinafter set forth, to make one or more Loans (including by way of issuing one or more Letters of Credit) to the Borrower from the Closing Date to the Termination Date in an aggregate principal amount at any one time outstanding not to exceed the Commitment. Notwithstanding the foregoing or anything else contained herein or in any other Loan Document, the Bank shall have no obligation to make a Loan (including by way of issuing a Letter of Credit) and no Loan shall be made to the Borrower (including by way of issuing a Letter of Credit) if, after giving effect thereto, the Availability would be less than zero. Each Loan shall be in an amount equal to $100,000 or an integral multiple of $25,000 in excess thereof. Each request for a Loan, other than by way of issuing a Letter of Credit (a "Notice of Borrowing"), shall be made by telephonic or written communication by a Person reasonably believed by the Bank to be an authorized representative of the Borrower at least one (1) Business Day prior to the proposed date for such requested Loan. The Notice of Borrowing shall specify the proposed amount of such Loan and the Business Day on which such Loan shall be made. On the Business Day specified in the Notice of Borrowing and upon fulfillment of the applicable terms and conditions set forth in Article III hereof, the Bank will make the proceeds of such Loan available to the Borrower in same day funds in United States Dollars to the account specified by the Borrower, not later than 5:00 p.m. (New York City time) on such date. Each request for a Letter of Credit shall be made in accordance with Section II.M. Within the limits of the Commitment and subject to the second sentence of this Section II.A., the Borrower may borrow, repay in whole or in part and reborrow Loans pursuant to this Section until the Termination Date. Notwithstanding any other provision of this Agreement, the Commitment shall expire on, and the Bank shall have no obligation to extend credit to the Borrower or make any Loan (including by way of issuing a Letter of Credit) on or after, the Termination Date and no Letter of Credit shall be issued that has an expiration date that extends beyond the Termination Date. B. NOTE. All Loans shall be evidenced by the Note. The Bank shall record advances and principal payments thereof on the grid attached thereto or, at its option, in its records, and the Banks record thereof shall be conclusive absent manifest error. Notwithstanding the foregoing, the failure to make or an error in making a notation with respect to any Loan or any payment shall not limit or otherwise affect the Obligations of the Borrower with respect to such Loan or payment. 10 15 C. INTEREST RATE AND REPAYMENT. The Borrower shall repay, and shall pay interest on, the unpaid principal amount of the Loans in accordance with the provisions of the Note. D. USE OF PROCEEDS. The proceeds of the Loans shall be available (and the Borrower agrees that it shall use such proceeds) to finance seasonal needs, provide funds for special projects, pay transaction costs for the Purchase Transactions and provide for the ordinary working capital of the Borrower. E. CLEAN-UP PERIOD. The Borrower shall reduce the aggregate principal amount of Loans outstanding, and all accrued and unpaid interest thereon, under this Agreement to zero for a period of at least 30 consecutive days during each Fiscal Year; provided that no Loan that has been extended by the issuance by the Bank of a letter of credit for the benefit of the Borrower shall be required to be reduced as a result of this Section II.E. F. REDUCTION OF COMMITMENT. Upon at least three Business Days' irrevocable notice, the Borrower shall have the right to permanently terminate or reduce the Commitment at any time or from time to time; provided that (i) each partial reduction shall be in aggregate amount at least equal to $1,000,000 or any integral multiple of $100,000 in excess thereof and (ii) no reduction shall be made to the extent it would reduce the Commitment to an amount less than the aggregate principal amount of the Loans then outstanding. Any reduction or termination of the Commitment under this Section 2.F. shall be permanent and may not be reinstated. G. EXTENSION OF MATURITY DATE. No later than 60 days before the Maturity Date, the Borrower may deliver a written notice to the Bank specifying that it desires to extend the Maturity Date to June 30 of the following calendar year. Should the Borrower so notify the Bank, no later than 30 days before the Maturity Date the Bank shall notify the Borrower whether the Bank is willing to so extend the Maturity Date. Should the Bank agree to so extend the Maturity Date, the Bank shall timely so notify the Borrower and the Maturity Date shall be extended to June 30 of the following calendar year. If the Bank does not agree to extend the Maturity Date, the Bank shall so notify the Borrower and the Maturity Date shall remain unchanged. H. PREPAYMENTS. (1) MANDATORY PREPAYMENTS. (a) If, at any time and from time to time, the Bank notifies the Borrower that the aggregate principal amount of the Loans then outstanding exceeds an amount equal to the Borrowing Base on such date, the Borrower shall repay the Loans within two (2) Business Days of the date such notice is given by the amount equal to such excess, together with accrued and unpaid interest to the date of such prepayment on the principal amount so prepaid. Any amount of principal of a Loan so prepaid may be reborrowed in accordance with Section II.A. 11 16 (b) The Borrower shall, on each day on which funds are deposited in the Account (as defined in the Security Agreement), apply such funds to prepay the outstanding principal amount of the Loans, together with accrued and unpaid interest to the date of such prepayment on the principal amount so prepaid. Any amount of principal of a Loan so prepaid may be reborrowed in accordance with Section II.A. (2) OPTIONAL PREPAYMENT. The Borrower may prepay any Loan in whole at any time or in part from time to time, without penalty or premium, and each such prepayment shall be accompanied by the payment of accrued interest to the date of such prepayment on the amount prepaid; provided that (i) each partial prepayment shall be in a principal amount equal to $10,000 or an integral multiple thereof and (ii) the Borrower shall give the Bank written notice at least one (1) Business Day prior to the date of the prepayment of a Loan. Each notice of prepayment shall be irrevocable and shall specify the date and the amount of the prepayment. Any amount of principal of a Loan so prepaid may be reborrowed in accordance with Section II.A. I. COMMITMENT FEE. The Borrower will pay in immediately available funds on the last Business Day of each March, June, September and December and on the Termination Date, a commitment fee (the "Commitment Fee") equal to one-half of one percent (1/2%) per annum on the average amount, calculated on a daily basis, by which the Commitment exceeds the sum of the aggregate outstanding principal amount of all Loans during the quarterly (or shorter) period ending on such date. The Commitment Fee due under this Section II.H. shall be calculated by the Bank (which calculation shall be conclusive absent demonstrable error), shall commence to accrue on the Closing Date and shall cease to accrue on the Termination Date. J. PAYMENT. Payment of principal, interest and any other sums due under this Agreement or under the Note shall be made without setoff or counterclaim in United States dollars and in immediately available funds on the day such payment is due not later than 12:00 noon (New York time). All sums received after such time shall be deemed received on the next Business Day, and principal payments or sums (other than interest) due hereunder shall bear interest for an additional day or days, as applicable. All payments shall be made to the Bank in accordance with the Bank's written instructions. K. COMPUTATIONS OF INTEREST; BUSINESS DAY. (1) All computations of interest under this Agreement and the Note shall be made on the basis of a year of three hundred sixty (360) days and actual days elapsed. Interest shall accrue daily on each Loan outstanding from and including the date such Loan is made by the Bank to but excluding the date on which such Loan is repaid. (2) Payment of all amounts due hereunder shall be made on a Business Day. Any payment due on a day that is not a Business Day shall be made on the next Business Day. 12 17 L. INCREASED COSTS, ETC. (1) If, after the date of this Agreement, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any (x) change in the basis of taxation of payments to the Bank of the principal of or interest on any Loan (excluding changes in the rate of tax payable on the Bank's overall income or income allocable to a particular jurisdiction and bank franchise taxes) or (y) imposition or change in any reserve or similar requirement, and the result of any of the foregoing is an increase in the cost to the Bank of agreeing to make or making, funding or maintaining any Loan, then the Borrower shall from time to time, upon demand by the Bank, pay to the Bank an additional amount which the Bank has determined reasonably and in good faith to be sufficient to compensate the Bank for such increased cost. The Bank shall give the Borrower written notice of such occurrence and deliver to the Borrower a certificate setting forth the amount of such increased cost, together with its reasonably detailed calculations used to determine such amount, which shall be conclusive and binding for all purposes, absent demonstrable error. (2) If the Bank determines that compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and that the amount of such capital is increased by or based upon the existence of any Loan or the Commitment, then the Borrower shall, upon demand by the Bank, pay to the Bank an additional amount sufficient to compensate the Bank or such corporation in the light of such circumstances, to the extent that the Bank reasonably determines such increase in capital to be allocable to the existence of such Loans or the Commitment. A certificate as to such amounts, submitted to the Borrower by the Bank, shall be conclusive and binding for all purposes, absent demonstrable error. (3) Prior to making any demand for compensation under this Section II.K., (i) the Bank will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its lending office if the making of such a filing or change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the judgment of the Bank, be otherwise disadvantageous to the Bank, and (ii) the Bank will permit the Borrower to prepay all or any part of the affected Loans, together with interest to the date of payment; provided that nothing herein shall relieve the Borrower from its obligations to compensate the Bank for increased costs or reduced return incurred prior to the taking of the actions contemplated by clauses (i) and (ii) above. M. LETTERS OF CREDIT. Subject to the terms of this Agreement, the Commitment may be utilized, upon the request of the Borrower, in addition to making Loans pursuant to Section II.A., by the issuance by the Bank of letters of credit ("Letters of Credit") for the account of the Borrower. At least three (3) Business Days prior to the proposed date of issuance of any requested Letter of Credit, the Borrower shall deliver to the Bank a completed and executed application in form satisfactory to the Bank (a "Letter of Credit Application") with 13 18 respect to such Letter of Credit which shall specify the account party or parties therefor and shall describe in reasonable detail the proposed terms of such Letter of Credit (including the beneficiary thereof) and the nature of the transactions or obligations proposed to be supported thereby. The Borrower shall observe and perform all of the agreements to be observed and to be performed by it under each Letter of Credit Application, including its obligation to pay any letter of credit fee specified therein and its Reimbursement Obligation with respect thereto. The issuance by the Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article III, be subject to the conditions precedent that (i) such Letter of Credit shall be in such form, contain such terms and support such transactions as shall be satisfactory to the Bank and (ii) the Borrower shall have executed and delivered a Letter of Credit Application and such other instruments relating to such Letter of Credit as to the Bank shall reasonably request; provided, however, that in the event of any conflict between any Letter of Credit Application or other instrument and the provisions of any other Loan Document, the provisions of such other Loan Document shall govern. III. CONDITIONS TO LOANS. A. CONDITIONS TO ALL LOANS. The obligation of the Bank to make any Loan hereunder on any date is subject to the conditions precedent that: (1) The following statements shall be true on and as of the date when such Loan is made, and the acceptance of the proceeds of such Loan by the Borrower shall be deemed to be a representation and warranty of the Borrower on the date of such Loan that: (a) the representations and warranties contained in Article IV hereof and in each other Loan Document are true and correct on and as of such date, before and after giving effect to such Loan and to the application of the proceeds therefrom and (b) no event has occurred and is continuing or would result from the making of such Loan, which constitutes a Default or an Event of Default hereunder; (2) The Bank shall have received a Notice of Borrowing in accordance with Section II.A. with respect to such Loan; (3) The Bank shall have determined that there is sufficient Availability to make such Loan; and (4) The Bank shall not have determined that the prospect of payment or performance of any Loan has been materially impaired as a result of any event or condition causing a Material Adverse Effect. B. CONDITIONS TO INITIAL LOAN. The obligation of the Bank to make the initial Loan hereunder is subject to the following additional conditions precedent: (1) The Bank shall have received this Agreement, duly executed by the Borrower. (2) The Bank shall have received the Note, duly executed by the Borrower. 14 19 (3) The Bank shall have received the Guaranty, duly executed by the Guarantor. (4) The Bank shall have received the Partnership Guaranty, duly executed by the Stewart Partnership. (5) The Bank shall have received the Borrower Security Agreement, duly executed by the Borrower, the Partnership Security Agreement, duly executed by the Stewart Partnership, and the Stewart Security Agreement, duly executed by the Guarantor, together with: (a) copies of proper Uniform Commercial Code financing statements, and other appropriate filings, each duly filed or ready for filing in all jurisdictions and offices that the Bank may deem necessary in order to perfect the security interests created by the Borrower Security Agreement, the Partnership Security Agreement and the Stewart Security Agreement, (b) completed requests for information, listing all effective financing statements filed in the jurisdictions referred to in paragraph (a) above that name the Borrower, the Stewart Partnership or the Guarantor as debtor, together with copies of such financing statements (none of which shall cover the Collateral purported to be covered by the Borrower Security Agreement, the Partnership Security Agreement or the Stewart Security Agreement), and (c) evidence that all other actions necessary or, in the good faith opinion of the Bank, desirable to perfect and protect the security interests created by the Borrower Security Agreement, the Partnership Security Agreement and the Stewart Security Agreement have been taken, in form and substance reasonably satisfactory to the Bank. (6) The Bank shall have received a Borrowing Base Certificate setting forth the Borrowing Base as of the Closing Date. (7) The Bank shall have received the Kmart Consent, duly executed by Kmart Corporation and acknowledged by the Borrower. (8) The Bank shall have received the Lifetime Consent, duly executed by Lifetime Entertainment Services and acknowledged by the Borrower. (9) The Bank shall have received the Sherwin-Williams Consent, duly executed by The Sherwin-Williams Company and acknowledged by the Borrower. (10) The Bank shall have received the Subordination Agreement, duly executed by the Borrower and Time Publishing. (11) Prior to or simultaneously with the Closing Date, the transactions contemplated under the Time Publishing Agreements and the Purchase Transactions shall have 15 20 been consummated in accordance with (i) the Time Publishing Agreements and the Purchase Documents, without any waiver or amendment not consented to by the Bank of any term, provision or condition set forth therein and (ii) all applicable laws or requirements of any applicable Governmental Authority. (12) All representations and warranties of the Borrower and Time Publishing contained in the Time Publishing Agreements and the Purchase Documents shall be true and correct in all material respects on the Closing Date, as though made on and as of such date (except insofar as such representations and warranties relate expressly to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date) and no default or event of default shall exist thereunder. (13) The Bank shall have received true and complete copies, certified by an officer of the Borrower, of the Purchase Agreement with all schedules and exhibits thereto, each other Purchase Document, each Time Publishing Agreement and each Assigned Contract (as defined in the Borrower Security Agreement). (14) The Bank shall have received (a) a copy of the Certificate of Formation of the Borrower, as amended to such date, certified as of a recent date by the Secretary of State of the State of Delaware, and a certificate of good standing from such Secretary of State dated as of a recent date; (b) a certificate of an officer of the Borrower, dated the Closing Date and certifying (i) that attached thereto is a true and complete copy of the LLC Agreement and other constitutive documents as in effect on the date of such certificate, (ii) that attached thereto is a true and complete copy of the resolutions adopted by the managers of the Borrower authorizing the execution, delivery and performance of each of the Loan Documents and the Contemplated Transactions and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (iii) that the Borrower's Certificate of Formation has not been amended since the date of the last amendment thereto shown on the certificate of good standing delivered pursuant to subparagraph 14(a) above, (iv) that attached thereto is a true and complete list of the members, officers and directors of the Borrower as of the date of such certificate and (v) as to the incumbency and specimen signature of each of the Borrower's officers executing this Agreement, the Note, each Security Document or any other Loan Document delivered herewith or therewith, as applicable; and (c) a certificate of another of the officers of the Borrower as to the incumbency and signature of the officer delivering the certificate described in subparagraph 14(b) above. 