Interesting reading from the Martha Stewart Omnimedia 10-K. Beyond the extravagant package Martha has for appearing in The Apprentice: Martha Stewart -- $500,000 an episode -- things are well spelled out in the Executive Summary. Notice the package for Mark Burnett, of reality TV fame:
via Level 12
EXECUTIVE SUMMARY
Since June 2002, public disclosure of various governmental investigations
into Martha Stewart's sale of non-Company stock and of the criminal and
civil proceedings against Ms. Stewart arising out of the investigations
has generated a great deal of negative publicity surrounding Ms. Stewart.
Because our principal brand and several brand labels are closely
associated with the name Martha Stewart, we have experienced substantial
negative impacts on our business as a result of the resolution of these
legal proceedings and resulting negative publicity. Although difficult to
quantify with any precision, we believe that the uncertainty and publicity
surrounding these matters contributed substantially to the adverse trends
our business has experienced since June 2002.
Although we cannot provide any assurances regarding future trends, based
on our current view of the market, we are cautiously optimistic about the
Company's prospects in 2005, including prospects for an increase in
advertising pages and revenue in certain of the Company's magazines, as
well as potential benefits from the launch of a new syndicated television
program in the Fall of 2005, which is being distributed by NBC Universal
Domestic Television Distribution. Additionally, as part of an agreement
discussed below, the Company will participate in the production of a
primetime network television series titled, The Apprentice: Martha
Stewart. This new program will feature Martha Stewart as the host and will
be broadcast by NBC. While MSO will not have a direct financial interest
in the prime-time program, MSO expects to benefit from promotion of the
Company's brands, products and its business. We expect that this program
will expose the brand to a wider audience of viewers, consumers and
business partners.
On June 4, 2003, a federal grand jury in the United States District Court
for the Southern District of New York indicted Ms. Stewart, then the
Company's Chairman and Chief Executive Officer, on charges of obstruction
of an agency proceeding, making false statements to federal investigators,
conspiracy, and securities fraud. That same day, the Securities and
Exchange Commission ("SEC") filed a civil complaint against Ms. Stewart,
in the United States District Court for the Southern District of New York,
alleging violations of federal securities law. On July 10, 2003, the SEC
action was stayed until further order of the court. Following the
indictment, Ms. Stewart resigned her positions as Chairman and Chief
Executive Officer, but retained her roles as a director and the Company's
Chief Creative Officer. A new Chairman and CEO assumed those positions.
On March 5, 2004, Martha Stewart was found guilty of conspiracy,
obstruction of an agency proceeding, and making false statements to
federal investigators concerning her personal sale of non-Company stock.
On March 15, 2004, Ms. Stewart resigned her positions as a director and
Chief Creative Officer of the Company, and assumed the position of
Founding Editorial Director, a non-officer position. Ms. Stewart later
assumed the role of Founder. On July 16, 2004, Ms. Stewart was sentenced
to five months in prison and two years of supervised release, which
includes five months of home confinement to be served immediately upon
release from prison. Ms. Stewart has completed her prison term.
On April 22, 2004, we reached an agreement with Kmart to amend the terms
of our contract and executed certain releases with respect to a legal
action Kmart filed against the Company on February 11, 2004. We believe
that this agreement better aligns the two companies' mutual business
interests. In connection with the amendment and releases, on April 23,
2004, Kmart voluntarily dismissed its complaint with prejudice,
terminating the litigation. The amendment, among other things, extends the
Kmart contract for an additional two years and expands the scope of the
contract to cover several new product categories. At the same time, the
amendment eliminates, with respect to 2003 and subsequent years,
provisions of the contract providing for payment of guaranteed minimum
royalties by individual product category and reduces the amount Kmart is
obligated under the contract to spend with MSO on advertising in MSO media
properties. The amendment also reduces the aggregate minimum royalty
payments. The aggregate minimum royalty payment for the period February 1,
2004 to January 31, 2005 was reduced to $49.0 million from $53.4 million
previously. We continue to expect that the minimum guaranteed royalty
payments will exceed actual royalties earned from retail sales through
January 31, 2008. For the contract years ending January 31, 2009 and
2010 (the extension years), the minimum guarantees will be substantially
lower than in prior years. The specific computation is discussed in the
paragraph below. [omitted]
For the year ending January 31, 2009 the minimum royalty amount is the
greater of $20 million or 50% of the earned royalty for the year ending
January 31, 2008. For the year ending January 31, 2010 the minimum royalty
amount is the greater of $15 million or 50% of the earned royalty for the
year ending January 31, 2009. Furthermore, $3.8 million of the January 31,
2005 and January 31, 2006 minimum royalty payments and $2.5 million of the
January 31, 2007 and January 31, 2008 minimum royalty payments, but not
more than $10.0 in the aggregate over the term of the agreement, will be
deferred and subject to recoupment in the periods ending January 31, 2009
and January 31, 2010.
In August 2004, we decided to discontinue the Catalog for Living and its
online product offerings, which are included in the Internet/ Direct
Commerce segment. The operations of the Catalog for Living and the online
component of this business were not profitable. In the future, the
Internet/ Direct Commerce segment will principally consist of our online
flowers program, marthasflowers.com, as well as the online content portion
of our business.
The operations of our television segment were significantly reduced in
2004. Pending the launch of our new syndicated television program, the
segment primarily consists of a cable television distribution agreement
with The Style Network, a weekly syndicated program - Petkeeping with Marc
Morrone and effective January 2005 a weekly show airing on PBS stations
nationwide - Everyday Food. Previously, the segment included our
nationally syndicated daily show, Martha Stewart Living, as well as
several other cable television shows.
In September 2004, we entered into agreements (referred to above) with
Mark Burnett, a well regarded producer of prime-time programming, and an
affiliated entity under which Mr. Burnett will advise and consult with the
company regarding various television matters, including developing
opportunities to evolve the future Martha Stewart Living daily syndicated
television show and relating to the development and production of a
primetime network television series to feature Martha Stewart. In
connection with the consulting agreement with Mr. Burnett, MSO issued to
Mr. Burnett a warrant to purchase up to 2.5 million shares of MSO's Class
A Common Stock at the market price on the date of signing or $12.59 per
share. The warrant will vest and become exercisable in several tranches,
subject to the achievement of various milestones achieved with respect to
various television programs. We currently expect to begin to recognize as
an expense, a portion of the 2.5 million shares in mid 2005, when certain
milestones are achieved.
