MARTHA STEWART LIVING OMNIMEDIA, INC.
2013 ANNUAL REPORT >NOTICE OF 2014 ANNUAL MEETING >PROXY STATEMENT >ANNUAL REPORT ON FORM 10-K
A Message from our CEO and our Founder
Dear Stockholders,
INSPIRATION - IT’S WHERE WE STARTED AND WHAT WE ARE
Almost twenty-five years ago, Martha Stewart Living published its first inspirational issue with the following statement: “Our Company is about this wonderful life, and about how to live it. About going home again, and about building a house. About a glorious feast, and chocolate chip cookies. About gardens of flowers and rows of beans. It’s about the American Dream, and the reality that’s in our hands.” While the world of the past few decades has experienced amazing and rapid change, this simple statement continues to inspire us. It is an invaluable guidepost for all the things we do for our readers, our retail partners, our stockholders and ourselves.
We are Makers, Doers, Cooks, Gardeners, Crafters, Learners, Sharers, Embracers of Technology and Starters of Conversations and Ideas. And, most importantly, we touch like-minded people through our dynamic content and quality products. We are passionate weavers of inspiration, deeply connected with our loyal community that shares the same desire to live well. We see our message resonating with our growing and increasingly diverse community, and we will look to expand our influence abroad this year. Passion, creativity and community are our core principles, and they will continue to guide how we approach our business and our customers.
INSPIRING PRODUCTS
We are proud of our relationships with many of the best retailers and manufacturers in North America. Companies such as Macy’s, The Home Depot, J.C. Penney, PetSmart, Michael’s and Jo-Ann Fabric & Craft Stores (through our craft manufacturing partners Wilton Properties, Plaid Enterprises and Lion Brand Yarn) partner with us to translate our ideas and brands into successful consumer retail experiences in their thousands of stores. North America is our biggest geography in terms of merchandise partnerships, and we continue to strive to offer high-quality affordable products to our customers. We believe there is more opportunity in North America to grow with our existing partners and identify new relationships to underpin growth and earnings.
INSPIRING CONTENT
Whether it’s in our magazines, on the web or on television, consumers look to us for guidance, inspiration and creativity, and we continue to deliver high-quality content across all platforms. Our audience is increasingly engaging with our content on mobile devices. In the fourth quarter of 2013, we saw strong performance in views of our video content and increased visits to our websites from mobile devices. Consumers are also engaging more with our brands via social media, demonstrated by almost 9 million fans and followers across all platforms, including 1 million fans on Facebook and almost 3 million followers on Twitter. We have a growing presence on PBS, drawing a total of 1.8 million viewers a week from our successful Martha Bakes and Martha’s Cooking School series. We are also consistently nominated for, and win, prestigious industry awards for our TV show, website, and magazines.
As an indicator of our popularity outside of North America, we have international editions of our magazines and related content in eight countries - Turkey, Germany, Mexico, Australia, China, Indonesia, Netherlands, and Hungary, publish our books worldwide, including in Russia, France, the United Kingdom, Spain, Australia and Israel and 40% of the traffic to our websites comes from visitors outside of the United States. Our international partnerships have allowed us to test the popularity of our brand outside the United States and we continue to explore interest in our content on a global scale. While each market has a unique heritage, culture and commercial environment, we believe these populations share a universal connection to living well. In many ways, these international markets provide opportunities for a brand like ours to help teach and inspire a whole new generation to live well - akin to where we started in America many decades ago. We are confident that over the long term we will succeed at connecting our passion with these eager consumers.
INSPIRING THE COMMUNITY
We have also been building our community through our successful American Made initiative, which is a celebration of individuals and companies that are reviving and reinventing this country’s deep-rooted spirit of artisanship and entrepreneurialism. We expanded the initiative in November by joining forces with eBay to launch an e-commerce site to support many of these American artists, artisans, crafters and purveyors. Our third American Made celebration is scheduled for the fall of 2014 in New York City. We are proud to have been early champions of American entrepreneurship, and our Company, some two decades later, remains the embodiment of that spirit.
INSPIRING YOU, OUR STOCKHOLDERS
2013 was a year of positive change for Martha Stewart Living Omnimedia. We overcame a number of significant challenges and took aggressive steps to realign our business to benefit from promising opportunities in the marketplace. We made some tough decisions to reduce our costs to match current and projected revenue opportunities and the realities of a highly competitive marketplace. With the realignment and other matters now behind us, and with the brightest and most creative employees and best-in-class retail partners, we look with great promise to the future for our brand and the ultimate harnessing of its earnings power.
Thank you for your continued support.
Sincerely,
Daniel W. Dienst Martha Stewart Chief Executive Officer Founder MARTHA STEWART LIVING OMNIMEDIA, INC.
2014 Proxy Statement
NOTICE OF 2014 ANNUAL MEETING OF STOCKHOLDERS April 7, 2014 Dear Stockholder:
You are cordially invited to attend the Martha Stewart Living Omnimedia, Inc. 2014 Annual Meeting of Stockholders to be held on Tuesday, May 20, 2014 at 10:00 a.m., Eastern time. The 2014 Annual Meeting of Stockholders (the "Annual Meeting") will be a virtual stockholder meeting through which you can view the meeting, submit questions and vote online. The Annual Meeting can be accessed by visiting www.virtualshareholdermeeting.com/mso2014 and entering your 12-digit Control Number.
As permitted under Securities and Exchange Commission rules, we have elected to deliver our proxy materials to the majority of our stockholders over the Internet. We believe this process increases the ability of our stockholders to receive the materials and information they require, lowers the costs of our Annual Meeting, and conserves natural resources. On April 7, 2014, we mailed to our stockholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to access our proxy statement for our 2014 Annual Meeting of Stockholders and fiscal 2013 annual report to stockholders. The Notice also provides instructions on how to vote online or by telephone and includes instructions on how to receive a paper copy of the proxy materials by mail. If you received your proxy materials by mail, the notice of annual meeting, 2014 Proxy Statement and proxy card from our Board of Directors were enclosed. You will find your 12-digit Control Number on your Notice or your proxy card, depending on which you received.
The attached Notice of Annual Meeting of Stockholders and Proxy Statement contain details of the business to be conducted at the Annual Meeting. It is important that your shares be represented and voted at the meeting regardless of the size of your holdings and whether you plan to virtually attend the meeting. Accordingly, please vote your shares as soon as possible in accordance with the instructions you received.
On behalf of the Board of Directors, I would like to express our appreciation for your continued investment in Martha Stewart Living Omnimedia, Inc. I very much look forward to our 2014 Annual Meeting of Stockholders.
Sincerely,
Daniel W. Dienst
Chief Executive Officer
601 West 26th Street New York, New York 10001 (212) 827-8000 MARTHA STEWART LIVING OMNIMEDIA, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Time and Date: 10:00 a.m. Eastern time, on Tuesday, May 20, 2014
Place: Online only at: www.virtualshareholdermeeting.com/mso2014 You will not be able to attend the Annual Meeting in person.
Admission: To participate, vote, or submit questions during the Annual Meeting via live webcast, please visit www.virtualshareholdermeeting.com/mso2014 and be sure to have your 12-digit control number (included in your Notice of Internet Availability of Proxy Materials).
Agenda: 1. To elect 6 directors to our Board of Directors, each to hold office until our 2015 annual meeting of stockholders or until their successors are duly elected and qualified; 2. To cast a non-binding advisory vote to approve named executive officer compensation (“say-on-pay”); 3. To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2014; 4. To consider and vote upon a stockholder proposal regarding special meetings to be called by stockholders, if properly presented; and 5. To transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof.
Record Date: You are entitled to vote only if you were a Martha Stewart Living Omnimedia, Inc. stockholder as of March 25, 2014.
Voting: Your vote is very important. Whether or not you plan to attend the Annual Meeting via live webcast, we encourage you to read this proxy statement and submit your proxy or voting instructions as soon as possible via the Internet, through computer or mobile device such as a tablet or smartphone; the telephone; or mail.