16 21 (15) The Bank shall have received (a) a copy of the Certificate of Limited Partnership of the Stewart Partnership, as amended to such date, certified as of a recent date by the Secretary of State of the State of Connecticut, and a certificate of existence from such Secretary of State dated as of a recent date; (b) a certificate of the general partner of the Stewart Partnership, dated the Closing Date and certifying (i) that attached thereto is a true and complete copy of the Partnership Agreement and other constitutive documents as in effect on the date of such certificate, (ii) that the Certificate of Limited Partnership of the Stewart Partnership has not been amended since the date of the last amendment thereto shown on the certificate of good standing delivered pursuant to subparagraph 15(a) above, (iii) that attached thereto is a true and complete list of the partners of the Stewart Partnership as of the date of such certificate and (iv) as to the incumbency and specimen signature of each of the Stewart Partnership's partners executing the Loan Documents to which the Stewart Partnership is party; and (c) a certificate of another of the partners of the Stewart Partnership as to the incumbency and signature of the partner delivering the certificate described in subparagraph 15(b) above. (16) The LLC Agreement shall have been executed by the members of the Borrower and shall be in form and substance satisfactory to the Bank. (17) The Borrower shall have paid to the Bank the fee of $100,000 with respect to the issuance of the commitment letter dated as of January 13, 1997 among the Bank, the Borrower, the Guarantor, Martha Stewart, Inc. and Martha Stewart Company. (18) The Bank shall have received, and determined the same to be in form and substance satisfactory to it, evidence of the Borrower's compliance with Section V.B. hereof. (19) The Account shall have been established in accordance with the terms of this Agreement and the Borrower Security Agreement. (20) The Bank shall have received favorable opinions of Wachtell, Lipton, Rosen & Katz and Kenyon & Kenyon, counsel to the Borrower, as to such matters as the Bank may reasonably request, in form and substance reasonably satisfactory to the Bank. (21) The Bank shall have received a certificate(s) evidencing the interest of the Stewart Partnership in the Company, together with a stock power executed in blank with medallion guaranty. (22) All legal matters in connection with the Contemplated Transactions and the Purchase Transactions shall be satisfactory to the Bank and its counsel in their sole discretion. 17 22 (23) The Bank shall have received all other promissory notes, loan agreements, security agreements, financing statements, assignments, guaranties, corporate resolutions, appraisals and other documents and instruments that are, in the opinion of the Bank, necessary in connection with the Loans, and such other financial or other information as the Bank may reasonably require. IV. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Bank as follows: A. GOOD STANDING. The Borrower (i) is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has the requisite power and authority to own, lease and operate its property and assets and to carry on its business as conducted and currently proposed to be conducted and (iii) is qualified to do business in each jurisdiction where the failure to so qualify could have a Material Adverse Effect. B. AUTHORIZATION. The Borrower (i) has the power and authority to execute, deliver and perform its obligations under this Agreement, the Note, the other Loan Documents, the Time Publishing Agreements and the Purchase Documents to which it is a party and (ii) is duly authorized to execute, deliver and perform this Agreement, each of the other Loan Documents, the Time Publishing Agreements and the Purchase Documents to which it is a party, borrow hereunder, grant the security interests in the Collateral created by the Security Documents and consummate the Contemplated Transactions and the Purchase Transactions and to incur the Time Publishing Indebtedness. C. NO CONFLICTS. Neither the execution and delivery of the Loan Documents, the Time Publishing Agreements and the Purchase Documents, nor the consummation of the transactions contemplated herein and therein, nor the performance of and compliance with the terms and provisions hereof and thereof by the Borrower will (i) violate or conflict with any provision of its Certificate of Formation or the LLC Agreement or other constitutive documents, (ii) violate, contravene or conflict with any law, regulation (including, without limitation, Regulation G, T, U or X of the Board of Governors of the Federal Reserve), order, writ, judgment, injunction, decree or permit of any Governmental Authority or arbitration authority applicable to it, (iii) violate, contravene or conflict with contractual provisions of, or cause a default under, any indenture, agreement, mortgage, deed of trust or other agreement or instrument to which it is a party or by which it may be bound, the violation of which could reasonably be expected to have a Material Adverse Effect, or (iv) result in or require the creation of any Lien (other than Permitted Liens) upon any property or assets of the Borrower. D. APPROVALS. No registration or filing with, consent or approval of, or other action by, any Governmental Authority is or will be required on behalf of the Borrower in connection with the Contemplated Transactions, the Purchase Transactions or the incurrence of the Time Publishing Indebtedness, other than the filings necessary to perfect the Liens as contemplated by the Subordination Agreement and those which the failure to obtain could not have a Material Adverse Effect. 18 23 E. BINDING AGREEMENT. Each of this Agreement, the other Loan Documents, the Purchase Documents and the Time Publishing Agreements to which the Borrower is a party have been duly executed and delivered by the Borrower and each constitutes its valid and legally binding obligation, enforceable against the Borrower in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. F. LITIGATION. There is no litigation or proceeding involving the Borrower pending or, to the knowledge of the Borrower, threatened before any court or other Governmental Authority or arbitration authority, against or affecting the Borrower or its business, assets or rights, the Purchase Transactions or the transactions contemplated by the Time Publishing Agreements. G. COMPLIANCE WITH LAWS. The Borrower is not in violation of any law, rule or regulation or in default with respect to any judgment, writ, injunction or decree, of any Governmental Authority or arbitration authority the violation of which could have a Material Adverse Effect. H. TAXES. All taxes and assessments due and payable by the Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. I. ACCURACY OF INFORMATION. All information furnished by the Borrower to the Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete in all material respects on the date as of which such information is delivered to the Bank and is not and will not be incomplete by the omission of any fact necessary to make such information not materially misleading. J. USE OF PROCEEDS. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section II.D. hereof. None of such proceeds will be used for the purpose of purchasing or carrying any Margin Stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of Regulation G, T, U or X of the Board of Governors of the Federal Reserve. K. OWNERSHIP OF PROPERTIES. The Borrower has good and marketable title to its assets, free and clear of all Liens, other than Permitted Liens. The Borrower has good and marketable title to all the assets purchased by it from Time Publishing under the Purchase Documents, free and clear of all Liens other than Permitted Liens, and such assets comprise all of the rights and property necessary to permit the Borrower to conduct the business of Martha Stewart Living Enterprises division, including, without limitation, Martha Stewart Living Television, Martha by Mail and Home for the Holidays, in all material respects as it was conducted by Time Publishing. 19 24 L. ERISA. With respect to the provisions of ERISA: (1) Each Plan has complied with and has been administered in all material respects in accordance with applicable provisions of ERISA and the Code. (2) No Reportable Event has occurred with respect to any Plan that resulted or is reasonably likely to result in any unpaid liability that could have a Material Adverse Effect. (3) The present value of all accrued benefits under each Single Employer Plan maintained by the Borrower or any ERISA Affiliate (based on then current assumptions used to fund such Plan as of the last annual valuation date applicable thereto), does not exceed the value of the assets of each such Plan allocable to such benefits. (4) Neither the Borrower nor any ERISA Affiliate has received notice that any Multiemployer Plan is in reorganization or insolvent where such reorganization or insolvency has resulted, or would be reasonably likely to result in an unpaid liability that is reasonably likely to have a Material Adverse Effect nor, to the best knowledge of the Borrower, is any such reorganization or insolvency reasonably likely to occur. Neither the Borrower nor any ERISA Affiliate has incurred any unpaid withdrawal liability, or is reasonably expected to incur any withdrawal liability, to any Multiemployer Plan. M. ENVIRONMENTAL. The conduct of the Borrower's business operations and the condition of the Borrower's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency, any applicable local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials the violation of which could reasonably be expected to have a Material Adverse Effect. N. PURCHASE DOCUMENTS. The Purchase Documents have been duly executed and delivered by the parties thereto, are in full force and effect, constitute valid and legally binding obligations of the parties thereto and are enforceable against such parties in accordance with the terms thereof. The Purchase Transactions to occur on or prior to the Closing Date have been consummated, and all conditions precedent to such transactions have been satisfied or waived in writing. The representations and warranties of the Borrower and, to the knowledge of the Borrower, Time Publishing contained in the Purchase Documents are each true and correct in all material respects. O. SOLVENCY. The Borrower is and, immediately after consummation of the Contemplated Transactions and the transactions contemplated by the Purchase Documents and the Time Publishing Agreements, will be Solvent. P. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. The Borrower is not an "investment company" as defined in, or is otherwise subject to regulation under, the Investment Company Act of 1940. The Borrower is not a "holding company" as that 20 25 term is defined in or is otherwise subject to regulation under, the Public Utility Holding Company Act of 1935. V. AFFIRMATIVE COVENANTS. Until full payment and performance of all Obligations and the termination of the Commitment, the Borrower will, and will cause each of the Subsidiaries to, unless the Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. FINANCIAL STATEMENTS AND OTHER INFORMATION. Furnish to the Bank, in form and content reasonably acceptable to the Bank, the following: (1) as soon as available, but not later than 90 days after the end of each Fiscal Year, a copy of the audited consolidated balance sheet of the Borrower as at the end of such Fiscal Year and the related consolidated statements of income and statements of earnings, operations, cash flow and members' equity for such Fiscal Year, prepared in accordance with GAAP and certified in a manner reasonably acceptable to the Bank by independent certified public accountants reasonably acceptable to the Bank; (2) as soon as available, but not later than 45 days after the end of each of the first three quarters of each Fiscal Year of the Borrower, an unaudited consolidated balance sheet of the Borrower as of the end of such quarter and a consolidated income statement, and consolidated statement of earnings, operations, cash flows and members' equity for the period commencing at the end of the previous Fiscal Year and ending with end of such quarter, prepared in accordance with GAAP and certified (subject to normal year-end audit adjustment and the absence of footnotes) on behalf of the Borrower by the chief financial officer of the Borrower; (3) as soon as available, but not later than 30 days after the end of each month, an unaudited consolidated balance sheet of the Borrower as of the end of such month and a consolidated income statement and consolidated statement of earnings, operations, cash flows and members' equity for each such month, prepared in accordance with GAAP and certified (subject to normal year-end audit adjustment and the absence of footnotes) on behalf of the Borrower by the chief financial officer of the Borrower; (4) concurrently with any delivery under paragraph (1), (2) or (3) above, a certificate of the chief financial officer of the Borrower (a) certifying that no Default or Event of Default has occurred and, if a Default or Event of Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (b) setting forth computations and conclusions, in such detail as the Bank may reasonably request, with respect to compliance with this Agreement, and the other Loan Documents, including computations of all quantitative covenants; (5) as soon as practicable, copies of all registration statements, annual, periodic or other reports, forms, filings, proxy statements, loan documents, financial information, and other information filed by any Loan Party with or submitted to the Securities and Exchange Commission or any Governmental Authority that may be substituted therefor, or any national 21 26 securities exchange and copies of all proxy statements, financial statements and reports submitted to its shareholders; (6) not later than November 30 of each year, a copy of the business plan and the projections of the operating budget and cash flow budget of the Borrower and the Subsidiaries for the next succeeding Fiscal Year, such projections to be accompanied by a summary of assumptions and operating statistics used in calculating such budgets and a certificate of the chief financial officer of the Borrower certifying that such projections have been prepared in good faith on the basis of reasonable assumptions and that such officer has no reason to believe that they are incorrect or misleading in any material respect, and within 45 days after the end of each fiscal quarter, an update or revision to such plan, and any other updates or revisions to such plan as soon as available; (7) as soon as available, but not later than 20 days after the end of each month, (a) a summary aging schedule of the Receivables as of the last day of such month for the Borrower, and (b) a Borrowing Base Certificate as of the last day of such month executed by the chief financial officer of the Borrower; (8) promptly upon, and in any event not later than five (5) days after, becoming aware thereof, notice of (a) the breach by any party of any Assigned Contract, any Purchase Document or any Time Publishing Agreement; (b) the issuance by any Governmental Authority of any injunction, order, decision or other restraint prohibiting, or having the effect of prohibiting, the making of the Loans, or invalidating, or having the effect of invalidating, any provision of this Agreement, the Note, the other Loan Documents or any Time Publishing Agreement or Purchase Document, or the initiation of any litigation or similar proceeding seeking any such injunction, order, decision or other restraint; (c) the filing or commencement of any action, suit or proceeding against the Borrower or any Subsidiary before any Governmental Authority the adverse determination of which could reasonably be expected to have a Material Adverse Effect; (d) any Default or Event of Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto; (e) the occurrence or expected occurrence of any Reportable Event with respect to any Plan; 22 27 (f) the institution of proceedings or the taking or expected taking of any other action by the PBGC or the Borrower or any ERISA Affiliate to terminate, withdraw or partially withdraw from any Plan, and, with respect to any Multiemployer Plan, the reorganization or insolvency of such Plan; (g) any development in the business or affairs of the Borrower, the Subsidiaries or any other Loan Party which has had or could reasonably be expected to have a Material Adverse Effect; (h) the commencement by the United States Internal Revenue Service of an audit of any Federal income tax return of the Borrower, any Subsidiary or any other Loan Party; and (i) the commencement of any proceeding pursuant to which the Borrower, any Subsidiary or any other Loan Party contests the validity or amount of any tax, assessment or governmental charge or levy which is in excess of $100,000; (9) promptly upon receipt or delivery thereof, copies of all notices received or delivered under or pursuant to the Purchase Documents or the Time Publishing Agreements; and (10) promptly such other information, reports and other information as the Bank may reasonably request. B. INSURANCE. Maintain at all times insurance with responsible insurance companies (i) on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers' compensation insurance and liability insurance, all to be with such companies as are reasonably satisfactory to the Bank and providing for at least 30 days' prior notice to the Bank of any cancellation thereof and (ii) of the type and in the amounts specified in the definition of Insurance Assignments herein. All casualty insurance, credit insurance and other insurance covering tangible personal property subject to a Lien in favor of the Bank granted pursuant to the Security Documents shall provide that the Bank is a loss payee. C. EXISTENCE AND COMPLIANCE. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, and comply in all respects with all laws, rules, regulations and orders of any Governmental Authority (including, without limitation, those relating to environmental laws) applicable to the operation of its business whether now in effect or hereafter enacted if noncompliance with such law, rule, regulation or order could reasonably be expected to have a Material Adverse Effect. D. TAXES. Pay and discharge promptly when due all material taxes, assessments and governmental charges, levies or claims imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give 23 28 rise to Liens upon such properties or any part thereof, except such taxes, assessments and governmental charges, levies and claims which are diligently contested in good faith by appropriate proceedings and as to which adequate reserves have been established in accordance with GAAP. E. USE OF PROCEEDS. Use the proceeds of the Loans solely as permitted under Section II.D. F. MAINTENANCE. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, copyrights, privileges, permits, franchises, certificates and the like necessary for the operation of its business. G. ENVIRONMENTAL. Immediately advise the Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting the Borrower's or any Subsidiary's business operations and (ii) all claims made or threatened by any third party against the Borrower or a Subsidiary relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials which if adversely determined could reasonably be expected to have a Material Adverse Effect. The Borrower shall promptly notify the Bank of any remedial action taken by the Borrower or any Subsidiary with respect to any Hazardous Materials affecting business operations of the Borrower or such Subsidiary. The Borrower will not use or permit any other party to use any Hazardous Materials at any of the Borrower's or the Subsidiaries' places of business or at any other property owned by the Borrower except such materials as are incidental to the Borrower's or such Subsidiary's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. The Borrower agrees to permit the Bank, its agents, contractors and employees to enter and inspect any of the Borrower's or the Subsidiaries' places of business or any other property of the Borrower or any Subsidiary at any reasonable times upon three (3) days' prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that the Borrower and the Subsidiaries are complying with this covenant and the Borrower shall reimburse the Bank on demand for the costs of any such environmental investigation and audit. The Borrower and the Subsidiaries shall provide the Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by the Borrower's and the Subsidiaries' business operations within five (5) days of the request therefor. H. ERISA. Pay and discharge promptly any liability imposed upon it pursuant to the provisions of Title IV of ERISA; provided, however, that neither the Borrower nor any ERISA Affiliate shall be required to pay any such liability if (i) the amount, applicability or validity thereof shall be diligently contested in good faith by appropriate proceedings, and (ii) such Person shall have set aside on its books reserves which, in the opinion of the independent certified public accountants of such Person, are adequate with respect thereto. 24 29 I. OBLIGATIONS UNDER LOAN DOCUMENTS. (i) Make full and timely payment of the Obligations, whether now existing or hereafter arising, (ii) duly comply with all the terms and covenants contained in this Agreement and in each of the other Loan Documents, and (iii) except for the filing of continuation statements and the making of other filings by the Bank as secured party or assignee, at all times take all actions necessary to maintain the Liens and security interests provided for under any of the Loan Documents as valid and perfected first priority Liens on the property intended to be covered thereby (subject only to Permitted Liens) and supply all information to the Bank necessary for such maintenance. J. OTHER OBLIGATIONS. Perform in all respects all of its obligations under the terms of all agreements, indentures, mortgages, security agreements or other instruments to which it is a party or by which it or its properties is bound (including those contained in the Purchase Documents and the Time Publishing Agreements), except where the failure to perform could not reasonably be expected to have a Material Adverse Effect. K. MAINTAINING RECORDS; ACCESS TO PROPERTIES AND INSPECTIONS; RIGHT TO AUDIT. Maintain financial records in accordance with GAAP and, upon reasonable notice, at all reasonable times and as often as the Bank may reasonably request, permit any authorized representative designated by the Bank to visit and inspect the properties and financial records of the Borrower and the Subsidiaries, subject to Section IX.A. hereof, and permit any authorized representative designated by the Bank to discuss the affairs, finances and condition of the Borrower and the Subsidiaries with the chief financial officer of the Borrower and such other officers as the Bank shall deem appropriate and the independent public accountants of the Borrower, as applicable. At the expense of the Borrower, subject to Section IX.A. hereof, the Bank shall have the right to audit (i) as often as it may reasonably request, the books and records of the Borrower and the Subsidiaries and to review its compliance with the terms and conditions of this Agreement and the other Loan Documents, and (ii) at least twice each Fiscal Year, the books and records of the Borrower relating to the Receivables. L. MAINTENANCE OF ACCOUNTS. Maintain the Account, and maintain all of its deposit accounts and cash concentration accounts with the Bank or its Affiliates, except as is permitted by the Borrower Security Agreement. M. ASSIGNMENT OF LIFE AND DISABILITY INSURANCE; COPYRIGHT AND TRADEMARK FILINGS. As soon as practicable, (i) but not later than 60 days after the Closing Date, deliver to the Bank the Insurance Assignments duly executed by the Borrower and acknowledged by the issuers of the policies assigned thereunder and (ii) but not later than 10 days after request therefor by the Bank, deliver to the Bank such documents and instruments as the Bank may request to perfect the Bank's Lien in the Copyrights and Trademarks (as defined in the Borrower Security Agreement) pursuant to the Borrower Security Agreement. N. FURTHER ASSURANCES. Execute any and all further documents and take all further actions which may be required under applicable law, or which the Bank may reasonably request, to grant, preserve, protect and perfect the first priority security interest created by the Security Documents in the Collateral. 25 30 VI. NEGATIVE COVENANTS. Until full payment and performance of all Obligations and the termination of the Commitment, the Borrower will not, and will not permit its Subsidiaries to, without the prior written consent of the Bank (and without limiting any requirement of any other Loan Documents): A. LIENS. Incur, create, assume or permit to exist any Lien on any of its property or assets, whether owned on the Closing Date or hereafter acquired, or assign or convey any rights or security interest in any future revenues, except for the following (collectively, "Permitted Liens"): (i) Liens incurred and pledges and deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, old-age pensions and other social security benefits (not including any Lien described in Section 412(m) of the Code) and utility company deposits; (ii) Liens imposed by law, such as landlord, carriers', warehousemen's, mechanics', materialmen's and vendors' Liens and other similar Liens, incurred in good faith in the ordinary course of business and securing obligations which are not overdue or are being contested in good faith by appropriate proceedings; (iii) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, restrictions on the use of real property (and with respect to leasehold interests, mortgages, obligations, liens and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord, ground lessor or owner of the leased property, with or without consent of the lessee) which do not in the aggregate materially detract from the value of the property or the assets or materially impair the use thereof in the operation of the business of the Borrower and the Subsidiaries; (iv) Liens created in favor of the Bank; (v) Liens securing the Indebtedness permitted under clause (v) of Section VI.B. and which are at all times subordinate to the Lien created by the Borrower Security Agreement in accordance with the terms of the Subordination Agreement; (vi) judgment Liens which do not constitute an Event of Default; provided that the execution or enforcement of any such Lien is effectively stayed and the claim secured thereby is being actively contested in good faith and by appropriate proceedings; (vii) purchase money Liens on any property acquired by the Borrower or any Subsidiary securing Indebtedness incurred or assumed by the Borrower or such Subsidiary in compliance with the provisions of this Agreement and for the purpose of financing all or any part of the cost of acquiring such property; provided that such Lien (A) is created or incurred contemporaneously with such acquisition, (B) attaches solely to the property so acquired in such transaction and (C) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 100% of the original purchase price of such property at the time it was acquired; (viii) Liens arising by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights with respect to deposit accounts permitted to exist under this Agreement; (ix) inchoate Liens for taxes not yet due and payable or for taxes that are being contested actively and in good faith by appropriate proceedings for which appropriate reserves have been established in accordance with GAAP; and (x) Liens constituting intellectual property licenses entered into in the ordinary course of business. B. DEBT. Incur, create, assume or permit to exist any Indebtedness other than (i) Indebtedness secured by Liens permitted under Section VI.A.; (ii) Indebtedness existing on the Closing Date and listed on Schedule VI.B hereto, and any extension, renewal or refunding 26 31 thereof on terms and conditions no more favorable, in the aggregate, to the obligee under such Indebtedness, but not any increase thereof; (iii) Indebtedness incurred hereunder and under the other Loan Documents; (iv) Indebtedness in respect of current accounts payable and accrued expenses incurred in the ordinary course of business including, to the extent not current, accounts payable and accrued expenses that are subject to good faith dispute; and (v) the Time Publishing Indebtedness in an amount not to exceed $30,000,000 in aggregate principal amount outstanding at any time and which shall at all times be subordinate to the Loans and the Obligations in accordance with terms of the Subordination Agreement. C. INVESTMENTS. Make any Investments except for Investments which are (i) accounts receivable created, acquired or made in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, (ii) except to the extent limited or prohibited by any other provision of this Agreement, leases, subleases and capital leases, regardless of whether rent is paid in arrears or in advance, (iii) deposits made or expenses prepaid in the ordinary course of business in connection with workers' compensation, real estate taxes and insurance policies required to be maintained hereunder, (iv) any other prepaid expenses not to exceed $9,500,000 in the aggregate for the Borrower and the Subsidiaries, (v) Investments in each Fiscal Year not to exceed $750,000 in the aggregate for the Borrower and the Subsidiaries, (vi) Investments listed on Schedule IV to the Borrower Security Agreement, (vii) Collateral Investments (as defined in the Borrower Security Agreement) and (viii) Investments in Subsidiaries in compliance with Section VI.O. D. CAPITAL EXPENDITURES. Permit or suffer the aggregate amount of payments made for Capital Expenditures, at the time incurred, to exceed (i) $6,500,000 in 1997 and (ii) $2,000,000 in 1998 for the Borrower and the Subsidiaries. E. DIVIDENDS, DISTRIBUTIONS AND PAYMENTS. Declare or pay, directly or indirectly, any cash dividends or make any other distribution in cash, property, securities (other than its own membership interests or shares of its capital stock) or a combination thereof, with respect to any of its membership interests or shares of its capital stock, or directly or indirectly redeem, purchase, retire or otherwise acquire for value any of its membership interests or any shares of its capital stock, or set aside any amount for any such purpose (including, without limitation, making the Call Offer, as such term is defined in the LLC Agreement), except that (i) any Subsidiary may pay dividends or distributions to the Borrower or any Subsidiary, (ii) the Borrower may pay distributions to its members as provided in Section 9.2 of the LLC Agreement as in effect on the date hereof and (iii) the Borrower may pay the Time Special Distribution (as defined in the LLC Agreement). F. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. Consolidate or merge into any other Person or sell, lease, transfer or assign to any Person, voluntarily or by operation of law, or otherwise dispose of any of its assets (whether now owned or hereafter acquired), or permit another Person to merge into it, except that (i) the Borrower or any Subsidiary may sell any of its inventory in the ordinary course of business, (ii) the Borrower or any Subsidiary may sell, lease, transfer, assign or otherwise dispose of its assets which are no longer necessary for the proper conduct of its business, (iii) the Borrower may transfer its assets to a corporation to which the Borrower is converting in accordance with Section 15.1(a) of the LLC Agreement as in effect 27 32 on the date thereof and such transfer otherwise satisfies the requirements of Section X.C. and (iv) the Borrower may pledge its assets to Time Publishing in accordance with the terms of the Subordination Agreement. G. SALE AND LEASE-BACK TRANSACTIONS. Enter into any arrangement, directly or indirectly, with any person whereby the Borrower or any Subsidiary shall sell or transfer any real or personal property and thereafter rent or lease such property or such other property which the Borrower or such Subsidiary intends to use for substantially the same purpose as the property being sold or transferred. H. SALES OF RECEIVABLES. Sell, assign, discount, transfer or otherwise dispose of any Receivable, promissory note, draft or trade acceptance or other right to receive payment held by it, except for (i) the purpose of collection or settlement in the ordinary course of business and (ii) the grant of Liens thereon pursuant to the Loan Documents and the Time Publishing Agreements in accordance with the terms of the Subordination Agreement. I. QUICK RATIO. Permit or suffer the ratio of Current Assets to Current Liabilities of the Borrower and the Subsidiaries at the end of any calendar quarter to be less than 1.35 to 1.0 for the three-month period then ending. J. DEBT SERVICE COVERAGE RATIO. Permit or suffer the Debt Service Coverage Ratio of the Borrower and the Subsidiaries at each June 30 and December 31 to be less than 2.0 to 1.0 for the six-month period then ending, except as may occur solely as a result of any payment of the Time Publishing Indebtedness required to be made pursuant thereto as a result of the registration by the Borrower of any equity securities of the Borrower pursuant to a registration statement under the Securities Act of 1933, as amended. K. CHARACTER OF BUSINESS. Change the general character of its business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. L. SUBSIDIARIES. Create, acquire or otherwise cause to come into existence any Subsidiary; provided that the Borrower may create, acquire or otherwise cause to come into existence a Subsidiary wholly owned (directly or indirectly) by the Borrower if (i) the Borrower pledges all of its equity interest in such Subsidiary to the Bank to secure the Obligations pursuant to a pledge agreement in form and substance reasonably satisfactory to the Bank, (ii) such Subsidiary guarantees the Obligations pursuant to a guaranty agreement in form and substance reasonably satisfactory to the Bank, (iii) such Subsidiary grants to the Bank a first priority security interest in all of its assets of any kind or nature to secure such Subsidiary's obligations under the guaranty described in clause (ii) above pursuant to a security agreement in form and substance reasonably satisfactory to the Bank and (iv) the Bank receives such board resolutions, officer's certificates and opinions of counsel as the Bank shall reasonably request in connection with the actions described in clauses (i), (ii) and (iii) above. M. ACCOUNTING CHANGE. Make any change in its accounting treatment or financial reporting practices except as required or permitted by GAAP, or change its Fiscal Year. 28 33 N. TRANSACTIONS WITH AFFILIATES. Directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or enter into any other transaction with, any equity holder, Affiliate or agent of such Person, or any relative thereof, except (i) transfers of membership interests in the Borrower to employees of the Borrower as incentive compensation in connection with such employment in an aggregate amount not to exceed at any time 15% of the outstanding membership interests in the Borrower, (ii) transactions pursuant to the agreements set forth on Schedule VI.N hereto as such agreements are in effect on the date hereof and (iii) other transactions at prices and on terms not less favorable to it than that which would have been obtained in an arm's-length transaction with a non-affiliated third party. O. ERISA. (1) Engage in any transaction in connection with which the Borrower or any ERISA Affiliate is reasonably likely to be subject to either a material civil penalty assessed pursuant to the provisions of Section 502 of ERISA or a material tax imposed under the provisions of Section 4975 of the Code. (2) Terminate any Pension Plan in a "distress termination" under Section 4041 of ERISA or take any other action which could result in a material liability of the Borrower or any ERISA Affiliate to the PBGC. (3) Fail to make payment when due of all amounts which, under the provisions of any Plan, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, or, with respect to any Pension Plan, permit to exist any material "accumulated funding deficiency" (within the meaning of Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect thereto. (4) Adopt an amendment to any Pension Plan requiring the provision of security under Section 307 of ERISA or Section 401(a)(29) of the Code. P. PREPAYMENT OR MODIFICATION OF INDEBTEDNESS; MODIFICATION OF AGREEMENTS. (1) Other than the Indebtedness incurred under any Loan Document, directly or indirectly prepay, redeem, purchase or retire in advance of its scheduled maturity any Indebtedness, including, without limitation, the Time Publishing Indebtedness, except as is permitted by the terms of the Subordination Agreement. (2) Directly or indirectly amend, modify, supplement or waive compliance with any term or provision of its Certificate of Formation, the LLC Agreement, certificate of incorporation, bylaws or other constitutive documents if the effect thereof could have a Material Adverse Effect. (3) Directly or indirectly amend, modify, supplement or waive compliance with, or seek a waiver, in any manner under any term or provision of any of the Purchase Documents or the Time Publishing Agreements, or consent to any of the foregoing. 29 34 (4) Directly or indirectly amend, modify, supplement or waive compliance with or seek a waiver under any term or provision of or any other agreement, instrument or document to which the Borrower or such Subsidiary is a party if the effect thereof could reasonably be expected to have a Material Adverse Effect. Q. NEGATIVE PLEDGES, ETC. Enter into or be subject to, directly or indirectly, including, without limitation, as a non-party subsidiary of a party to any agreement, any agreement (other than this Agreement, any other Loan Document or any Time Publishing Agreement) which prohibits or restricts, in any manner (i) the incurrence, creation or assumption of any Indebtedness or any Lien upon any property of the Borrower or the Subsidiaries, or the sale, disposition or pledge of any asset of the Borrower or the Subsidiaries, except restrictions in any purchase money financing agreement permitted hereunder relating only to the asset financed thereunder, or (ii) any amendment or supplement to, or waiver under, this Agreement or any other Loan Document. VII. REMEDIES UPON DEFAULT. If an Event of Default (as defined in the Note) shall occur, the Bank may exercise all rights, powers and remedies available to it under each of the Loan Documents, as well as all rights and remedies available at law or in equity. VIII. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: if to the Borrower: Martha Stewart Living Omnimedia LLC 20 West 43rd Street 25th Floor New York, New York 10036 Attention: David Steward Telecopy No.: (212) 522-7875 with a copy to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Andrew J. Nussbaum, Esq. Telecopy No.: (212) 403-2000 if to the Bank: NationsBank, N.A. Credit Services Center 101 South Tryon Street, 6th Floor NationsBank Plaza Charlotte, North Carolina 28255 30 35 Attention: Tom Fruge Telecopy No.: (704) 388-0040 with a copy to: NationsBank, N.A. Private Client Group 767 Fifth Avenue, 6th Floor New York, New York 10153 Attention: Jane Heller Telecopy No.: (212) 407-5461 and Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Neale M. Albert, Esq. Telecopy No.: (212) 757-3990 or to such other address as any party may designate by written notice to all of the parties. Each such notice, request and demand shall be deemed given or made as follows: (1) If sent by hand delivery, upon delivery; (2) If sent by certified mail, upon the earlier of the date of receipt or five (5) days after receipt in the U.S. mail, first class postage prepaid; (3) If telecopied, telegraphed, telexed or cabled, when telecopied with telephonic confirmation of the receipt thereof, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively. IX. COSTS, EXPENSES AND ATTORNEYS' FEES. A. The Borrower agrees to pay on demand all reasonable costs and expenses, including, without limitation, all due diligence, transportation, computer, duplication, appraisal, audit, insurance, consultant, search, filing and recording fees and expenses, incurred by the Bank and its successors in interest in connection with the preparation and administration of this Agreement and any of the Loan Documents and the other documents to be delivered hereunder or with any amendments, modifications, waivers, extensions, renegotiations or workouts of the provisions hereof or thereof (whether or not consummated) or after a Default and the continuance thereof or an Event of Default and the continuance thereof, or in connection with any pending or threatened action, proceeding or investigation relating to the foregoing, including, without limitation, in each case, the reasonable fees and out-of-pocket expenses of outside counsel for the Bank with respect thereto and with respect to advising the Bank as to its rights and responsibilities under any Loan Document. The Borrower further agrees to pay on demand all reasonable costs and expenses, if any (including reasonable outside counsel fees and out-of- 31 36 pocket expenses), incurred by the Bank and its successors in interest in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of the Loan Documents and the other documents to be delivered hereunder, including, without limitation, reasonable outside counsel fees and out-of-pocket expenses incurred in connection with the enforcement of rights under this Article IX. B. The Borrower hereby indemnifies the Bank and each of its Affiliates, and their officers, directors, employees, agents, advisors and successors in interest (each, an "Indemnified Party") against, and agrees to hold each such Indemnified Party harmless from, any and all claims, damages, losses, liabilities and expenses, including, without limitation, reasonable fees and expenses of counsel, that may be incurred by or asserted or awarded against any such Indemnified Party, in each case arising out of, in any way connected with, or as result of, (i) the use of any of the proceeds of the Loans, (ii) this Agreement or any of the other Loans Documents or the other documents contemplated hereby or thereby, (iii) the performance by the parties hereto and thereto of their respective obligations hereunder and thereunder and consummation of the Contemplated Transactions, (iv) breach of any representation or warranty by the Borrower, or (v) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not an Indemnified Party is a party thereto, or whether or not such investigation, litigation or proceeding is brought by the Borrower, its members or creditors or an Indemnified Party and whether or not the Contemplated Transactions are consummated; provided, however, that such indemnity shall not apply to the extent that any such claims, damages, losses, liabilities or expenses are found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. C. The provisions of this Article IX shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the Contemplated Transactions, the repayment of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or the Note, or any investigation made by or on behalf of the Bank. All amounts due under this Article IX shall be payable on written demand therefor. X. MISCELLANEOUS. The Borrower and the Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to the Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other right and may be exercised in addition to any and all other rights of the Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by the Bank of any right preclude any other future exercise thereof or the exercise of any other right. The Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on the Borrower in any case shall, of itself, entitle the Borrower to any other or future notice or demand in similar or other circumstances. B. APPLICABLE LAW. This Agreement and the Note and the rights and obligations of the parties hereunder and thereunder shall be governed by and interpreted in accordance with the laws of the State of New York without regards to conflict of laws provisions. 32 37 C. AMENDMENT. No modification, consent, amendment or waiver of any provision of this Agreement, nor consent to any departure by the Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer that is at least a vice president of the Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Agreement is binding upon the Borrower and its successors and assigns, and inures to the benefit of the Bank, its successors and assigns; however, no assignment or other transfer of the Borrower's rights or obligations hereunder shall be made or be effective without the Bank's prior written consent, nor shall it relieve the Borrower of any obligations hereunder, except that the Borrower may assign and transfer its rights and obligations hereunder to any corporation to which the Borrower may be converted in accordance with Section 15.1(a) of the LLC Agreement as in effect on the date hereof if (i) no Default or Event of Default is then continuing or would result from such assignment, transfer or conversion and (ii) such corporation executes and delivers to the Bank such agreements, documents and other instruments (including promissory notes, security agreements and financing statements) as the Bank may request to effectuate and evidence such assignment and transfer. There is no third party beneficiary of this Loan Agreement. D. RIGHT TO SETOFF. If an Event of Default shall have occurred and be continuing, the Bank shall and is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any Indebtedness at any time owing by the Bank to or for the credit or account of the Borrower against any and all of the Obligations now or hereafter existing under this Agreement, the Note or any other Loan Document, irrespective of whether the Bank shall have made any demand therefor and although such Obligations may be unmatured. The Bank agrees to notify promptly the Borrower after any such setoff and application so made, but the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Bank under this Section X.D. are in addition to other rights and remedies which may be available to the Bank. E. DOCUMENTS. All documents, certificates and other items required under this Agreement to be executed and/or delivered to the Bank shall be in form and content satisfactory to the Bank and its counsel. F. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any Person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other Persons or circumstances. G. SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loans and shall continue in full force and effect until indefeasible payment in full in cash of all Obligations. H. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 33 38 I. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be considered to be an original and all of which taken together shall constitute one and the same instrument. XI. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF THE BORROWER'S DOMICILE AT TIME OF THE EXECUTION OF THIS AGREEMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. Section 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSURE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR 34 39 MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. XII. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written. BORROWER: BANK: Martha Stewart NationsBank, N.A. Living Omnimedia LLC By: /s/David Stewart By: /s/ Jane R. Heller ------------------------------- -------------------------------- Name: David Stewart Jane R. Heller Title: Chief Adm. Officer Senior Vice President 35 EX-4.3 5 AMENDMENT #1 TO LOAN AGREEMENT 1 EXHIBIT 4.3 AMENDMENT NO. 1 TO LOAN AGREEMENT AMENDMENT NO. 1, dated as of June 30, 1998 (the "Amendment"), to the LOAN AGREEMENT, dated as of February 3, 1997 (the "Loan Agreement"), between MARTHA STEWART LIVING OMNIMEDIA LLC, a Delaware limited liability company (the "Borrower"), and NATIONSBANK, N.A. (the "Bank"). The parties desire to amend the Loan Agreement. Therefore, in consideration of the premises and the agreements herein, the Borrower hereby agrees with the Bank as follows: 1. Definitions. All terms used herein which are defined in the Loan Agreement and not otherwise defined herein are used herein as defined therein. 2. Amendments. (a) Section I.UU. of the Loan Agreement is hereby amended and restated in its entirety as follows: "UU. "MATURITY DATE" means June 30, 1999 or such later date that is established pursuant to Section II.G." (b) Article IV of the Loan Agreement is hereby amended to add the following as a new Section IV.Q.: "Q. YEAR 2000 REPRESENTATIONS AND WARRANTIES. (1) The Borrower has (i) begun analyzing the operations of the Borrower and its subsidiaries and affiliates that could be adversely affected by failure to become Year 2000 compliant (that is, that computer applications, imbedded microchips and other systems will be able to perform date-sensitive functions prior to and after December 31, 1999): and (ii) developed a plan for becoming Year 2000 compliant in a timely manner, the implementation of which is on schedule in all material respects. The Borrower reasonably believes that it will become Year 2000 compliant for its operations and those of its subsidiaries and affiliates on a timely basis except to the extent that a failure to do so could not reasonably be expected to have a material adverse effect upon the financial condition of the Borrower. (2) The Borrower reasonably believes any suppliers and vendors that are material to the operations of the Borrower or its subsidiaries and affiliates will be Year 2000 compliant for their own computer appli- 2 expected to have a material adverse effect upon the financial condition of the Borrower. (3) The Borrower will promptly notify the Bank in the event the Borrower determines that any computer application which is material to the operations of the Borrower, its subsidiaries or any of its material vendors or suppliers will not be fully Year 2000 compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a material adverse effect upon the financial condition of the Borrower." (c) Paragraph (3) of Section V.A. of the Loan Agreement is hereby amended and restated in its entirety as follows: "(3) as soon as available, but not later than 45 days after the end of each month, an unaudited consolidated balance sheet of the Borrower as of the end of such month and a consolidated income statement and consolidated statement of earnings, operations, cash flows and members' equity for each such month, prepared in accordance with GAAP and certified (subject to normal year-end audit adjustment and the absence of footnotes) on behalf of the Borrower by the chief financial officer of the Borrower, provided, that the Borrower shall be required to comply with this paragraph (3) only during any period in which a Loan is outstanding;" (d) Paragraph (7) of Section V.A. of the Loan Agreement is hereby amended and restated in its entirety as follows: "(7) as soon as available, but no later than 45 days after the end of each March, June, September and December of each Fiscal Year, (a) a summary aging schedule of the Receivables as of the last day of such month for the Borrower, and (b) a Borrowing Base Certificate as of the last day of such month executed by the chief financial officer of the Borrower; provided, that during any period in which a Loan is outstanding, the summary aging schedule and Borrowing Base Certificate described in clauses (a) and (b) above shall be required to be delivered to the Bank as soon as available, but not later than 45 days after the end of each month;" 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) The representations and warranties made by the Borrower in the Loan Agreement, as amended hereby, and in each other Loan Document to which it is a party deliv- -2- 3 ered to the Bank on or prior to the date hereof are true and correct on and as of the date hereof as though made on and as of the date hereof (except to the extent such representations and warranties expressly relate to an earlier date). (b) The Borrower has all requisite power and authority to execute, deliver and perform this Amendment and the Amended and Restated Note (as defined below) and to perform the Loan Agreement, as amended hereby. (c) The execution, delivery and performance by the Borrower of this Amendment and the Amended and Restated Note, and the performance by the Borrower of the Loan Agreement, as amended hereby, (i) do not and will not contravene any law or any contractual restriction binding on or affecting the Borrower or any of its properties, and (ii) do not and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties, other than in favor of the Bank. (d) Each of this Amendment, the Amended and Restated Note and the Loan Agreement, as amended hereby, constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower In accordance with its terms. 4. Continued Effectiveness of the Loan Agreement. Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects except that on and after the date hereof (i) all references in the Loan Agreement to "this Agreement," "hereto," "hereof," "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (ii) all references in the other Loan Documents to the "Loan Agreement," "thereto," "thereof," "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and all references in the Loan Documents to the "Note," "thereto," "thereof," "thereunder" or words of like import referring to the Note shall mean the amended and restated promissory note attached as Exhibit A hereto (the "Amended and Restated Note"). 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. 6. Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 7. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. 8. Amendment as Loan Document. The Borrower hereby acknowledges and agrees that this Amendment constitutes a "Loan Document." 9. Effectiveness. This Amendment will become effective on the date upon which the following conditions precedent shall have been satisfied: (i) execution and delivery of -3- 4 this Amendment by the parties hereto; and (ii) the Borrower shall have executed the Amended and Restated Note and delivered it to the Bank. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the date first above written. MARTHA STEWART OMNIMEDIA LLC By: /s/ Barry Pincus --------------------------- Name: Barry Pincus Title: CFO NATIONSBANK, N.A. By: /s/ Jane R. Heller --------------------------- Name: Jane R. Heller Title: SVP Acknowledged and Agreed this 30th day of June, 1998: MARTHA STEWART, INC. By: /s/ Barry Pincus --------------------------- Name: Barry Pincus Title: Treasurer THE MARTHA STEWART FAMILY LIMITED PARTNERSHIP By: /s/ Martha Stewart --------------------------- Martha Stewart General Partner /s/ Martha Stewart - - - ------------------------------- Martha Stewart -4- EX-4.4 6 AMENDMENT #2 TO LOAN AGREEMENT 1 EXHIBIT 4.4 AMENDMENT NO. 2 TO LOAN AGREEMENT AMENDMENT NO. 2, dated as of March 30, 1999 (the "Amendment"), to the LOAN AGREEMENT, dated as of February 3, 1997, as amended (the "Loan Agreement"), between MARTHA STEWART LIVING OMNIMEDIA LLC, a Delaware limited liability company (the "Borrower"), and NATIONSBANK, N.A. (the "Bank"). The parties desire to amend the Loan Agreement. Therefore, in consideration of the premises and the agreements herein, the Borrower hereby agrees with the Bank as follows: 1. Definitions. All terms used herein which are defined in the Loan Agreement and not otherwise defined herein are used herein as defined therein. 