By order of the Board of Directors,
ALLISON HOFFMAN
Executive Vice President, General Counsel & Corporate Secretary
New York, New York April 7, 2014
YOUR VOTE IS IMPORTANT
Please note that we are only mailing a full set of our proxy materials for the 2014 Annual Meeting to those stockholders who specifically request printed copies. If you have only received a Notice Regarding the Availability of Proxy Materials in the mail and wish to request printed copies, please follow the instructions in the Notice. TABLE OF CONTENTS
Page
Proxy Statement Summary i
Questions and Answers about the Proxy Materials and the Annual Meeting 1
Proxy Materials 1
Voting Information 2
Attending the Annual Meeting 4
Additional Information 5
Directors, Executive Officers and Corporate Governance 7
Directors and Executive Officers 7
Director Nominations and Qualifications 9
Corporate Governance and Board Matters 9
Proposal 1: Election of Directors 15
Director Compensation 16
Compensation Arrangements for Non-Employee Directors 16
Director Compensation Table 18
Security Ownership of Certain Beneficial Owners and Management 20
Section 16(a) Beneficial Ownership Reporting Compliance 22
Proposal 2: Advisory Vote on the Compensation of our Named Executive Officers 23
Compensation Discussion and Analysis 24
Overview 24
Section 1- Executive Summary 24
Section 2 - Elements of 2013 Compensation 29
Section 3 - Other Compensation Information 33
Compensation Committee Report 36
Employment Agreements and Compensatory Arrangements 37
Summary Compensation Table 41
Grant of Plan-Based Awards in 2013 43
Outstanding Equity Awards at Fiscal Year-End 2013 45
Option Exercises and Stock Vested During 2013 47 Potential Payments Upon Termination or Change in Control 48
Certain Relationships and Related Person Transactions 52
Policies and Procedures Regarding Transactions with Related Persons 52
Related Persons Transactions 53
Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm 55
Audit Committee Matters 56
Report of the Audit Committee 56
Fees Billed by Ernst & Young 56
Stockholder Proposals 58
Proposal 4: Special Shareowner Meetings 59 PROXY STATEMENT SUMMARY
This summary highlights information contained elsewhere in this proxy statement. It does not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting.
References to “we,” “us,” “our,” “the Company” and “MSO” refer to Martha Stewart Living Omnimedia, Inc.
Voting
Stockholders of record of our Class A common stock, par value $0.01 per share (“Class A Common Stock”) and Class B common stock, par value $0.01 per share (“Class B Common Stock”) as of March 25, 2014, the Record Date, are entitled to vote. Each share of Class A Common Stock entitles its holder to one vote, while each share of Class B Common Stock entitles its holder to ten votes. Holders of our Class A Common Stock and Class B Common Stock will vote together as a single class on all matters to be voted upon at the Annual Meeting.
Attending the Annual Meeting
We will be hosting the Annual Meeting live via Internet webcast. You will not be able to attend the meeting in person. Any stockholder can listen to the meeting and participate via live webcast at www.virtualshareholdermeeting.com/mso2014. The webcast will begin at 10:00 a.m., Eastern time, on May 20, 2014. Stockholders may vote and submit questions during the meeting. Please have your 12-digit control number to enter the meeting. Instructions on how to connect and participate via the Internet, including how to demonstrate proof of stock ownership, are posted at www.virtualshareholdermeeting.com/mso2014.
Voting Matters
MSO Board Voting Page Reference Proposal Recommendation (for more detail)
FOR Election of Six Directors Each director nominee 15 Advisory Vote to Approve Named Executive Officer Compensation FOR 23 Ratification of Appointment of Ernst & Young LLP as Independent Auditors FOR 55 Vote on Stockholder Proposal Concerning Special Stockholder Meetings AGAINST 59
Our Director Nominees For more detailed information, please refer to “Directors, Executive Officers and Corporate Governance” beginning on page 7.
Director Principal Committee Memberships Name Age Since Occupation Independent AC CC NCGC FC Daniel W. Dienst 48 2013 Chief Executive Officer, MSO Founder, Chief Creative Martha Stewart 72 2011 Officer, MSO Former CEO, US Tennis Arlen Kantarian 61 2009 Association X, LD X X X William Roskin 72 2008 Founder, Roskin Consulting X X Chair Chair Alt. Vice President, Finance, Margaret M. Smyth 50 2012 Consolidated Edison X Chair X X Chief Executive Officer, Pierre deVillemejane 47 2013 WWRD Holdings Limited X X X Chair
AC Audit Committee LD Lead Director CC Compensation Committee Chair Chairperson NCGC Nominating and Corporate Governance Committee Alt. Alternate Member FC Finance Committee
Each director nominee serves as a current director and attended at least 75% of all meetings of the board of directors, and each committee on which he or she sat, during 2013.
i Executive Compensation Highlights
Pay for Performance Alignment
The recently completed 2013 fiscal year was challenging for MSO as we continued our business and organizational transition to return the Company to profitability while continuing to generate unique and high-quality ideas, inspirations, content and products. We delivered a $54.5 million improvement in operating income from the prior year, growth in our Merchandising segment and impressive consumer engagement through our digital offerings. We also underwent several leadership changes. Following the resignation of Lisa Gersh in February 2013, we appointed Daniel Taitz as interim principal executive officer until Daniel W. Dienst was appointed as Chief Executive Officer in October 2013. Mr. Taitz subsequently stepped down as Chief Administrative Officer on December 31, 2013.
Financial highlights are summarized below:
2013 Results 2012 Results (in thousands, except per (in thousands, except per Financial Metric share amounts) share amounts) Revenues $160,675 $197,627 Operating loss $(1,897) (56,396)* Loss per share (basic and diluted) $(0.03) $(0.83)* * Includes a non-cash goodwill impairment charge
Although we have improved over the prior year, our 2013 results fell short of our expectations in most cases and had the following impact on compensation:
• Annual bonuses were not paid to our executive officers, including our named executive officers.
• Performance based restricted stock units granted prior to and in 2013 to certain of our named executive officers and tied to the performance of the Company's stock did not vest.
Further, in conjunction with the amendment of her employment agreement and in an effort to return the Company to profitability, Ms. Stewart's base salary was reduced by 10% to $1.8 million.
For more information, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC.
Key Features of our Executive Compensation Program
We designed our compensation programs for named executive officers to attract, motivate and retain the key executives who drive our success. Pay that reflects performance and alignment of that pay with the interests of our stockholders are the key principles that underlie our compensation program and decisions. In that regard, we:
• consider peer group competitive pay and practices in establishing compensation;
• have robust stock ownership guidelines that encourage our named executive officers to act as owners with an equity stake in the Company thereby aligning their interests closely with stockholders;
• schedule and price stock option grants to promote transparency and consistency;
• pay reasonable salaries to our senior executives;
• award performance based equity that ties vesting to the performance of our Common Stock;
• enhance retention by subjecting a significant percentage of total compensation to multi-year vesting;
• do not include excise tax gross-ups in change in control termination benefits; and
• do not encourage unnecessary and excessive risk taking.
For more detailed information, please refer to “Compensation Discussion and Analysis” beginning on page 24. ii Auditors For more detailed information, please refer to “Fees Billed by Ernst & Young” beginning on page 56.
We are asking our stockholders to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2014. Set forth below is summary information with respect to the fees paid or accrued by us for the audit and other services provided by Ernst & Young LLP during 2013 and 2012.
2013 2012 Audit fees $ 797,900 $ 829,015 Audit-related fees 28,000 28,000 Tax fees 36,622 41,809 All other fees 2,172 2,172 Total fees $ 864,694 $ 900,996
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QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND THE ANNUAL MEETING
Proxy Materials
1. Why am I receiving these materials?
The Board of Directors (the “Board”) of Martha Stewart Living Omnimedia, Inc. is providing these proxy materials to you on the Internet or, upon your request, has delivered the proxy materials to you, in connection with MSO’s 2014 Annual Meeting of Stockholders. As a stockholder, you are invited to attend the Annual Meeting and are requested to vote on the items of business described in this proxy statement. This proxy statement includes materials that we are required to provide to you under Securities and Exchange Commission ("SEC") rules and that are designed to assist you in voting your shares.
2. What is included in the proxy materials?
The proxy materials include:
• Our proxy statement for the 2014 Annual Meeting of Stockholders;
• Our 2013 Annual Report to Stockholders (the "2013 Annual Report"), which consists of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013; and
• Your proxy card for the Annual Meeting.
3. What information is included in the proxy materials?
The information in this proxy statement relates to the proposals to be voted on at the Annual Meeting, the voting process, our Board and Board committees, the compensation of directors and certain executive officers, corporate governance matters, and certain other required information.
4. Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a full set of printed proxy materials?
Pursuant to rules adopted by the SEC, we may furnish proxy materials, including this proxy statement and our 2013 Annual Report to Stockholders, to our stockholders electronically via the Internet instead of mailing printed copies. Unless a stockholder previously requested paper delivery of communications from us, a stockholder will receive a Notice of Internet Availability of Proxy Materials instructing the stockholder as to how to access and review all of the proxy materials on the Internet.
5. What is "householding"?
The SEC permits us to deliver a single copy of the Notice of Internet Availability of Proxy Materials, and if applicable, the proxy statement and 2013 Annual Report, to multiple stockholders who share the same address unless we received contrary instructions from one or more of the stockholders. Each stockholder will continue to receive a separate proxy card. By “householding” we can reduce printing costs, mailing costs and fees.
If you are a stockholder of record and wish to receive a separate Notice of Internet Availability of Proxy Materials or the proxy statement and 2013 Annual Report, or if your household is receiving multiple sets of these documents and would prefer to receive only one set, please contact Broadridge by telephone at 1-800-542-1061 or by mail at Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, N.Y. 11717. Stockholders owning their shares through a bank, broker, or other nominee may request to discontinue or begin householding by contacting their bank, broker or nominee. You can also request additional copies by sending a written request to the Corporate Secretary, Martha Stewart Living Omnimedia, Inc., 601 West 26th St., New York, New York 10001. 1 Table of Contents
6. How can I access the proxy materials over the Internet?
The Notice of Internet Availability of Proxy Materials and proxy card will contain instructions on how to view our proxy materials for the Annual Meeting on the Internet and vote your shares. The proxy materials, as well as other financial information, are also available on our Investor Relations website at: www.marthastewart.com under the link for “Investor Relations.” Voting Information
7. Who is entitled to vote at the Annual Meeting?
The record date for the Annual Meeting is March 25, 2014. Stockholders of record and beneficial owners as of that date are entitled to vote at the Annual Meeting. You are considered a stockholder of record if you hold Common Stock in your name in an account with our stock transfer agent, Broadridge Corporate Issuer Solutions, Inc. (“Broadridge”). You are a beneficial owner if you hold Common Stock indirectly through a broker, bank or other nominee.
On the Record Date, we had 31,156,460 shares of Class A Common Stock and 25,734,625 shares of Class B Common Stock outstanding.
8. How do I vote my shares?
You can vote your shares:
• By Internet: You can vote electronically in accordance with the instructions on your proxy card or, if you are a beneficial owner, in accordance with any electronic voting instructions provided to you by the record holder, as applicable. • By Telephone: If you received your proxy materials by mail or if you request paper copies of the proxy materials, you can vote by calling 1-800-690-6903 and following the instructions on your proxy card or, if you are a beneficial owner, in accordance any telephonic voting instructions provided to you by the record holder, as applicable. • By Proxy Card: If you received your proxy materials by mail or if you request paper copies of the proxy materials, you can vote by completing and returning your signed proxy card in the postage-paid envelope. If you vote by telephone or Internet, you should not return your proxy card unless you wish to change your vote. • During the Annual Meeting: Instructions on how to vote while participating in our Annual Meeting live via the Internet are posted at www.virtualshareholdermeeting.com/mso2014. Shares held beneficially may not be voted during our Annual Meeting.
Telephone and Internet voting facilities for stockholders of record will be available 24 hours a day and will close at 11:59 p.m. Eastern Time on May 19, 2014.
9. How many votes am I entitled per share?
Each holder of shares of Class A Common Stock is entitled to one vote for each share of Class A Common Stock held as of the Record Date, and each holder of shares of Class B Common Stock is entitled to ten votes for each share of Class B Common Stock held as of the Record Date. The holders of Class A Common Stock and Class B Common Stock are voting as a single class on all matters described in this proxy statement for which your vote is being solicited.
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10. Can I change my vote or revoke my proxy?
You may change your vote at any time prior to the taking of the vote at the Annual Meeting. If you are a stockholder of record, you may change your vote and grant a new proxy bearing a later date by:
• signing and returning a new proxy card with a later date; • submitting a later-dated vote by telephone or via the Internet (only your last telephone or Internet vote will be counted) by 11:59 p.m. Eastern time on May 19, 2014; • participating in the Annual Meeting live via the Internet and voting again by telephone or via the Internet; or • sending a written notice of revocation to our Corporate Secretary at Martha Stewart Living Omnimedia, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, New York, 11717 prior to the Annual Meeting.
11. Is my vote confidential?
Proxy instructions, ballots, and voting tabulations that identify individual stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within MSO or to third parties, except: (1) as necessary to meet applicable legal requirements, (2) to allow for the tabulation of votes and certification of the vote, and (3) to facilitate a successful proxy solicitation.
12. How many shares must be present or represented to conduct business at the Annual Meeting?
The quorum requirement for holding the Annual Meeting and transacting business is that holders of a majority of the voting power of our Class A Common Stock and Class B Common Stock outstanding as of the Record Date must be present in person or represented by proxy. Both abstentions and broker non-votes (described below) are counted for the purpose of determining the presence of a quorum.
13. How are my votes counted?
In the election of directors, you may vote “FOR” all or some of the nominees or your vote may be “WITHHELD” with respect to one or more of the nominees. In tabulating voting results for the election of directors, only “FOR” votes are counted.
For the other items of business to be brought before the Annual Meeting, you may vote “FOR,” “AGAINST,” or “ABSTAIN.” If you “ABSTAIN” in any of the other items of business to be brought before the Annual Meeting, the abstention has the same effect as a vote “AGAINST.”
If you provide specific instructions with regard to certain items, your shares will be voted in accordance with your instructions on such items. If no instructions are indicated, the shares will be voted as recommended by the Board.
14. What is a "broker non-vote"?
If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute “broker non-votes.” Broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-routine” matters. All of the matters scheduled to be voted on at the Annual Meeting are “non- routine,” except for the proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2014.
In tabulating the voting result for any particular proposal, shares that constitute broker “non-votes” are not considered entitled to vote on that proposal. Thus, broker “non-votes” will not affect the outcome of any matter being voted on at the Annual Meeting, assuming that a quorum is obtained.
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15. What is the voting requirement to approve each of the proposals?
In the election of directors, each director will be elected by the vote of a plurality of “FOR” votes cast with respect to that director nominee. The approval of the remaining four proposals described below requires the affirmative “FOR” votes of the holders of a majority of the voting power of the Company’s Class A Common Stock and Class B Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote thereon, voting together as a single class:
(1) advisory vote to approve executive compensation;
(2) ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2014;
(3) the stockholder proposal regarding special stockholder meetings; and
(4) any other items of business that may be properly brought before the Annual Meeting.
16. What happens if additional matters are presented at the Annual Meeting?
Our Board does not intend to present any business at the Annual Meeting other than the proposals described in this proxy statement. However, if any other matter properly comes before the Annual Meeting, the persons named as proxy holders, Daniel W. Dienst and Kenneth P. West, will act on such matters in their discretion as permitted.