2. Amendments. (a) Section I.A of the Loan Agreement is hereby amended and restated in its entirety as follows: "A. "Affiliate" of the Bank means any other Person which, directly or indirectly, controls or is controlled by or is under common control with the Bank and, without limiting the generality of the foregoing, includes (i) any Person which beneficially owns or holds 10% or more of any class of voting securities of the Bank or 10% or more of the equity interest in the Bank, (ii) any Person of which the Bank beneficially owns or holds 10% or more of any class of voting securities or in which the Bank beneficially owns or holds 10% or more of the equity interest in such Person and (iii) any director, officer, member or partner of the Bank." (b) Section I.N. of the Loan Agreement is hereby amended by (i) deleting the phrase "the Partnership Security Agreement and the Stewart Security Agreement" and (ii) inserting in place of such deleted phrase "the Company Security Agreement." (c) The Loan Agreement is hereby amended by inserting the following after Section I.P.: "P-1. "Company Guaranty" means the Continuing and Unconditional Guaranty of the Stewart Company, dated February 6, 1997, as the same may be amended, modified or supplemented from time to time. 2 2 P-2 "Company Security Agreement" means the Security Agreement, dated February 6, 1997, between the Stewart Company and the Bank, as the same may be amended, modified or supplemented from time to time." (d) Section I.U. of the Loan Agreement is hereby amended and restated in its entirety as follows: "U. "Debt Service Coverage Ratio" means, for any period, the consolidated net income of the Borrower and the Subsidiaries for such period plus (to the extent such items were deducted in the determination of such consolidated net income) the sum for such period of (i) the Borrower's and the Subsidiaries' consolidated interest expense, (ii) provision for taxes based on or measured by income for the Borrower and the Subsidiaries and (iii) the Borrower's and the Subsidiaries' provision for amortization (including, without limitation, amortization of intangibles), divided by the sum for such period of (w) the current portion of principal and interest on Indebtedness and Capital Lease Obligations, (x) the Borrower's and the Subsidiaries' consolidated interest expense, (y) Capital Expenditures and (z) all distributions, whether in cash, securities or other property, declared by the Borrower to be payable to any holder of any membership interest, capital stock or other equity security of the Borrower in respect of such interest, stock or security ("Dividends") (other than Dividends paid pursuant to Section 9.2 of the LLC Agreement as in effect on the date hereof )." (e) Section I.EE. of the Loan Agreement is hereby amended and restated in its entirety as follows: "EE. [intentionally omitted]." (f) Section I.QQ. of the Loan Agreement is hereby amended and restated in its entirety as follows: "QQ. "Loan Document" means any of this Agreement, the Note, the Security Documents, the Company Guaranty and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by the Borrower or the Stewart Company in connection with the Loans, and from and after such time, if any, that Stewart and the Stewart Partnership execute and deliver guaranties and security agreements to the Bank as contemplated by Section 4.(j)(iii) of the Note, the term "Loan Documents" shall include such guaranties and security agreements." (g) Section I.RR. of the Loan Agreement is hereby amended and restated in its entirety as follows: "RR. "Loan Parties" mean, collectively, the Borrower and the Stewart Company and from and after such time, if any, that Stewart and the Stewart Partnership are required to execute and deliver guaranties and security agreements to the Bank as contemplated by Section 4.(j)(iii) of the Note, the term "Loan Parties" shall include Stewart and the Stewart Partnership." 3 3 (h) Section I.TT. of the Loan Agreement is hereby amended by amending and restating clauses (i) and (ii) thereof as follows: "(i) the business, assets, liabilities, properties, prospects, operations or financial or other condition of the Loan Parties taken as a whole, (ii) the ability of the Loan Parties to perform or pay the Obligations in accordance with the terms hereof or of any other Loan Document or to perform their obligations thereunder or" (i) Section I.UU. of the Loan Agreement is hereby amended and restated in its entirety as follows: "UU. "Maturity Date" means June 30, 2000 or such later date that is established pursuant to Section II.G." (j) Section I.WW. of the Loan Agreement is hereby amended and restated in its entirety as follows: "WW. "Note" means the promissory note of the Borrower , in the form of Exhibit A to the Amendment No. 2 to this Agreement, dated as of March 31, 1999, as such promissory note may be modified or extended from time to time, and any promissory note or notes issued in exchange or replacement thereof." (k) Section I.YY. of the Loan Agreement is hereby amended by inserting the phrase "to the Bank or its Affiliates" (i) following the phrase "from time to time owing by it" in clause (i) thereof and (ii) following the phrase "such Loan Party's other obligations" in clause (ii) thereof. (l) Section I.MMM. of the Loan Agreement is hereby amended by (i) deleting the phrase the Borrower Security Agreement, the Partnership Security Agreement, the Stewart Security Agreement" therein and (ii) inserting in place of such deleted phrase the following: "the Borrower Security Agreement, the Company Security Agreement". (m) The Loan Agreement is hereby amended by inserting the following after Section I.OOO: "OOO-1. "Stewart Company" means Martha Stewart, Inc., a Connecticut corporation." (n) Section I.VVV.(iii) of the Loan Agreement is hereby amended by inserting the phrase "(other than the LLC Agreement)" following the phrase "in connection therewith". (o) Section IV.F. of the Loan Agreement is hereby amended and restated by deleting the balance of such Section following the phrase "assets or rights" contained therein and inserting in place thereof the following: 4 4 ", except as such as could not reasonably be expected to cause a Material Adverse Effect." (p) Section IV.H. of the Loan Agreement is hereby amended by deleting the phrase "All taxes and assessments" and inserting in its place the phrase "All material taxes and assessments". (q) Section IV.L. of the Loan Agreement is hereby amended and restated in its entirety as follows: "L. ERISA. With respect to the provisions of ERISA: (1) Each Plan has complied with and has been administered in all material respects in accordance with applicable provisions of ERISA and the Code other than any non-compliance which would not be reasonably expected to have a Material Adverse Effect. (2) No Reportable Event has occurred with respect to any Plan that resulted or is reasonably likely to result in any unpaid liability that would be reasonably expected to have a Material Adverse Effect. (3) The present value of all accrued benefits under each Single Employer Plan maintained by the Borrower or any ERISA Affiliate (based on then current assumptions used to fund such Plan as of the last annual valuation date applicable thereto), did not, as of such valuation date, exceed the value of the assets of each such Plan allocable to such benefit, except where such event would not reasonably be expected to have a Material Adverse Effect and, to Borrower's knowledge, no material change has occurred to such funded status as of the valuation date. (4) Neither the Borrower nor any ERISA Affiliate has received notice that any Multiemployer Plan is in reorganization or insolvent where such reorganization or insolvency has resulted, or would be reasonably likely to result in an unpaid liability that would be reasonably expected to have a Material Adverse Effect nor, to the best knowledge of the Borrower, is any such reorganization or insolvency (which would be reasonably expected to have a Material Adverse Effect) reasonably likely to occur. Neither the Borrower nor any ERISA Affiliate has incurred any unpaid withdrawal liability, or is reasonably expected to incur any withdrawal liability, to any Multiemployer Plan (which in any such case would be reasonably expected to have a Material Adverse Effect)." (r) Section IV.N. of the Loan Agreement is hereby amended and restated in its entirety as follows: "N. [intentionally omitted]." 5 5 (s) Section IV.Q. of the Loan Agreement is hereby amended by (i) deleting the phrase "and its Affiliates" in each of the places it appears therein and (ii) amending and restating clause 1(ii) thereof in its entirety as follows: "(ii) developed a plan for becoming Year 2000 complaint in all material respects in a timely manner, the implementation of which is on schedule in all material respects." (t) Section V.A.(3) of the Loan Agreement is hereby amended and restated in its entirety as follows: "(3) [intentionally omitted];" (u) Section V.A(6) of the Loan Agreement is hereby amended by (i) deleting the phrase "November 30" contained therein and replacing it with the phrase "December 15" and (ii) deleting the phrase "and within 45 days after the end of each fiscal quarter, an update or revision to such plan," and replacing it with the following: "and within 45 days after the end of each fiscal quarter either (i) notify the Bank that the Borrower has not updated or revised such plan or (ii) furnish the Bank with an update or revision to such plan if it has been revised or updated,". (v) Section V.A.(8) of the Loan Agreement is hereby amended by (i) deleting the phrase in clause (a) thereof "the breach by" and replacing such deleted phrase with the phrase "the material breach by" and (ii) deleting the phrase "the Borrower, the Subsidiaries or any other Loan Party" in clause (g) thereof and replacing such deleted phrase with the phrase "the Loan Parties". (w) Section V.A.(8)(c) of the Loan Agreement is hereby amended by deleting the phrase "the adverse determination of" contained therein. (x) Section V.A.(8)(e) and (f) of the Loan Agreement are hereby amended by adding at the end of each thereof the phrase "within 10 Business Days thereof". (y) Section V.H. of the Loan Agreement is hereby amended by inserting the following prior to the phrase ";provided, however": "where the failure to so pay or discharge would reasonably be expected to result in a Material Adverse Effect". (z) Section V.M. of the Loan Agreement is hereby amended and restated in its entirety as follows: "M. [intentionally omitted]." (aa) Section VI.B. of the Loan Agreement is hereby amended and restated in its entirety as follows: 6 6 "B. [intentionally omitted]." (bb) Section VI.C. of the Loan Agreement is hereby amended by (i) amending and restating clause (v) thereof as follows: "(v) Investments not to exceed $5,000,000 in the aggregate for the Borrower and the Subsidiaries," and (ii) adding the following at the end of such Section: ", (ix) other Investments consented to by the Bank, which consent will not be unreasonably withheld and (x) advances to employees made in the ordinary course of business." (cc) Section VI.D. of the Loan Agreement is hereby amended and restated in its entirety as follows: "D. [intentionally omitted]." (dd) Section VI.E. of the Loan Agreement is hereby amended and restated in its entirety as follows: "E. [intentionally omitted]." (ee) Section VI.F. of the Loan Agreement is hereby amended by deleting the phrase "voluntarily or by operation of law, or otherwise dispose of any of its assets" contained therein and replacing it with the following: "voluntarily or by operation of law, or otherwise dispose (except for licenses entered into in the ordinary course of business and dispositions of inventory in the ordinary course of business) of any of its material assets" (ff) Section VI.H. of the Loan Agreement is hereby amended by inserting the following at the end thereof: "and the Term Agreement (as such term is defined in Amendment No. 2 to this Agreement, dated as of March 31, 1999)." (gg) Section VI.N. of the Loan Agreement is hereby amended by (i) deleting the phrase "15%" contained therein and substituting it with the phrase "25%" and (ii) adding the following at the end thereof: ", (iv) customary fees to Persons serving as a director of the Borrower who are not officers or employees of the Borrower or any Subsidiary and (v) indemnification, insurance and similar arrangements for directors and officers of the Borrower or any Subsidiary." (hh) Section VI.O. of the Loan Agreement is hereby amended and restated in its entirety as follows: 7 7 "O. ERISA. Except where any such action or failure to act would not reasonably be expected to result in a Material Adverse Effect: (1) engage in any transaction in connection with which the Borrower or any ERISA Affiliate is reasonably likely to be subject to either a material civil penalty assessed pursuant to the provisions of Section 502 of ERISA or a material tax imposed under the provisions of Section 4975 of the Code; (2) terminate any Pension Plan in a "distress termination" under Section 4041 of ERISA or take any other action which could result in a material liability of the Borrower or any ERISA Affiliate to the PBCG; (3) fail to make payment when due of all amounts which, under the provisions of any Plan, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, or, with respect to any Pension Plan, permit to exist any material "accumulated funding deficiency" (within the meaning of Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect thereto; or (4) adopt an amendment to any Pension Plan requiring the provision of security under Section 307 of ERISA or Section 401(a)(29) of the Code." (ii) Section VI.P. of the Loan Agreement is hereby amended by (i) inserting the phrase "or the Term Agreement" in clause (1) thereof following the phrase "Loan Document" and (ii) deleting the phrase "if the effect thereof could" in clause (2) thereof and replacing such deleted phrase with the phrase "if the effect thereof would reasonably be expected to". (jj) Section VI.Q of the Loan Agreement is hereby amended by inserting the following at the beginning of the text: "other than in connection with the Term Agreement". (kk) Section VIII. of the Loan Agreement is hereby amended by (i) deleting the references therein to "David Steward" and Telecopy No. "(212) 522-7875" and replacing such references with Barry Pincus" and Telecopy No. "(212) 827-8330" and (ii) deleting the references therein to "Credit Services Center" and "Tom Fruge" and replacing such references with "Private Lending Center" and "Jackie Tatikus". 3. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) The representations and warranties made by the Borrower in the Loan Agreement, as amended hereby, and in each other Loan Document to which it is a party delivered to the Bank on or prior to the date hereof are true and correct on and as of the date 8 8 hereof as though made on and as of the date hereof (except to the extent such representations and warranties expressly relate to an earlier date). (b) The Borrower has all requisite power and authority to execute, deliver and perform the Note in the form attached hereto and this Amendment and to perform the Loan Agreement, as amended hereby. (c) The execution, delivery and performance by the Borrower of the Note in the form attached hereto and this Amendment, and the performance by the Borrower of the Loan Agreement, as amended hereby, (i) do not and will not contravene any law or any contractual restriction binding on or affecting the Borrower or any of its properties, and (ii) do not and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties, other than in favor of the Bank. (d) Each of the Note in the form attached hereto and this Amendment and the Loan Agreement, as amended hereby, constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 4. Terminated Documents. Upon the execution and delivery of this Amendment by the parties hereto, the Guaranty, the Partnership Guaranty, the Stewart Security Agreement and the Partnership Security Agreement (as such terms are defined in the Loan Agreement prior to the date of this Amendment) shall be of no further force or effect and shall be deemed terminated and cancelled and all Liens purported to be created by the Stewart Security Agreement and the Partnership Security Agreement shall be fully and effectively discharged and terminated. 5. Continued Effectiveness of the Loan Agreement. Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects except that on and after the date hereof (i) all references in the Loan Agreement to "this Agreement," "hereto," "hereof," "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment, (ii) all references in the other Loan Documents to the "Loan Agreement," "thereto," "thereof," "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (iii) all references in the Loan Documents to the "Note," "thereto," "thereof," "thereunder" or words of like import referring to the Note shall mean the Note in the form attached hereto. 6. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. 9 9 7. Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. 9. Amendment as Loan Document. The Borrower hereby acknowledges and agrees that this Amendment constitutes a "Loan Document." To the extent there is a conflict between the representations, warranties and covenants contained in Sections IV, V and VI (or, where appropriate, the definitions contained in Section I) of the Loan Agreement, dated as of March 30, 1999 (the "Term Agreement"), between the Borrower and the Bank and the representations, warranties and covenants contained in Sections IV, V and VI (and the appropriate definitions contained in Section I) of the Loan Agreement (other than those relating to the revolving nature of the Loans, the Borrowing Base, the Availability and the Maturity Date), the provisions of Sections IV, V and VI (and, where appropriate, Section I) of the Term Agreement shall govern. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered as of the date first above written. MARTHA STEWART OMNIMEDIA LLC By: /s/ Martha Stewart --------------------------------------- Name: Martha Stewart Title: CEO NATIONSBANK, N.A. By: /s/ Jane R. Heller --------------------------------------- Name: Jane R. Heller Title: Senior Vice President EX-10.4 7 MSLO LLC PHANTOM PERFORMANCE UNIT PLAN 1 EXHIBIT 10.4 MARTHA STEWART LIVING OMNIMEDIA LLC PHANTOM PERFORMANCE UNIT PLAN ARTICLE I - GENERAL 1.01 PURPOSE The purposes of the Martha Stewart Living Omnimedia LLC Phantom Performance Unit Plan (the "Plan") are to more closely align the interests of participants in the Plan ("Participants") with those of equity owners ("members") of Martha Stewart Living Omnimedia LLC ("MSLO") and to motivate Participants to achieve "over and above" performance in the future to result in enhanced MSLO profitability and value. 1.02 ADMINISTRATION The Plan shall be administered collectively by the Board of Directors of MSLO or a committee thereof (hereinafter referred to as "the Board") and Martha Stewart. 1.03 ELIGIBILITY FOR PARTICIPATION Eligible participants in the Plan include all employees with at least one year of service with MSLO as of the year end of the year preceding the award year, with an exception for officers of MSLO (i.e., EVP's, SVP's, VP's, and AVP's). Officers of MSLO may be immediately eligible upon their employment with MSLO to participate in the Plan at the discretion of Martha Stewart. 1.04 EFFECTIVE DATE OF THE PLAN The Plan shall become effective on the date approved by the Board. 1 2 ARTICLE II - PHANTOM PERFORMANCE UNITS 2.01 TYPES OF AWARDS UNDER PLAN (a) Phantom Performance Units ("Units") represent a contingent right, pursuant to the terms of this Plan and the related grant letter, to receive (a) shares of MSLO common stock upon consummation of an initial public offering of such stock (an "IPO"), or (b) cash if an IPO does not occur before the fifth anniversary of the date as of which the Units were granted. This contingent right will become vested based on continued employment with MSLO, as provided in Section 2.04 below. (b) The value of a Unit shall be determined based on achieving predetermined MSLO profit targets over the term of the Plan (see Section 2.05 below). 2.02 FREQUENCY OF PHANTOM PERFORMANCE UNIT AWARDS (a) There will potentially be three awards of Units, with the first award year beginning January 1, 1998 ("Year 1"), the next award year beginning January 1, 1999 ("Year 2"), and the last award year beginning January 1, 2000 ("Year 3"). Notwithstanding the preceding sentence, no Units will be awarded following an IPO. (b) Subject to the Change in Control provisions of Section 2.07 below, this plan will be terminated as of the earlier of the successful completion of an IPO, or December 31, 2004. Upon the occurrence of these events, prior grants will be treated as provided in this Plan. 2.03 NUMBER OF PHANTOM PERFORMANCE UNITS AWARDED Year 1 awards will consist of approximately 10,000 Units awarded equally among all eligible employees. The number of Units , if any, awarded in Year 2 and Year 3 will be determined by the Board, based upon, among other considerations, corporate financial performance of MSLO. 2 3 2.04 PHANTOM PERFORMANCE UNIT VESTING REQUIREMENTS Subject to Sections 2.07, 2.08 and 2.09, in order for Units to vest, Participants must remain employed with MSLO through the earlier of (i) the completion of an IPO, and (ii) the fifth anniversary of the date as of which the relevant Units were awarded (the earlier to occur of (i) and (ii), the "Settlement Date"). Upon termination of service with MSLO prior to such time for reasons other than death, Retirement, or Disability, Units will lapse worthless. (See Section 2.08 for a discussion of termination due to the Death of a Participant. See Section 2.09 for a discussion of termination due to Retirement or Disability of a Participant.) 2.05 DETERMINING VALUE OF UNITS The value of a Unit will be based on MSLO's Earnings Before Interest Taxes and Amortization (EBITA) (as defined in Section 3.09(a) below) as of the Settlement Date for such Unit. With respect to each award, the Board shall set forth the Unit values for all possible EBITA's of MSLO as of the Settlement Date for such Units. For Year 1 awards such values shall be determined pursuant to the following matrix:
- - - ------------------------------------------------------------------------------- If MSLO's Less 2x 1997 4x 1997 Equal to EBITA than 2x EBITA EBITA or Greater as of the 1997 Than 6x Settlement EBITA 1997 EBITA Date for Year 1 Awards is: - - - ------------------------------------------------------------------------------- The Value $0 $50 $100 $150 Per Year 1 Unit shall be: - - - -------------------------------------------------------------------------------
Unit values for EBITA performances falling between 2x and 4x, and 4x and 6x, 1997 EBITA will be interpolated on a straight-line basis. For Unit Values for Year 2 and Year 3 Awards, if any, see addendums to the Plan. 3 4 Contingent values for any Units awarded in Year 2 and Year 3 will be determined at the beginning of each of these years by the Board, based upon, among other considerations, EBITA projections and other applicable factors. The Board's determination as to any matter relating to value will be binding on the Participant. The Board shall be under no obligation to issue additional Units in any future period. In the event that MSLO disposes of a significant portion of its businesses, acquires a business or makes a significant investment which, in each case, results in a material change in the nature of MSLO's existing businesses, then the Board may, in its discretion, take such actions with respect to the Unit values as it determines appropriate in light of such transaction, including, without limitation, (i) adjusting the Unit values so that such values relate to the MSLO business as altered by such transaction; (ii) providing that Unit values shall be based on the EBITA of the MSLO businesses as they existed prior to the time of such transaction; or (iii) leaving Unit values unchanged and dependent on the EBITA of the entire MSLO business, as altered by the transaction. 2.06 SETTLEMENT OF PHANTOM PERFORMANCE UNITS (a) The number of shares of MSLO common stock a Participant receives after the completion of an IPO is determined by the number of Units received upon award, multiplied by the value of each Unit as of the date of the IPO, divided by the initial offering price of a share of MSLO common stock in the IPO. A Participant will receive the shares of MSLO common stock due on account of such Participant's Units as soon as is practicable following the consummation of an IPO. At MSLO's discretion, cash may be paid in lieu of fractional shares. (b) Alternatively, if an IPO does not occur prior to the fifth anniversary of the date upon which a Unit was awarded, such Unit will be settled in cash on or about the fifth anniversary of the date on which it was awarded. Settlement in cash is subject to any and all restrictions pursuant to indebtedness of MSLO, whether owed to financial institutions or other parties. In the event settlement in cash is restricted by such indebtedness, MSLO shall settle any such Units by delivering to the Participant a promissory note of MSLO bearing interest at a rate of 5% per annum, compounded annually, payable promptly when such restrictions are no longer applicable. The settlement amount will be determined by multiplying the number of Units received upon award by the value of each Unit. (c) Subject to the provisions of Sections 2.07, 2.08 and 2.09, Participants will receive value for their Units only if the Participant is employed with MSLO on the Settlement Date for such Units. 4 5 2.07 CHANGE IN CONTROL Notwithstanding anything in this Plan to the contrary, in the event of a Change in Control (as defined below) of MSLO, the Board shall value all outstanding Units as of the date immediately prior to such Change in Control, as though such date was the Settlement Date for such Units. Immediately prior to consummation of the Change in Control, Participants employed by MSLO as of such time shall receive the value for their Units determined pursuant to the preceding sentence. The Board, in its discretion, may determine to pay the value of the Units using cash or shares of MSLO common stock, or, if different from the foregoing, the form of consideration to be received by Members or shareholders, as the case may be, of MSLO in the Change of Control transaction. For purposes of this Plan, "Change in Control" shall mean (i) a sale of all or substantially all of the assets of MSLO to an entity not controlled by Martha Stewart and her affiliates (collectively, "Stewart"), or (ii) a merger, tender offer, exchange offer, recapitalization, spin-off or other extraordinary corporate transaction which results in Stewart beneficially owning or controlling (whether by proxy, shareholders agreement or similar arrangement) immediately following such transaction (a) less than 50% of the outstanding voting power of the entity resulting from such transaction and another person or entity becoming the beneficial owner of more than the percentage of the outstanding voting power beneficially owned or controlled by Stewart or (b) less than 30% of the outstanding voting power of the entity resulting from such transaction. 2.08 DEATH OF PARTICIPANT Any Units of a Participant employed with MSLO on the date of such Participant's death shall not terminate as a result of such death and may be settled on the Settlement Date for such Units by the Participant's estate, or by a person who acquires the right to settle such Units by bequest or inheritance or by reason of the death of the Participant. 2.09 RETIREMENT OR DISABILITY OF PARTICIPANT Upon termination of a Participant's employment by reason of retirement (pursuant to the retirement policies of MSLO in effect from time to time), or disability (as determined by the Board), the Participant's Units shall not terminate as a result of such retirement or disability and the Participant may settle any Units as of the Settlement Date for such Units. 5 6 ARTICLE III - MISCELLANEOUS 3.01 NON-ASSIGNABILITY No Unit shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of a Participant, such Participant's Units shall be settled only by such Participant or by such Participant's guardian or legal representative. 3.02 WITHHOLDING TAXES Whenever MSLO is required by the Plan to issue or transfer securities or cash to a Participant in satisfaction of a Unit, MSLO shall have the right to require the recipient to remit to MSLO an amount sufficient to satisfy any Federal, State and/or Local withholding tax requirements prior to the delivery of such securities or cash. Alternatively, MSLO may issue or transfer such securities or cash net of the amount of such securities or cash sufficient to satisfy the withholding tax requirements. 3.03 RIGHT TO TERMINATE EMPLOYMENT Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Participant the right to continue in the employment of MSLO or effect any right which MSLO may have to terminate the employment of such Participant. 3.04 NON-UNIFORM DETERMINATIONS The Board's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan. 3.05 RIGHTS AS A SHAREHOLDER The recipient of any Units under the Plan shall have no rights as a member or shareholder with respect thereto unless and until shares of MSLO common stock are issued to her/him in settlement of such Units. 6 7 3.06 LEAVES OF ABSENCE The Board shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Board shall be entitled to (i) determine whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan, (ii) determine the impact, if any, of any such leave of absence, and (iii) reinstate an employee's Units which had previously been forfeited as a result of such employee's termination of employment with the Company, provided that such employee has re-commenced employment with the Company within six months of such employee's earlier termination (which power shall, until further action of the Board, be exercisable by Martha Stewart at her discretion). 3.07 NEWLY ELIGIBLE EMPLOYEES The Board shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or performance period. 3.08 AMENDMENT OR TERMINATION OF THE PLAN (a) The Board may, without receiving further consideration from the Participants, amend this Plan to comply with changes in tax, securities, exchange, or other rules, laws or regulations applicable to this Plan. (b) The Board may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without the approval of the members of MSLO, the Board may not (i) extend the period during which an award may be granted, or (ii) extend the term of the Plan. The termination or any modification or amendment of the Plan, except as provided above in Section, 3.08(a), shall not, without the consent of a Participant, adversely affect his or her rights under an award previously granted to her or him. 3.09 DEFINITIONS (a) "EBITA" shall, as of a particular time, mean: (1) Net Income (Loss) of MSLO for the four fiscal quarters most recently ended as of such time (with respect to which such 7 8 figures are then available) as it would appear on its statement of income (loss) contained in its audited financial statements (if statements were prepared for such period), which shall reflect a reduction for all management and employee annual bonuses earned and accrued with respect to such period, prepared in accordance with U.S. generally accepted accounting principles (GAAP), consistently applied; - PLUS (MINUS) - (2) Any PROVISION (BENEFIT) for income taxes deducted (added) in calculating such net income (loss); - PLUS (MINUS) - (3) Any net interest expense (net interest income) deducted (added) in calculating such net income (loss). (Note: For purposes of this item, interest expense and interest income will be netted); - PLUS - (4) Amortization expenses deducted in calculating such net income (loss); - PLUS (MINUS) - (5) Any UNUSUAL LOSSES (GAINS) DEDUCTED (ADDED) in calculating such net income (loss). (Unusual items are intended to include transactions considered outside the ordinary course of business, as determined by the Board. EBITA will be adjusted to eliminate the effects, if any, of such transactions, the intent being to calculate EBITA as if such transaction had not occurred); - PLUS (MINUS) - (6) Any COMPENSATION EXPENSE (INCOME) DEDUCTED (ADDED) in calculating such net income (loss) attributable to transactions involving Units of MSLO. 3.10 GOVERNING LAW The Plan will be governed by and in accordance with the laws of the State of Delaware, without regards to its conflicts of laws and principles. 8 9 ADDENDUM #1 TO THE MSLO PHANTOM PERFORMANCE UNIT PLAN: YEAR 2 AWARD VALUES VALUE MATRIX The values for Units awarded as of January 1, 1999, shall be determined as follows:
- - - ------------------------------------------------------------------------------- If MSLO's Less 2.5x 4x 1997 Equal to EBITA than 1997 EBITA EBITA or Greater as of the 2.5x Than 6x Settlement 1997 1997 EBITA Date for EBITA Year 2 Awards is: - - - ------------------------------------------------------------------------------- The Value $0 $60 $120 $180 Per Year 2 Unit shall be: - - - -------------------------------------------------------------------------------
Per Unit values for EBITA performances falling between 2.5x and 4x 1997 EBITA will be interpolated on a straight-line basis. Per Unit values for EBITA performances falling between 4x and 6x 1997 EBITA will be interpolated on a straight-line basis. 9 EX-10.5 8 MSLO NONQUALIFIED CLASS A LLC UNIT/STOCK OPTION 1 EXHIBIT 10.5 MARTHA STEWART LIVING OMNIMEDIA LLC NONQUALIFIED CLASS A LLC UNIT/STOCK OPTION PLAN ARTICLE I - GENERAL 1.01 PURPOSE The purposes of the Martha Stewart Living Omnimedia Nonqualified Class A LLC Unit/Stock Option Plan (the "Plan") are to: (1) closely associate the interests of executives, key employees, and outside consultants of Martha Stewart Living Omnimedia LLC (MSLO) with those of MSLO Class A, Class B, and Class C LLC unitholders by reinforcing the relationship between participants' rewards and unitholder gains; (2) recognize, through participation in the Plan, key performers for their contributions to building the assets of MSLO; (3) motivate key performers to continue to achieve "over and above" performance in the future to result in enhanced MSLO profitability and value; and (4) provide an incentive to executives and key employees for continued employment with MSLO. 1.02 ADMINISTRATION (a) The Plan shall be administered by the Board of Directors or a committee thereof (hereinafter referred to as "the Board"), and by Martha Stewart as provided herein. Martha Stewart may delegate any of her administrative duties hereunder to the Board. (b) Martha Stewart, subject to the approval of the Board, shall have the authority to, from time to time: (i) designate the employees or classes of employees, and the outside consultants eligible to participate in the Plan; (ii) grant awards provided for in the Plan in such form and amount as the Board shall determine; and (iii) impose such limitations, restrictions and conditions upon any such award as the Board shall deem appropriate. (c) Decisions and determinations of Martha Stewart and the Board on all matters relating to the Plan shall be in their sole discretion and shall be conclusive. 1 2 1.03 ELIGIBILITY FOR PARTICIPATION Individuals eligible to be Plan participants are those executives, key employees, and outside consultants that added significant value to the businesses that were previously contributed to or acquired by MSLO and, with respect to employees, were employed in these predecessor businesses before January 1, 1996, with the exception of corporate officers employed after January 1, 1996. Corporate officers employed after January 1, 1996 who occupy responsible managerial or professional positions and who have the capability of making a substantial contribution to the success of MSLO will also be eligible to participate in the Plan. Participants in the Plan shall be selected by Martha Stewart, subject to approval by the Board, based on the purposes of the Plan. In making this selection and in determining the number of Options to be awarded under the Plan, Martha Stewart will consider factors deemed relevant by her, including an individual's functions, responsibilities, value of services to MSLO and an individual's contributions to MSLO's profitability and sound growth. 1.04 TYPES OF AWARDS UNDER THE PLAN Awards to be made under the Plan will be in the form of Nonqualified Class A LLC Unit/Stock Option awards, as further described in Article II, Section 2.01 below, and hereinafter referred to as "Option(s)." 