17. Who will bear the cost of soliciting votes for the Annual Meeting?
MSO will pay the entire cost of preparing, assembling, printing, mailing, and distributing these proxy materials and soliciting votes. In addition to the mailing of these proxy materials, the solicitation of proxies or votes may be made in person, by telephone, or by electronic communication by our directors, officers, and employees, who will not receive any additional compensation for such solicitation activities. Upon request, we will reimburse banks, brokers, custodians, nominees and fiduciaries for their reasonable charges and expenses to forward our proxy materials to beneficial owners in accordance with applicable rules.
18. Where can I find the voting results of the Annual Meeting?
We will announce preliminary voting results at the Annual Meeting and publish the final voting results in a Current Report on Form 8-K filed with the SEC within four business days of the Annual Meeting.
Attending the Annual Meeting
19. Can I attend the Annual Meeting?
We will be hosting the 2014 Annual Meeting live via the Internet. You will not be able to attend the meeting in person. Any stockholder can listen to and participate in the Annual Meeting live via the Internet at www.virtualshareholdermeeting.com/mso2014. The webcast will start at 10:00 a.m., Eastern time, on May 20, 2014. Stockholders may vote and submit questions while connected to the Annual Meeting on the Internet.
20. What do I need in order to participate in the Annual Meeting online?
In order to participate in the Annual Meeting online, you will need the 12-digit control number included on your Notice of Internet Availability of Proxy Materials or your proxy card (if you received a printed copy of the proxy materials) in order to be able to submit questions or vote your shares during the meeting. Instructions on how to connect and participate via the Internet, including how to demonstrate proof of stock ownership, are posted at www.virtualshareholdermeeting.com/mso2014.
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Additional Information
21. What is the deadline to propose actions for consideration at next year's Annual Meeting of Stockholders or to nominate individuals to serve as directors?
Stockholders may present proper proposals for inclusion in our proxy statement and for consideration at the next annual meeting of stockholders by submitting their proposals in writing to our Corporate Secretary in a timely manner. For a stockholder proposal to be considered for inclusion in our proxy statement for our 2015 Annual Meeting of Stockholders, our Corporate Secretary must receive the written proposal at our principal executive offices no later than December 31, 2014. If we hold our 2015 Annual Meeting of Stockholders more than 30 days before or after May 20, 2015 (the one-year anniversary of our 2014 Annual Meeting of Stockholders), we will disclose the new deadline by which stockholder proposals must be received under Item 5 of Part II of our earliest possible Quarterly Report on Form 10-Q or, if impracticable, by any means reasonably determined to inform stockholders. In addition, stockholder proposals must otherwise comply with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Proposals can be addressed to Martha Stewart Living Omnimedia, Inc., Attn: Corporate Secretary, 601 West 26th Street, New York, New York 10001.
Our bylaws also establish advance notice procedures for certain matters, including for stockholders who wish to present a proposal before an annual meeting of stockholders but do not intend for the proposal to be included in our proxy statement or for stockholders who wish to nominate individuals for election to the Board. To be timely for our 2015 Annual Meeting of Stockholders, our Corporate Secretary must receive written notice at our principal executive offices:
• not earlier than the close of business on February 19, 2015, and
• not later than the close of business on March 21, 2015.
If we hold our 2015 Annual Meeting of Stockholders more than 30 days before or 60 days after May 20, 2015 (the one-year anniversary of the 2014 Annual Meeting of Stockholders), then notice of a stockholder proposal that is not intended to be included in our proxy statement or a nomination for director must be received:
• not earlier than the 90th day prior to the 2015 Annual Meeting of Stockholders, 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 public announcement of the date of the 2015 Annual Meeting.
Stockholders must also comply with certain other applicable requirements contained in our bylaws.
If a stockholder who has notified us of his or her intention to present a proposal at an annual meeting does not appear to present his or her proposal at such meeting, we are not required to present the proposal for a vote at such meeting. We reserve the right to reject, rule out of order or take other appropriate action with respect to any proposal or nomination that does not comply with these and other applicable requirements contained in our bylaws and applicable laws.
22. Where can I obtain corporate governance materials?
Our corporate governance materials are posted on our website (www.marthastewart.com) under the link for “Investor Relations - Corporate Governance.” In addition, stockholders may obtain paper copies of our corporate governance materials by sending a written request to Martha Stewart Living Omnimedia, Inc., Attn: Corporate Secretary, 601 West 26th Street, New York, New York 10001.
23. Where can I obtain more information about the Company?
Stockholders can access our stockholder forum at www.theinvestornetwork.com/forum/mso to learn more about the Company and to submit questions in advance of the Annual Meeting. Stockholders may also view our proxy
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materials, vote through the Internet and access the live webcast of the Annual Meeting through the stockholder forum. To access the forum, you must have your 12-digit control number available.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The names of our directors and executive officers and their ages, positions and biographies as of April 7, 2014 are set forth below. Our executive officers are appointed by, and serve at the discretion of our Board. There are no family relationships among our directors or executive officers.
Name Age Position Martha Stewart 72 Non-Executive Chairman of the Board, Founder and Chief Creative Officer Daniel W. Dienst 48 Chief Executive Officer and Director Arlen Kantarian 61 Lead Director Pierre deVillemejane 47 Director William Roskin 71 Director Margaret M. Smyth 50 Director Allison Hoffman 43 Executive Vice President, General Counsel and Corporate Secretary Allison Jacques 49 Senior Vice President, Controller and Principal Accounting Officer Patricia Pollack 59 Senior Executive Vice President, Merchandising Kenneth P. West 55 Executive Vice President and Chief Financial Officer
Martha Stewart, our founder, has served as one of our directors since September 2011 and was elected Non- Executive Chairman of the Board in May 2012. In addition, Ms. Stewart became the Company’s Chief Creative Officer in 2012, a role she previously held from 2003 to 2004. In 2010, the Board appointed Ms. Stewart Chief Editorial, Media and Content Officer. Ms. Stewart previously served as Chairman of the Board from the Company’s creation in 1996 until June 2003 when she resigned as a director. She also served as Chief Executive Officer from 1996 until 2003. In March 2004, she resigned and assumed the position of Founder, a non-officer position. In 2004, she was found guilty in the United States District Court for the Southern District of New York of conspiracy, obstruction of an agency proceeding and making false statements to federal investigators in connection with the personal sale of non-Company stock. In 2006, Ms. Stewart settled insider trading charges with the SEC related to that same sale and accepted penalties that included a five-year ban from serving as a director of a public company and a five-year limitation on her service as an officer or employee of a public company. Ms. Stewart is the author of numerous books on the domestic arts.
Daniel W. Dienst, has served as our Chief Executive Officer since October 2013 and has served on our Board since August 2013. From March 2008 through June 2013, Mr. Dienst served as Executive Director and Group Chief Executive Officer of Sims Metal Management Limited (“Sims Metal”) where he was also a member of each of the Safety, Health, Environment & Community Committee, the Nomination/Governance Committee and the Finance & Investment Committee. Mr. Dienst was formerly a director (since June 2001), Chairman (since April 2003), Chief Executive Officer (since January 2004) and President (since September 2004) of Metal Management, which merged with Sims Metal in March 2008. From January 1999 to January 2004, Mr. Dienst served in various capacities with CIBC World Markets Corp., including Managing Director of the Corporate and Leveraged Finance Group. From October 1995 to March 1998, he served in various capacities with Jefferies & Company, Inc., and served as its Vice President for Corporate Finance and Restructurings. Mr. Dienst has also served as Chairman of the Board of Metals, USA, Inc. before its sale to an affiliate of Apollo Management LP in 2005. Arlen Kantarian, has served as one of our directors since February 2009. Mr. Kantarian served as the United States Tennis Association’s Chief Executive Officer of Professional Tennis from March 2000 to December 2008, where he oversaw all aspects of the USTA’s Professional Tennis operations, including the US Open. Prior to working at the USTA, Mr. Kantarian was the President and Chief Executive Officer of Radio City Entertainment and Radio City Music Hall, serving from 1989 to 1998. Mr. Kantarian also served as a Vice President, Marketing for the National Football League from 1981 to 1988. Prior to that, Mr. Kantarian had senior level marketing positions and PepsiCo, Inc. and Colgate-Palmolive Company.