1.05 AGGREGATE LIMITATIONS ON AWARDS (a) Class A LLC units which may be issued under the Plan upon Option exercise prior to an IPO (as defined in Article III, Section 3.10(d) below) shall be Class A LLC units of MSLO. Shares of MSLO common stock which may be issued under the Plan upon Option exercise after an IPO shall be authorized shares of MSLO common stock. The maximum number of Class A LLC units (or shares of MSLO common stock into which such LLC units may be converted) which may be issued under the Plan shall be equivalent to approximately 5% of the number of outstanding LLC units of all classes as of the Effective Date (as defined in Article I, Section 1.06) of the Plan (or shares of MSLO common stock into which such Class A LLC units may be converted). (b) Any Class A LLC units/shares of MSLO common stock subject to an Option, which for any reason is forfeited, terminated unexercised, or expires, shall again be available for issuance under the Plan. 1.06 EFFECTIVE DATE AND TERM OF PLAN The Plan shall become effective on the date (the "Effective Date") it is approved by the Board and approved by other holders of LLC interests, to the extent required by law or the Second Amended and Restated Operating Agreement of the LLC. The term of the Plan is ten years from its 2 3 Effective Date, provided that any Options granted shall remain outstanding consistent with the terms of the Plan and the related Option Agreement. ARTICLE II - CLASS A LLC UNITS/STOCK OPTIONS 2.01 CLASS A LLC UNIT/STOCK OPTION AWARDS Martha Stewart (subject to the provisions of the Plan and to approval by the Board) may award to any eligible individual in the Plan one or more Options to purchase Class A LLC units (if exercise occurs prior to an IPO), or shares of MSLO common stock (if exercise occurs after an IPO). The date on which an Option is awarded shall mean the date selected by the Board when the Board approves its grant of an Option with respect to a specific number of Class A LLC units/shares of MSLO common stock to a participant pursuant to the Plan. In the event of an IPO, all unexercised Options will automatically convert to Options to purchase a number of shares of MSLO common stock, and the related Option Price shall also be adjusted. The Options shall be adjusted so that, upon exercise, each Option would be exercisable for the same number of shares of MSLO common stock that the holder would have received had the Option been exercised immediately prior to the IPO (without regard to vesting or exercisability). The per share Option Price shall be adjusted such that the aggregate Option Price for each Option immediately prior to the IPO equals the aggregate Option Price for the Option thereafter. The Board shall make the determination regarding the foregoing adjustments and shall notify each holder of an Option of the adjustments. After the IPO, all other terms of the Options shall continue to be governed by the terms of this Plan and the related Option Agreement. 2.02 NONQUALIFIED CLASS A LLC UNIT/STOCK OPTION AGREEMENTS The award of an Option shall be evidenced by a written Nonqualified Class A LLC Unit/Stock Option Agreement ("Option Agreement"), executed by MSLO and the holder of an Option (the "Optionee"), stating the number of Class A LLC units/shares of MSLO common stock subject to the Option(s) evidenced thereby, and in such form as the Board may from time to time determine. Each Option shall be governed by the terms of the Option Agreement and this Plan. 2.03 NONQUALIFIED CLASS A LLC UNIT/STOCK OPTION PRICE The Option Price (as defined in Article III, Section 3.10(f) below) per Class A LLC unit/share of MSLO common stock deliverable upon the exercise of an Option shall be determined by the Board as of the date of grant and shall be set forth in the Option Agreement governing such Option. 2.04 TERM, VESTING AND EXERCISABILITY 3 4 Options vest pursuant to the following vesting schedule (whether or not an IPO occurs) unless otherwise modified or accelerated by Martha Stewart and approved by the Board, or as otherwise provided in a specific Option Agreement: - 10% calendar year end 1998 - 10% calendar year end 1999 - 20% calendar year end 2000 - 20% calendar year end 2001 - 40% calendar year end 2002 Vesting of Options pursuant to the above provisions is contingent upon the Optionee's continued employment with MSLO (or, with respect to outside consultants, engagement to perform services for MSLO) through the scheduled vesting dates. Vested options are not exercisable except as provided below. Vested Options become fully exercisable at the earlier of Termination of service with MSLO Without Cause (as defined in Article III, Section 3.10(h) below), or the completion of an IPO (as defined in Article III, Section 3.10(d) below). All Options which vest after an IPO shall be exercisable upon vesting. The term of the Option(s) is ten years beginning at the effective date of the Plan and subject to the terms of the Plan. No Option shall be exercisable after the expiration of the respective Option term. If an IPO or Termination of service Without Cause does not occur within the ten-year term of the Plan, Options will expire unexercised. Upon Termination of service Without Cause (as defined in Article III, Section 3.10(h) below), vested Options as of the date of termination will expire and no longer be exercisable 90 days following termination (except for extended exercise periods upon death, retirement, or disability), and unvested Options as of the date of the termination will expire immediately without exercise. In the event that a Plan participant is Terminated for Cause (as defined in Article III, Section 3.10(g) below), both his/her vested and unvested Options will expire immediately without exercise. (See Article II, Section 2.10 for a discussion of termination due to the Death of Optionee. See Article II, Section 2.11 for a discussion of termination due to Retirement or Disability of an Optionee.) 4 5 2.05 MANNER OF PAYMENT The Optionee shall exercise options by written notice to MSLO, which notice shall specify the number of LLC units/shares to be purchased, and which (except as provided below) shall be accompanied by a check in full payment of the Option Price for such LLC units/shares. Until such payment, the Optionee shall have no rights in the underlying LLC units/shares. The Optionee may exercise Options after an IPO (as defined in Article III, Section 3.10(d) below) in the manner discussed above, or may direct a broker, as specified by MSLO, to execute a cashless exercise transaction whereby Options will be exercised, and shares of MSLO common stock sufficient to cover the Option Price will be sold. The resulting shares of MSLO common stock, net of the shares sold to cover the Option Price, will be issued to the Optionee. The broker will remit the Option Price to MSLO. Alternatively, the Optionee may direct the broker to sell all shares of MSLO common stock subject to the Options exercised, to withhold and remit to MSLO the Option Price, and to remit the sales proceeds net of the above to the Optionee in cash. After an IPO, payment of the Option Price may be made in whole or in part, in the form of unrestricted shares of MSLO common stock already owned by the Optionee based on the Fair Market Value (as defined in Article III, Section 3.10(c)(ii) below) of the common stock on the date of exercise, provided that such shares of MSLO common stock have been held by the Optionee for at least six months at the time of exercise. 2.06 NON-TRANSFERABILITY OF CLASS A LLC UNITS CLASS A LLC UNITS ISSUED UNDER THIS PLAN SHALL NOT BE TRANSFERABLE BY THE OPTIONEE FOR A PERIOD OF SIX MONTHS FOLLOWING THE DATE OF EXERCISE, UNLESS OTHERWISE PERMITTED BY THE BOARD, EXCEPT BY WILL OR BY THE LAWS OF DESCENT AND DISTRIBUTION. HOLDERS OF CLASS A LLC UNITS PURSUANT TO EXERCISED OPTIONS SHALL GENERALLY HAVE NO VOTING RIGHTS IN SUCH UNITS AND STEWART SHALL VOTE SUCH UNITS PURSUANT TO THE LLC AGREEMENT. THEREAFTER, TRANSFERABILITY OF CLASS A LLC UNITS WILL BE DETERMINED BY THE PROVISIONS OF THE THIRD AMENDED AND RESTATED OPERATING AGREEMENT OF THE MSLO LIMITED LIABILITY COMPANY, AS AMENDED FROM TIME TO TIME (THE "LLC AGREEMENT"), WHICH IMPOSES SUBSTANTIAL LIMITATIONS ON TRANSFERABILITY. 2.07 RESTRICTIONS ON CLASS A LLC UNITS As soon as practicable after receipt of payment upon exercise of an Option prior to an IPO (as defined in Article III, Section 3.10(d) below), MSLO shall deliver to the Optionee a certificate or certificates for such Class A LLC units. The Optionee shall become a Unitholder of MSLO with respect to Class A LLC units represented by unit certificates so issued, and as such shall be entitled to all rights of a Class A Unitholder in respect of his/her unitholdings, subject to the following restrictions: 5 6 (a) LEGEND: The certificates for Class A LLC units purchased under this Plan upon Option exercise shall bear the following restrictive legend, (and other appropriate language regarding limitations on transfer): "The MSLO Class A LLC units represented by this certificate have not been registered by MSLO under the Securities Act of 1933 or state securities laws. They are subject to an Option Plan of, and related Option Agreement with, MSLO and they may not be sold or otherwise transferred except as therein provided, or as provided in the Third Amended and Restated Operating Agreement of the MSLO Limited Liability Company (or any successor agreement), and any sale or other transfer in violation thereof shall be void and of no effect. A copy of such Agreement is on file at MSLO's principal office." (b) VOTING RIGHTS: Class A LLC units purchased under this Option by the Optionee will be subject to a proxy pursuant to which Martha Stewart, or in the event of her death or disability, her legally designated representative, the majority Class A LLC unitholder will exercise all voting rights over such Class A LLC units with respect to all matters submitted for the vote or consent of holders of Class A LLC units. Such proxy shall be irrevocable and coupled with an interest for purposes of Delaware law. Each Option holder agrees, as a condition to the receipt of an Option, to execute any additional documents that may be required to effect such proxy. (c) Class A LLC units purchased pursuant to exercise of an Option under this Plan may be re-acquired by MSLO as follows, or disposed of as allowed by the provisions of the Third Amended and Restated Operating Agreement of the MSLO Limited Liability Corporation. (i) MSLO CALL OPTION EXERCISE The Optionee is obligated to resell Class A LLC units to MSLO when "called" upon to do so. Upon receipt of written notification from MSLO of its decision to exercise its "Call Option" with respect to such units, the Optionee agrees to sell all Class A LLC units purchased at the lower of their Book Value (as defined in Article III, Section 3.10(a) below) and their Fair Market Value (as defined in Article III, Section 3.10(c)(i) below) on the "Call Date" (as defined in Article II, Section 2.07 (c)(A) below). 6 7 (A) DELIVERY OF CERTIFICATES AND PAYMENT FOLLOWING A CALL The date on which written notification from MSLO of its decision to exercise its "Call Option" is received by the Optionee will be considered the "Call Date". The certificates for any Class A LLC units to be sold to MSLO pursuant to this Plan will be delivered by the Optionee or her/his legal representative to MSLO at its principal office, duly assigned to MSLO with signature guaranteed, on a date not less than ten (10) nor more than thirty (30) days following the giving of written notice by MSLO of intention to "call" pursuant to the provisions thereof. In exchange therefore, MSLO will pay to the Optionee the lower of the Book Value (as defined in Article III, Section 3.10(a) below) or the Fair Market Value (as defined in Article III, Section 3.10(c)(i) below), of the Class A LLC units on the "Call Date". Payment for such Class A LLC units will either be made in cash or made in the form of a promissory note of MSLO, as provided below. Settlement in cash is subject to any and all restrictions pursuant to indebtedness of MSLO whether owed to financial institution or other parties. In the event that Units would be settled in cash but for the restrictions in such indebtedness, MSLO shall settle such Class A LLC units by delivering to the participant a promissory note of MSLO, payable promptly, when such restrictions are no longer applicable, with the note bearing interest at a rate of 5% per annum, compounded annually. The applicability of the immediately preceding sentence will be determined in the sole discretion of the Board. MSLO will pay all transfer taxes, if any, due in connection with such sale. (B) DURATION OF CALL OPTION The "Call Option" will remain in effect until one of the following events occurs: (a) the consummation of an IPO; or (b) a Change in Control of MSLO, defined as follows: (i) a sale of all or substantially all of the assets of MSLO to an entity not controlled by Martha Stewart and/or her affiliates (collectively, "Stewart"), or (ii) a merger, tender offer, exchange offer, recapitalization, spin-off or other extraordinary corporate transaction (or a sale of LLC units or shares of MSLO common stock) (each a "Transaction") which results in Stewart and her affiliates beneficially owning or controlling in the aggregate (whether by proxy, shareholders agreement or similar arrangement) immediately following such transaction: (a) less than 50% of the outstanding voting power of the entity resulting from such transaction and another person or entity becoming the beneficial owner of more than the percentage of the aggregate outstanding voting power beneficially owned or controlled by Stewart and her affiliates, or (b) less than 30% of the outstanding voting power, or (iii) a majority of the members of the Board is replaced during any 12-month period by individuals whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. The determination of the Board as to the occurrence of a Change in Control shall be final, and it shall promptly notify the Optionee thereof. Upon the occurrence of any of the foregoing events, the obligation of the Unitholder or his/her legal representative to sell to MSLO any Class A LLC units acquired by the Unitholder hereunder shall terminate. 7 8 2.08 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION (a) CLASS A LLC UNITS AND SHARES OF COMMON STOCK AVAILABLE FOR AWARDS AND OPTIONS In the event of any change in the number of LLC units/shares of MSLO common stock outstanding by reason of any recapitalization, merger, consolidation, combination, stock dividend or split, reverse stock split, spin-off, split-up or exchange of LLC units/shares of MSLO common stock or similar corporate event, the maximum aggregate number of Class A LLC units/shares of MSLO common stock with respect to which the Board may award Options shall be appropriately adjusted by the Board and the Board shall likewise appropriately adjust the number of LLC units/shares and the Option Price of any outstanding Option. In the event of any change in the number of LLC units/shares of MSLO common stock outstanding by reason of any other event or transaction, the Board may, but need not, make such adjustments in the number and class of LLC units/shares of MSLO common stock with respect to which Options may be awarded as the Board may deem appropriate. (b) OUTSTANDING CLASS A LLC UNITS AND SHARES OF COMMON STOCK The Board shall appropriately adjust any issuance of Class A LLC units/shares of MSLO common stock, subject to an outstanding Option, to reflect any recapitalization, merger, consolidation, combination, stock dividend or split, reverse stock split, spin-off, exchange of LLC units/shares or similar corporate change as the Board may deem appropriate to prevent the enlargement or dilution of rights of Optionees under the award. (c) OUTSTANDING CLASS A LLC UNITS AND OPTIONS - CERTAIN MERGERS AND CHANGE IN CONTROL TRANSACTIONS In the event of a merger, consolidation or similar event pursuant to which LLC Units/MSLO shares are exchanged for or converted into other securities or property, or with respect to which holders of LLC units/MSLO shares receive any other form of consideration (an "Extraordinary Transaction"), the Board shall appropriately adjust each outstanding Option (including the number of Class A LLC units/shares subject to the Option and the Option Price, as appropriate) such that, upon exercise thereof, each Option will entitle the holder to receive the securities and/or property that such holder would have received had the Option been exercised immediately prior to the Extraordinary Transaction upon payment of the applicable Option Price. Notwithstanding the foregoing, in the event an Extraordinary Transaction is also a Change in Control, the provisions of the penultimate paragraph of this Section 2.08(c) shall apply in lieu of this paragraph. In the event of an IPO (as defined in Article III, Section 3.10(d) below), a Unitholder's Class A LLC interests shall be treated in the same manner as Class A LLC interests not issued pursuant to the Plan, as set forth in the LLC Agreement. 8 9 In the event of a Change in Control (as defined in (B) above), pursuant to the discretion of the Board, at least one of the following alternatives shall apply: (i) each outstanding Option shall become immediately and fully exercisable and shall remain exercisable pursuant to the terms of the Plan; (ii) each outstanding Option shall become immediately and fully exercisable, and shall terminate as of a date to be fixed by the Board, and not less than 30 days written notice of such date shall be given to each Optionee; (iii) each outstanding Option shall be canceled in exchange for a payment in an amount equal to the excess of the highest price paid per Class A LLC Unit in the Change in Control transaction, over the Option Price of the Option (any such payment shall be made by a promissory note if required by Article II, Section 2.07(c)(i)(A)); the Board shall appropriately adjust each outstanding Option pursuant to Article II, Section 2.08 to preserve the value of such Option following the Change in Control transaction, and may provide that, upon exercise thereof, each Option will entitle the holder to receive the securities and/or property that such holder would have received had the Option been exercised immediately as of the date of termination, prior to the Change in Control and the holder had been permitted to sell his/her Class A LLC Units in the Change in Control transaction. The determination of the Board as to the occurrence, and adjustment with respect to, of any of the events specified in this paragraph shall be final, and it shall promptly notify the Optionee and/or Unitholder thereof. (d) NO OTHER RIGHTS Except as expressly provided in the Plan, no Optionee shall have any rights by reason of any subdivision or consolidation of LLC units/shares of stock of any class, any increase or decrease in the number of LLC units/shares of stock of any class or any dissolution, liquidation, merger or consolidation of MSLO or any other corporation. Except as expressly provided in the Plan, no issuance by MSLO of LLC units/shares of stock of any class, or securities convertible into LLC units/shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Class A LLC units/shares of MSLO common stock subject to an Option. 