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Pierre deVillemejane, has served as one of our directors since August 2013. Mr. deVillemejane is currently the Chief Executive Officer and a member of the Board of Directors of WWRD Holdings Limited (“WWRD”), the leading provider of luxury home and lifestyle products sold worldwide under a number of well-recognized brands, including Waterford, Wedgwood, Royal Doulton, Royal Albert, Minton and Johnson Brothers. Prior to joining WWRD in March 2009, Mr. deVillemejane was an Advisor at KPS Capital Partners, LP from February 2008. Prior to this, Mr. deVillemejane held several executive roles at Speedline Technologies, which he joined in 1992, including President and Chief Executive Officer from 2003 to 2007. Mr. deVillemejane previously held leadership roles at L’Oreal SA.
William Roskin, has served as one of our directors since October 2008. In 2009, Mr. Roskin founded Roskin Consulting, a consulting firm with a specialty in media-related human relations. Mr. Roskin was a Senior Advisor to Viacom, Inc., a media conglomerate, from 2006 until 2009, when he retired to form Roskin Consulting. Prior to that, Mr. Roskin worked at Viacom, Inc. as the senior executive in charge of the human resources and administration functions from 1988 to 2006, ultimately serving as Executive Vice President. Before joining Viacom, Inc., Mr. Roskin was Senior Vice President, Human Resources at Coleco Industries, Inc. from 1986 to 1988. Prior to joining Coleco Industries, Inc., Mr. Roskin worked for Warner Communications for 10 years. He served as General Counsel to the City of New York’s Department of Personnel and City Civil Service Commission from 1971 to 1976. Within the past five years, Mr. Roskin has also served on the boards of Ritz Interactive, Inc. (2005-2010), ION Media Networks, Inc. (2006-2009) and Media and Entertainment Holdings, Inc. (2006-2008).
Margaret M. Smyth, has served as one of our directors since January 2012. Ms. Smyth is a skilled global business executive who has been the Vice President of Finance for Consolidated Edison, Inc. since 2012. Prior to this, Ms. Smyth served as Vice President and Chief Financial Officer of Hamilton Sundstrand, which is part of United Technologies Corp., from October 2010 to June 2011. Prior to that, she served as Vice President and Corporate Controller of United Technologies Corp. from August 2007 to September 2010. Ms. Smyth served as Vice President and Chief Accounting Officer of 3M Corporation from April 2005 to August 2007. Ms. Smyth has previously held financial leadership positions at Deloitte & Touche and Arthur Andersen. In addition, she has served on the Board of Directors of Vonage Holdings Corporation since September 2012 and is a member of its Audit and Nominating Committees, is a member of the board of Concern Worldwide, a non-governmental, international humanitarian organization dedicated to reducing suffering worldwide through the elimination of poverty, and was a member of the IFRS Interpretations Committee, IASB in London. Ms. Smyth is also an Aspen Institute Henry Crown Fellow and a member of both of the National Association of Corporate Directors and Women Corporate Directors.
Allison Hoffman, has served as our Executive Vice President, General Counsel and Corporate Secretary since August 2013 and joined the Company in December 2012. From June 1999 to September 2012, Ms. Hoffman was employed by ALM Media, LLC, a leading provider of specialized news and information for the legal and commercial real estate sectors, as Senior Vice President, Chief Legal Officer and Secretary (January 2007 - September 2012), Vice President, General Counsel and Secretary (August 2001 to December 2006) and Assistant General Counsel (June 1999 - July 2001). From 1995 to 1999, Ms. Hoffman was an associate in the corporate finance department of Skadden, Arps, Slate, Meagher and Flom LLP. Ms. Hoffman has served on the Board of Directors of Network-1 Technologies, Inc. (OTC Bulletin Board: NTIP) since December 2012 and is the Chairperson of its Compensation Committee and a member of the Audit Committee.
Allison Jacques, currently serves as our Senior Vice President, Controller and Principal Accounting Officer. She has served as our Controller since December 2002 and our principal accounting officer since February 2011. Ms. Jacques previously served as the Company’s interim principal financial and accounting officer from January 2009 to March 2009 and from February 2011 to September 2011. She served as the Assistant Controller from April 1997, when she joined the Company, to December 2002. From June 1991 until March 1997, Ms. Jacques served in various capacities in the finance department of General Media International, Inc. Prior to that, she worked at Grant Thornton LLP as a certified public accountant.
Patricia Pollack, currently serves as our Senior Executive Vice President, Merchandising. Ms. Pollack joined the Company in August 2008 and served as Executive Vice President of Merchandising until her promotion to Senior Executive Vice President in June 2011. Prior to joining the Company, Ms. Pollack served as Chief Executive Officer of Donna Karan Home from 1999 to 2008 and, prior to that, she was President of Calvin Klein Home. Ms. Pollack previously served as Vice President of licensing and marketing for F. Schumacher & Co. and held managerial positions at global textile mill Fieldcrest Cannon. 8 Table of Contents
Kenneth P. West, has served as our Executive Vice President and Chief Financial Officer since September 2011. Mr. West previously served as Executive Vice President and Chief Financial Officer of Marvel Entertainment LLC, a brand-driven licensing and media company from May 2002 to June 2010. From June 2010 to July 2011, he served as an independent consultant to media and entertainment companies. Prior to May 2002, Mr. West, a certified public accountant, was chief financial officer of two middle-market, privately held companies, and spent over 15 years with the Stamford, Connecticut office of Ernst & Young LLP, principally in the auditing division.
Directors Nominations and Qualifications
The Nominating and Corporate Governance Committee works with the Board on an annual basis to determine the appropriate characteristics, skills and experience for the Board as a whole and for its individual members. In evaluating the suitability of individual Board members, the Board takes into account many factors, including general understanding of marketing, finance and other disciplines relevant to the success of a large publicly traded company in today's business environment; understanding of the Company's business and activities on a technical level; and educational and professional background. The Board evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best support the success of the business and, based on its diversity of experience, represent stockholder interests through the exercise of sound judgment. In determining whether to recommend a director for re-election, the Nominating and Corporate Governance Committee also considers the director's past attendance at meetings and participation in and contributions to the activities of the Board.
Upon determining the need for additional or replacement Board members, the Nominating and Corporate Governance Committee will identify one or more director candidates and evaluate each candidate under the criteria described above based on information provided to the committee or may also include discussions with persons familiar with the candidate, an interview of the candidate or other actions the committee deems appropriate. Based on its assessment of each candidate's independence, skills and qualifications and the criteria described above, the Nominating and Corporate Governance Committee will make recommendations regarding potential director candidates to the Board. The Nominating and Corporate Committee may engage third parties to assist in the search for director candidates or to assist in gathering information regarding a candidate's background and experience.
Stockholder Recommendations
The Nominating and Corporate Governance Committee will consider properly submitted stockholder recommendations for candidates to the Board to be included in the Company's annual proxy statement using the same criteria as described above. Stockholders must comply with the advance notice, information and consent provisions contained in our bylaws. See "Questions and Answers About the Proxy Materials and the Annual Meeting" above for more information. Corporate Governance and Board Matters
Code of Ethics
We have adopted a Code of Business Conduct and Ethics ("Code of Ethics"), last amended in January 2014, that applies to all of our directors, officers and employees, including our principal executive officer, our principal financial officer, and our principal accounting officer and controller and persons performing similar functions. Our Code of Ethics requires, among other things, that all of our directors, officers and employees comply with all laws, avoid conflicts of interest, conduct business in an honest and ethical manner and otherwise act with integrity and in the Company's best interest. In addition, our Code of Ethics imposes obligations on all of our directors, officers and employees to maintain books, records, accounts and financial statements that are accurate and that comply with applicable laws and with our internal controls, as well as providing for disclosure controls and procedures. Our Code of Ethics sets forth controls and prohibitions on doing business with related parties. The Code of Ethics also
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provides for a whistleblower hotline that permits employees to report, anonymously or otherwise, ethical or other concerns they may have involving the Company.
The Audit and Nominating and Corporate Governance Committees of the Board adopted a Code of Ethics for the CEO and Senior Financial Officers ("Senior Financial Officer Code of Ethics") in February 2013 as an addendum to the Code of Ethics. The Senior Financial Officer Code of Ethics formalizes the general standards of honesty, integrity and judgment that we expect of all senior financial officers.
We maintain a corporate governance page on our website that includes key information about our corporate governance initiatives, including our Code of Ethics and Senior Financial Officer Code of Ethics. The corporate governance page can be found on our website at www.marthastewart.com under the link for "Investor Relations – Corporate Governance." We will promptly post under the same link amendments to or waivers of our Code of Ethics for Senior Financial Officer Code of Ethics, if any, involving our directors and executive officers.
Corporate Governance and Director Independence
Our Corporate Governance Guidelines state that a majority of the Board will consist of directors who meet the independence requirements of the New York Stock Exchange (“NYSE”) listing standards, as well as the criterion related to contributions to non-profit organizations. A copy of our Corporate Governance Guidelines, which include our definitions for independence, can be found on our website at www.marthastewart.com under the link for "Investor Relations – Corporate Governance." Our Board conducts an annual review to determine whether each of our directors qualifies as independent as defined in our Corporate Governance Guidelines and the NYSE listing standards applicable to board composition. The Board makes an affirmative determination regarding the independence of each director, based upon the recommendation of the Nominating and Corporate Governance Committee.
The independence standards in our Corporate Governance Guidelines provide that an “independent” director is a director whom the Board has determined has no material relationship with the Company or any of its consolidated subsidiaries (collectively, the “Corporation”), either directly, or as a partner, stockholder or officer of an organization that has a relationship with the Corporation. For purposes of this definition, the Corporate Governance Guidelines state that a director is not independent if:
1. The director is, or has been within the last three years, an employee of the Corporation, or an immediate family member of the director is, or has been within the last three years, an executive officer of the Corporation. 2. The director has received, or has an immediate family member who has received, during any consecutive 12-month period during the last three years, more than $120,000 in direct compensation from the Corporation (other than Board and committee fees, and pension or other forms of deferred compensation for prior service). Compensation received by an immediate family member for service as an employee (other than as an executive officer) of the Corporation is not considered for purposes of this standard. 3. (a) The director, or an immediate family member of the director, is a current partner of the Corporation’s internal or external auditor; (b) the director is a current employee of the Corporation’s internal or external auditor; (c) an immediate family member of the director is a current employee of the Corporation’s internal or external auditor who personally works on the Corporation’s audit; or (d) the director, or an immediate family member of the director, was within the last three years (but is no longer) a partner or employee of the Corporation’s internal or external auditor and personally worked on the Corporation’s audit within that time. 4. The director, or an immediate family member of the director, is, or has been within the last three years, employed as an executive officer of another company where any of the Corporation’s present executive officers serves or served at the same time on that company’s compensation committee. 5. The director is a current employee, or an immediate family member of the director is a current executive officer, of a company that has made payments to, or received payments from, the Corporation for property or services in an amount that, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of the other company’s consolidated gross revenues. In addition, the Nominating and Corporate Governance Committee must approve any contribution of $25,000 or more to a non-profit organization where a director or a director’s spouse is an employee. A director is presumed not to be independent if the director, or the director’s spouse, is an employee of a non-profit organization to which
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the Corporation has made contributions in an amount that exceeded $100,000 in any of the last three fiscal years. The Board may determine, however, that a director who does not meet this standard nonetheless is independent based on all the facts and circumstances.
Based on the foregoing standards, the Board determined that each of Pierre deVillemejane, Arlen Kantarian, William Roskin and Margaret M. Smyth is or was independent and has or had no transactions, relationships or arrangements with the Company, except as a director and stockholder of the Company. The Board has determined that Martha Stewart and Daniel W. Dienst are not independent. From January 2013 to October 2013, J. C. Penney Corporation ("J.C. Penney") appointed two directors on our Board to serve as Series A Designees pursuant to rights granted to them in accordance with their ownership of Series A Preferred Stock. The Board had determined that the Series A Designees were not independent due to our commercial relationship with J. C. Penney, J. C. Penney’s stock ownership in the Company, J. C. Penney’s right to elect the Series A Designees and other relevant factors. In October 2013, the Company and J.C. Penney entered into an amendment of our commercial agreement which, among other things, provided for the return of the 11,000,000 shares of our Class A Common Stock held by J.C. Penney (the "Returned Shares") and the one (1) share of our Series A Preferred Stock. Upon surrender by J.C. Penney of the Returned Shares and the Series A Preferred Stock, the Company retired these shares and J.C. Penney removed its Series A Designees from our Board. Upon cancellation of the Series A Preferred Stock, J.C. Penney is no longer entitled to designate for election any members of our Board. See "Certain Relationships and Related Person Transactions" below for more information on our relationship with J.C. Penney.
Board Meetings
During 2013, the Board held twelve meetings. Each of our directors attended, in person or by telephone, at least 75% of the total number of meetings of both the Board of Directors and Board committees on which such director served during the period. Under our Corporate Governance Guidelines, each of our directors is expected to attend our annual meetings. At the time of our 2013 Annual Meeting, we had eight directors, all of whom attended the 2013 Annual Meeting.
Executive Sessions
Executive sessions of our independent directors are held in connection with each regularly scheduled Board meeting and at other times as necessary, and are chaired by our Lead Director. Executive sessions are held without the presence of management, including our Chief Executive Officer and other non-independent directors. Our standing committees also generally meet in executive session at the end of each committee meeting.
Board Leadership Structure and Lead Director
Our Corporate Governance Guidelines do not dictate a particular Board structure and the Board has the flexibility to select its Chairperson and our Chief Executive Officer in the manner it believes is in the best interests of our stockholders. Our Corporate Governance Guidelines provide that the roles of Chairperson and Chief Executive Officer must be separate and filled by two individuals. On May 23, 2012, the Board appointed Ms. Stewart Non- Executive Chairman of the Board and Mr. Dienst has served as our Chief Executive Officer since October 2013. Our current separation of the duties of Chairman of the Board and Chief Executive Officer recognizes the differences between these roles as they are currently defined. Our Chief Executive Officer is responsible for setting the strategic direction of the Company and for the day-to-day leadership and performance of the Company, while the Chairperson’s function is to lead the Board. Therefore, the Company believes that separating the Chairperson and Chief Executive Officer roles is appropriate and in the best interest of its stockholders.
In addition, when the Chairperson is not an independent director, as was the case in 2013, the Company’s Corporate Governance Guidelines provide for an independent lead director (the “Lead Director”). The Lead Director’s responsibilities include presiding over and setting the agendas for executive sessions of the non- management or independent directors, consulting with the Chairperson regarding the scheduling of Board meetings, overseeing the appropriate flow of information to the Board, acting as a liaison between the non- management directors and management with respect to scheduling and agendas for Board meetings and being available for consultation and communication with stockholders as appropriate. Mr. Kantarian currently serves as our Lead Director.
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Stockholders or other interested parties who wish to communicate with a member or members of the Board, including the Lead Director or the non-management or independent directors as a group, may do so by addressing their correspondence to the Board member or members, c/o the Corporate Secretary, Martha Stewart Living Omnimedia, Inc., 601 West 26th Street, New York, New York 10001. The office of the Corporate Secretary will review and forward all correspondence to the appropriate Board member or members for response.