9 10 2.09 CONFIDENTIALITY Optionees shall not, during the period of employment (or, with respect to outside consultants, the period of engagement), or at any time thereafter (irrespective of the circumstances under which Optionee's employment or engagement by MSLO terminates), except as required by law, directly or indirectly give any Confidential Records or Information (as defined in Article III, Section 3.10(b) below) to, or permit any inspection or copying of Confidential Records or Information by, any individual or entity. 2.10 DEATH OF OPTIONEE Upon the death of the Optionee, any vested and exercisable Options, on the date of death, may be exercised by the participant's estate, or by a person who acquires the right to exercise such Options, by bequest or inheritance or by reason of the death of the Optionee within twelve months following termination due to death of the Optionee. 2.11 RETIREMENT OR DISABILITY Upon termination of the Optionee's employment (or, with respect to outside consultants, engagement) by reason of retirement (pursuant to the retirement policies of MSLO in effect from time to time), or disability (as determined by the Board), the Optionee may exercise any Options within twelve months following termination due to retirement or disability of the Optionee to the extent such Options were vested and exercisable as of the date of retirement or disability. 2.12 TERMINATION FOR OTHER REASONS Except as otherwise determined by the Board, all unvested Options shall expire without exercise upon the termination of the Optionee's employment (or engagement) for any reason. In the event an Optionee's employment with (or, with respect to outside consultants, engagement by) MSLO Terminates Without Cause (as defined in Article III, Section 3.10(h) below), vested Options as of the date of termination, will become immediately exercisable for a period of 90 days following such termination. In the event the Optionee's service with MSLO is Terminated for Cause, (as defined in Article III, Section 3.10(g) below), vested as well as unvested Options as of the date of such termination shall expire without exercise immediately upon the termination of the Optionee's employment (or, with respect to outside consultants, engagement). 10 11 ARTICLE III - MISCELLANEOUS 3.01 GENERAL RESTRICTION Each award under the Plan shall be subject to the requirement that, if at any time the Board shall determine that (i) the listing, registration or qualification of the Class A LLC units or shares of MSLO common stock subject or related thereto upon any securities exchange or under any Federal or State law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the Optionee of an Option with respect to the disposition of Class A LLC units or shares of MSLO common stock is, in each case, necessary or desirable as a condition of, or in connection with, the awarding of such Option or the issue or purchase of Class A LLC units or shares of MSLO common stock thereunder, such issue or purchase may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Board. 3.02 NON-ASSIGNABILITY No award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. 3.03 WITHHOLDING TAXES Whenever MSLO is required to issue or transfer Class A LLC units or shares of MSLO common stock under the Plan, MSLO shall have the right to require the Optionee to remit to MSLO an amount sufficient to satisfy any Federal, State and/or Local withholding tax requirements prior to the delivery of any certificate or certificates for such Class A LLC units or shares of MSLO common stock. Alternatively, in the sole discretion of the Board, MSLO may issue or transfer such Class A LLC units or MSLO shares of common stock net of the number of Class A LLC units or shares of MSLO common stock sufficient to satisfy the withholding tax requirement, or the Optionee may deliver to MSLO previously owned shares of MSLO common stock sufficient to satisfy the withholding liability. In the case of a cashless exercise transaction, a broker (as specified by MSLO) may issue or transfer shares of MSLO common stock net of the number of shares of MSLO common stock sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the Fair Market Value of Class A LLC units (as defined in Article III, Section 3.10(c) (i) below) and the Fair Market Value of shares of MSLO common stock (as defined in Article III, Section 3.10(c) (ii) below) shall be determined on the date the tax withholding obligation is incurred. 11 12 3.04 RIGHT TO TERMINATE EMPLOYMENT OR ENGAGEMENT Nothing in the Plan, the Option Agreements, or any other agreements entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of MSLO (or, with respect to outside consultants, to be engaged by MSLO), or effect any right which MSLO may have to terminate the employment (or, with respect to outside consultants, the engagement) of such participant. 3.05 NON-UNIFORM DETERMINATIONS Determinations by the Board and/or Martha Stewart under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan. 3.06 RIGHTS AS A UNITHOLDER/SHAREHOLDER The recipient of any award under the Plan shall have no rights as a unitholder/shareholder with respect thereto unless and until she/he has given written notice of exercise and has paid the Option Price in full, and has satisfied all applicable tax withholding requirements. The rights and privileges of LLC unitholders are governed by the LLC Agreement, as amended from time to time, except as specifically modified herein, and Class A LLC units purchased pursuant to an Option shall also be subject to the proxy described in Section 2.07(b) of this Plan. 3.07 LEAVES OF ABSENCE The Board shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any employee leave of absence taken by the Optionee. Without limiting the generality of the foregoing, the Board shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and pursuant to its Termination Policy, as described in Section I, (E) of MSLO House Rules and Etiquette and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any Optionee who takes such leave of absence. 12 13 3.08 NEWLY ELIGIBLE OPTIONEES The Board and Martha Stewart shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any individual who becomes eligible to participate in the Plan, or any portion thereof, after the commencement of an award or incentive period. 3.09 AMENDMENT OF THE PLAN (a) Except as set forth in Section 3.09(b) below, the Board may, without further action by Class A, Class B and Class C LL unitholders (or shareholders following an IPO), and without receiving further consideration from the participants, terminate the Plan or amend the provisions of this Plan or condition or modify awards under this Plan for any reason whatsoever, except that no termination, amendment or modification that adversely affects a participant's rights under an award previously awarded to him or her may be made without such participant's consent unless it is in response to changes in tax, securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with exchange rules or requirements. (b) Without LLC unitholder approval (or, if after an IPO, shareholder approval), the Board may not (i) increase the maximum number of Class A LLC units or shares of MSLO common stock which may be issued under the Plan (other than increases pursuant to Article III, Section 2.08 above), (ii) extend the period during which any award may be awarded or exercised, (iii) extend the term of the Plan or (iv) modify or amend the provisions of Article II, Section 2.07 above. 3.10 DEFINITIONS In this Plan, the following definitions shall apply: (a) "Book Value" of Class A LLC units in all cases will be determined by the Board on a semi-annual basis, to the extent necessary, in its sole discretion based on generally accepted accounting principles (GAAP) as consistently applied. In the event that transactions that require a determination of Book Value fall in between the Board's semi-annual determinations of Book Value, the determination of Book Value made on the semi-annual valuation date immediately preceding such transactions shall be used. The Board's determination as to any matter relating to Book Value hereunder, will be final and binding on both MSLO and any Optionee. (b) "Confidential Records or Information" means all MSLO LLC, LLC unitholder, and general business correspondence, memoranda, files, manuals, books, lists, financial, operating or marketing records, magnetic tape, or electronic or other media or equipment of any kind, or confidential or proprietary information which may be in the Optionee's possession or under his/her control or accessible to him/her. "Confidential Records or Information" will not include information that has become publicly available other than due to a breach by the Optionee of the obligation herein. 13 14 (c) (i) "Fair Market Value" of Class A LLC units will in all cases be determined by the Board, in its sole discretion, on a semi-annual basis, to the extent necessary, based on consultation with investment bankers or other financial advisors. In the event that transactions that require a determination of Fair Market Value fall in between semi-annual valuation dates, the determination of Fair Market Value made on the semi-annual valuation date immediately preceding such a transaction shall be used. The Board's determination as to any matter relating to Fair Market Value hereunder, including without limitation, the method of valuation to be applied, will be final and binding on both MSLO and the Optionee. (ii) "Fair Market Value" as of any date in respect of any shares of MSLO common stock shall be defined as: (i) the average of the closing bid and asked price of a share of MSLO common stock on such date if shares of MSLO common stock are traded on NASDAQ or, (ii) the average of the high and low price of a share of MSLO common stock on such date as reported on the composite trading system if shares of MSLO common stock are traded on NYSE or AMEX. If there was no such price (or the common stock was not traded) on such date, Fair Market Value shall be determined on the last preceding date or on which there was such a price (on which the common stock was traded). (d) "Initial Public Offering" ("IPO") shall mean upon the consummation of a public offering for shares of MSLO common stock pursuant to a registration statement filed with the Securities and Exchange Commission on Form S-1, or some similar form, that has become effective. (e) "Option" means an MSLO Nonqualified Class A LLC Unit/Stock Option. (f) "Option Price" means the purchase price per Class A LLC unit/share of MSLO common stock deliverable upon the exercise of a Nonqualified Class A LLC Unit/Stock Option. (g) "Termination for Cause" may occur at the option of MSLO because the Optionee: (1) has been convicted of, or has pled guilty or nolo contendere to a felony or to any other crime involving moral turpitude, or (2) has embezzled or misappropriated MSLO funds or property, or (3) has continued use of alcohol or drugs to an extent that interferes with the performance by the Optionee of her/his employment (or, with respect to outside consultants, engagement) responsibilities, or (4) has violated the Confidentiality provisions of Article II, Section 2.09, above, or (5) has been terminated for any other reason pursuant to MSLO's Discipline Policy, as defined in Section I, (E) of MSLO House Rules and Etiquette, or 14 15 (6) has materially breached any employment, consulting or other agreement with MSLO, or (7) has failed to use reasonable best efforts to perform his/her duties and obligations of employment with (or engagement by) MSLO. (h) "Termination Without Cause" is any cessation of an Optionee's employment with (or, with respect to outside consultants, engagement by) MSLO other than a Termination for Cause (as defined in Section 3.10(g) above), retirement or disability. 3.11 GOVERNING LAW The Plan will be governed by and in accordance with the laws of the State of Delaware, without regards to its conflicts of laws and principles. 15 EX-23.1 9 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP New York, New York July 29, 1999 EX-23.2 10 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 1, 1997, with respect to the financial statements of Martha Stewart Living (a wholly owned operation of Time Inc.) as of December 31, 1996 and for the year then ended included in the Registration Statement (Form S-1) and related Prospectus of Martha Stewart Living Omnimedia, Inc. for the registration of Class A common stock. ERNST & YOUNG LLP New York, New York July 28, 1999 EX-24.1 11 POWERS OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation (hereinafter referred to as the "Registrant"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1933, as amended, a registration statement on Form S-1 with respect to shares of Class A common stock of the Registrant (the "Registration Statement"); WHEREAS, the undersigned is Chairman of the Board and Chief Executive Officer of the Registrant, as indicated below her signature; and WHEREAS, the undersigned hereby constitutes and appoints Gregory Blatt (with full power to act alone), her true and lawful attorney-in-fact and agent, with full power of substitution, for her and on her behalf to sign, execute and file this Registration Statement and any or all amendments (including, without limitation, post-effective amendments and any amendment or amendments or abbreviated registration statement increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as she might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 26th day of July, 1999. /s/ Martha Stewart -------------------------------------- Name: Martha Stewart Title: Chairman of the Board and Chief Executive Officer 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation (hereinafter referred to as the "Registrant"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1933, as amended, a registration statement on Form S-1 with respect to shares of Class A common stock of the Registrant (the "Registration Statement"); WHEREAS, the undersigned is President, Chief Operating Officer and a director of the Registrant, as indicated below her signature; and WHEREAS, the undersigned hereby constitutes and appoints Gregory Blatt (with full power to act alone), her true and lawful attorney-in-fact and agent, with full power of substitution, for her and on her behalf to sign, execute and file this Registration Statement and any or all amendments (including, without limitation, post-effective amendments and any amendment or amendments or abbreviated registration statement increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as she might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 26th day of July, 1999. /s/ Sharon Patrick -------------------------------------- Name: Sharon Patrick Title: President, Chief Operating Officer and Director 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation (hereinafter referred to as the "Registrant"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1933, as amended, a registration statement on Form S-1 with respect to shares of Class A common stock of the Registrant (the "Registration Statement"); WHEREAS, the undersigned is Senior Vice President, Finance and Controller of the Registrant, as indicated below his signature; and WHEREAS, the undersigned hereby constitutes and appoints Sharon Patrick and Gregory Blatt, or either of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf to sign, execute and file this Registration Statement and any or all amendments (including, without limitation, post-effective amendments and any amendment or amendments or abbreviated registration statement increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 29th day of July, 1999. /s/ James Follo -------------------------------------- Name: James Follo Title: Senior Vice President, Finance and Controller 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation (hereinafter referred to as the "Registrant"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1933, as amended, a registration statement on Form S-1 with respect to shares of Class A common stock of the Registrant (the "Registration Statement"); WHEREAS, the undersigned is a director of the Registrant, as indicated below her signature; and WHEREAS, the undersigned hereby constitutes and appoints Sharon Patrick and Gregory Blatt, or either of them (with full power to each of them to act alone), her true and lawful attorney-in-fact and agent, with full power of substitution, for her and on her behalf to sign, execute and file this Registration Statement and any or all amendments (including, without limitation, post-effective amendments and any amendment or amendments or abbreviated registration statement increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 26th day of July, 1999. /s/ Charlotte Beers -------------------------------------- Name: Charlotte Beers Title: Director 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation (hereinafter referred to as the "Registrant"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1933, as amended, a registration statement on Form S-1 with respect to shares of Class A common stock of the Registrant (the "Registration Statement"); WHEREAS, the undersigned is a director of the Registrant, as indicated below his signature; and WHEREAS, the undersigned hereby constitutes and appoints Sharon Patrick and Gregory Blatt, or either of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution, for him and on his behalf to sign, execute and file this Registration Statement and any or all amendments (including, without limitation, post-effective amendments and any amendment or amendments or abbreviated registration statement increasing the amount of securities for which registration is being sought) to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 26th day of July, 1999. /s/ L. John Doerr -------------------------------------- Name: L. John Doerr Title: Director EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1998 AND MARCH 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 3-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 MAR-31-1999 24,578 17,363 0 0 25,260 29,738 0 0 6,522 8,088 59,673 58,408 11,468 11,380 0 0 125,372 123,467 53,635 59,382 27,650 12,000 0 0 0 0 0 0 36,815 43,434 125,372 123,467 0 0 180,048 53,379 0 0 152,663 45,959 0 0 0 0 2,243 457 25,142 6,963 1,336 344 23,806 6,619 0 0 0 0 0 0 23,806 6,619 0 0 0 0
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