Board Role in Risk Oversight
Risk management is primarily the responsibility of the Company’s management. The Board has oversight responsibility for the processes established to identify, report and mitigate material risks applicable to the Company and has delegated to the Audit Committee its oversight responsibility with respect to financial and accounting risks. The Audit Committee regularly meets and discusses with management, as well as consults the Company’s independent registered public accountant, the Company’s major financial risk exposures and the Company’s risk assessment and risk management policies and their effectiveness.
Each of the Board’s other committees also monitors management in evaluating risks that fall within that committee’s areas of responsibility. In performing this function, each committee has full access to management. The Board believes that the administration of its risk oversight function has not affected the Board’s choice of leadership structure.
Board Committees
In 2013 our Board had four standing committees: an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and a Finance Committee. Each committee is currently comprised of the following independent members:
Nominating and Corporate Audit Compensation Governance Finance Pierre deVillemejane X X Chairperson Arlen Kantarian X X X William Roskin X Chairperson Chairperson Alternate Margaret M. Smyth Chairperson X X
From time to time, the Board may establish ad hoc committees to address particular matters. In June 2013 a Special Committee was formed for the purposes of exploring, advising the Board with respect to, and negotiating various investment opportunities presented to the Company. Mr. Kantarian, Mr. Roskin and Ms. Smyth served on the Special Committee.
Each of our standing committees operates under a written charter. The committee charters can be found on our website at www.marthastewart.com under the link for "Investor Relations – Corporate Governance."
Audit Committee
The primary purpose of the Audit Committee is to assist our Board in overseeing the quality and integrity of our accounting, auditing and financial reporting processes. As more fully described in its charter, the Audit Committee's responsibilities include:
• overseeing our accounting and financial reporting process, including the review of our quarterly and annual financial results; • selecting, retaining and evaluating our independent auditors and reviewing the scope of the auditors' work, including pre-approval of audit and non-audit services; • overseeing the performance of our internal audit function; • reviewing management's assessment of the effectiveness of the Company's internal controls over financial reporting;
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• reviewing and approving or ratifying related party transactions and potential conflicts of interest; and • reviewing the Company's compliance with legal and regulatory requirements. A copy of the Audit Committee’s charter is posted on our website (www.marthastewart.com) under the link for “Investor Relations – Corporate Governance.”
Our Audit Committee currently consists of Ms. Smyth, who serves as its chairwoman, Mr. Roskin and Mr. deVillemejane. The Audit Committee met four times during 2013. The Board, in its business judgment, has determined that each director serving on the Audit Committee meets the independence criteria prescribed by the Exchange Act and SEC rules and regulations and meets the NYSE's financial literacy requirements for audit committee members. The Board has also determined that Ms. Smyth qualifies as an audit committee financial expert within the meaning of SEC rules.
Compensation Committee
The primary purpose of our Compensation Committee is to assist our Board in overseeing our compensation program. As more fully described in its charter, the Compensation Committee's responsibilities include:
• reviewing and approving our general compensation strategy; • establishing annual and long-term performance goals for our executive officers; • administering our stock and bonus plans and any equity or cash compensation arrangements that may be adopted by us from time to time; • reviewing compensation levels for directors for service on our Board and its committees and recommending changes in such compensation; and • reviewing and discussing with management the annual Compensation Discussion and Analysis (CD&A) disclosure and the related tabular presentations regarding named executive officer compensation and, based on this review and discussions, making a recommendation to include the CD&A disclosure and the tabular presentations in our annual public filings. A copy of the Compensation Committee’s charter is posted on our website (www.marthastewart.com) under the link for “Investor Relations – Corporate Governance.”
Our Compensation Committee currently consists of Mr. Roskin, who serves as its chairperson, Mr. deVillemejane and Mr. Kantarian. The Compensation Committee met 23 times during 2013. The Board, in its business judgment, has determined that each director serving on the Compensation Committee meets the independence requirements prescribed by the NYSE and is a “non-employee director” for purposes of the Exchange Act and an “outside director” for purposes of Section 162(m) of the Internal Revenue Code.
Nominating and Corporate Governance Committee
The primary purpose of our Nominating and Corporate Governance Committee is to assist our Board in identifying individuals qualified to become members of our Board, to oversee the evaluation of our Board and management and to review and update our corporate governance principles. As more fully described in its charter, the Nominating and Corporate Governance Committee's responsibilities include:
• developing and recommending a set of corporate governance principles to our Board; • evaluating the composition, size, organization and governance of our Board and its committees; • reviewing and recommending to our Board director independence determinations with respect to continuing and prospective directors; • evaluating and recommending candidates for election to our Board, including nominees recommended by our stockholders; and • overseeing our Board and Board committees' performance and self-evaluation process. A copy of the Nominating and Corporate Governance Committee’s charter is posted on our website (www.marthastewart.com) under the link for “Investor Relations – Corporate Governance.”
Our Nominating and Corporate Governance Committee currently consists of Mr. Roskin, who serves as its chairperson, Ms. Smyth and Mr. Kantarian. The Nominating and Corporate Governance Committee met nine times 13 Table of Contents
during 2013. The Board, in its business judgment, has determined that each director serving on the Nominating and Corporate Governance Committee meets the independence requirements prescribed by the NYSE.
Finance Committee
The primary purpose of our Finance Committee is to assist the Board in overseeing financing arrangements, budgets and long-term strategy. As more fully described in its charter, the Finance Committee's responsibilities include:
• overseeing and monitoring annual budgets; • reviewing long-term financial and investment plans and strategies; • evaluating strategic plans and initiatives with management; and • overseeing major commercial and investment banking relationships. Our Finance Committee currently consists of Mr. deVillemejane, who serves as its chairperson, Ms. Smyth and Mr. Kantarian. The Finance Committee met six times during 2013.
Compensation Committee Interlocks and Insider Participation
Each of the members of our Compensation Committee during 2013 is or was a non-employee director and was never an officer or employee of the Company or any of its subsidiaries. None of our executive officers currently serves, or in the past has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or on our Compensation Committee.
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PROPOSAL 1: ELECTION OF DIRECTORS The Nominating and Corporate Governance Committee recommended, and the Board of Directors has nominated:
Martha Stewart Margaret M. Smyth Arlen Kantarian William Roskin Pierre deVillemejane Daniel W. Dienst
as nominees for election as members of our Board of Directors at the Annual Meeting. At the Annual Meeting, six directors will be elected to the Board. The table below summarizes key qualifications, skills or attributes of each of our director nominees which we believe qualifies him or her to serve on our Board.
Director Qualifications Martha Stewart Extensive entrepreneurial experience; unique insight into operations and creative vision for the Company; media and merchandising experience. Arlen Kantarian Breadth of entertainment, media and merchandising industry experience; tenure on our Board provides valuable insight into operational strategy and execution. Pierre deVillemejane Global merchandising, business, marketing, brand management and financial experience; extensive career in retail and consumer/luxury goods industry. Margaret M. Smyth Corporate, accounting and financial management expertise; extensive experience at global public companies and accounting firms; service on other public company boards. William Roskin Leadership experience in media companies; specialization in human resources and executive compensation; service on other public company boards. Daniel W. Dienst Corporate leadership experience; significant senior management experience in finance and international operations; corporate governance experience through service on public company boards.
Unless otherwise instructed, the persons appointed in the accompanying form of proxy will vote the proxies received by them for these nominees, who are all presently directors of the Company. In the event that any nominee becomes unavailable or unwilling to serve as a member of our Board, the proxy holders will vote in their discretion for a substitute nominee, or if a substitute nominee cannot be identified, the Board may reduce the size of the Board.
The term of office of each person elected as a director will continue until the 2015 annual meeting or until a successor has been duly elected and qualified, or until the director’s earlier death, resignation, or removal.
OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH NOMINEE FOR DIRECTOR NAMED ABOVE.
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DIRECTOR COMPENSATION
The Nominating and Corporate Governance Committee reviews director compensation periodically and recommends changes to the Board, when it deems appropriate, based on market information provided by Frederick W. Cook & Co., Inc. ("FWC"), an independent compensation consulting firm, and taking into account various factors, including the responsibilities of directors generally and the responsibilities of committee chairs, and Company performance. Information regarding this process can be found under "Compensation Discussion and Analysis - Section 1 - Executive Summary - Setting our Compensation" on page 26 of this proxy statement. The Board reviews the recommendations of the Nominating and Corporate Governance Committee and determines the form and amount of director compensation. Directors who also serve as employees of the Company do not receive payment for services as a director.
Compensation Arrangements for Non-Employee Directors
The following summary describes compensation for non-employee directors.
Annual Cash Retainer for Board Service
Each non-employee director receives an annual cash retainer of $40,000, payable quarterly in arrears. Directors may elect to receive all or a portion of their annual retainer in Class A Common Stock. The amount of shares received is calculated based on the fees the director has elected to be paid in stock, divided by the closing price of a share of Class A Common Stock on the last business day of the quarter for which payment is being made.
Annual Cash Retainer for Committee Service
Each non-employee director who serves as the chairperson of a Committee receives an additional cash retainer, payable quarterly in arrears, in the following amounts: $10,000 per year for chairing the Nominating and Corporate Governance Committee, $10,000 per year for chairing the Finance Committee, $20,000 per year for chairing the Audit Committee and $20,000 per year for chairing the Compensation Committee.
Annual Cash Retainer for Board Chairperson or Lead Director
The annual cash retainer paid to the Chairperson of the Board (if the Chairperson of the Board is a non-employee director) is $20,000. Ms. Stewart, our current Non-Executive Chairman of the Board, does not receive this payment as she is a non-employee director. Effective July 1, 2012, the annual cash retainer paid to the Lead Director is $40,000.
Annual Restricted Stock Unit Grant for Board Service
Effective May 23, 2012, each non-employee director receives restricted stock units ("RSUs") equal to $60,000 in value upon election or re-election to the Board. The RSU grant is made as of the date of the annual meeting of stockholders and the number of RSUs to be awarded is determined by dividing $60,000 by the closing price of our Class A Common Stock on the date of issuance. Each RSU represents the contingent right to one share of our Class A Common Stock and vests on the earlier of May 31 of the following year or the next annual meeting. If a non-employee director is appointed to the Board at any point other than at the annual meeting of stockholders, the RSU grant is pro-rated and will be issued on the first business day of the month following the appointment, pursuant to our policy on equity issuances. Such grants will vest on the first anniversary of the grant. Grants to non-employee directors are issued pursuant to our Omnibus Stock and Option Compensation Plan (the "Stock Plan").
Meeting Fees
Meeting fees for non-employee directors are $1,500 for each in-person Board or committee meeting attended and $1,000 for each Board or committee meeting in which the director participates by telephone. All directors receive reimbursement of reasonable expenses incurred in connection with participation in Board and committee meetings.
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Stock Ownership Guidelines
We have stock ownership guidelines designed to encourage non-employee directors to have an equity interest in the Company and to help align their interests with the interests of stockholders. Non-employee directors must accumulate and hold 5,000 shares within a five-year period commencing on initial appointment to the Board. Unvested RSUs or stock options do not count towards satisfying these guidelines. Non-employee directors who do not meet the ownership test are required to hold 75% of their shares that vest (net of shares withheld for tax obligations, if any) until such time as the applicable target is achieved. As of the end of 2013, each non-employee director was in compliance with our stock ownership guidelines.
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Director Compensation Table
The following table provides information on the amount of compensation received by our non-employee directors for the year ended December 31, 2013. The directors who served as Series A Designees through April 2013, Michael Kramer and Daniel Walker, each waived their respective rights to receive compensation for serving as directors. The directors who served as Series A Designees from June 2013 through October 2013 received the compensation set forth below. Information regarding the compensation of Ms. Stewart, Mr. Dienst and Lisa Gersh, who served as executive officers as well as directors in 2013, is set forth in the Summary Compensation Table included elsewhere in this proxy statement.
Fees Earned or (2) All Other Name Paid in Cash ($)(1) Stock Awards ($) Compensation ($) Total ($) Charlotte Beers(3) 42,333 — — 42,333 Pierre deVillemajane(4) 28,354 60,000 — 88,354 Frederic Fekkai(5) 48,042 — — 48,042 Arlen Kantarian(6) 159,063 60,000 — 219,063 Robert Peterson(7) 23,593 60,000 — 83,593 William Roskin(8) 133,563 60,000 — 193,563 Margaret M. Smyth(9) 94,500 60,000 — 154,500 Michael Zacharia(10) 15,833 60,000 — 75,833
(1) Amounts represent all fees earned or paid in cash for services as a director, including annual retainer fees, committee chair fees, and meeting fees, as applicable. Also included are fees payable in cash, but forgone at the election of the director in exchange for shares of Class A Common Stock. The grant date fair value of such shares was computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, “Share Based Payments.” For the assumptions used to determine grant date fair value, see Note 8 to our audited financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The number of shares received by each director for retainer fees was equal to the fees payable to the director in Class A Common Stock divided by the applicable closing price of the Class A Common Stock. In 2013, the respective prices per share of the Class A Common Stock were: $3.81 on March 28, 2013, $2.64 on June 28, 2013, $2.30 on September 30, 2013 and $4.20 on December 31, 2013. (2) Amounts represent the aggregate grant date fair value of stock awards computed in accordance with Topic 718, “Share Based Payments.” For the assumptions used to determine grant date fair value, see Note 8 to our audited financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Stock Awards reflect a grant of $60,000 of grant date fair value of RSUs upon election or re-election to the Board, as applicable, at the 2013 Annual Meeting. For each of the restricted stock awards made on election or re-election, as applicable, grant date fair value was calculated using the closing price on the grant date multiplied by the number of shares. Outstanding RSUs and stock options held by each of the persons listed in this table are identified in the footnotes that follow. (3) Ms. Beers, who retired from the Board at the conclusion of the 2013 Annual Meeting of Stockholders, elected to receive 100% of her retainer in stock or 10,834 shares in 2013. As of December 31, 2013, Ms. Beers had options outstanding for 80,417 shares. (4) Mr. deVillemajane elected to receive 25% of his retainer in stock or 957 shares in 2013. As of December 31, 2013, Mr. deVillemajane had 24,000 RSUs outstanding. (5) Mr. Fekkai, who retired from the Board at the conclusion of the 2013 Annual Meeting of Stockholders, elected to receive 25% of his retainer in stock or 2,707 shares in 2013. As of December 31, 2013, Mr. Fekkai had options outstanding for 43,841 shares. (6) Mr. Kantarian elected to receive 25% of his retainer in stock or 3,664 shares in 2013. As of December 31, 2013, Mr. Kantarian had options outstanding for 70,507 shares and 24,000 RSUs outstanding. (7) Mr. Peterson, who left our Board in October 2013 pursuant to the amendment to our Commercial Agreement with J.C. Penney, elected to receive 100% of his retainer in stock or 5,140 shares in 2013. Upon his departure from our Board, Mr. Peterson's August 27, 2013 RSU grant was forfeited and as of December 31, 2013, Mr. Peterson had no outstanding equity. (8) Mr. Roskin elected to receive 25% of his retainer in stock or 3,664 shares in 2013. As of December 31, 2013, Mr. Roskin had options outstanding for 70,151 shares and 24,000 RSUs outstanding. (9) Ms. Smyth elected to receive 100% of her retainer in cash. As of December 31, 2013, Ms. Smyth had 24,000 RSUs outstanding.
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(10) Mr. Zacharia, who left our Board in October 2013 pursuant to the amendment to our Commercial Agreement with J.C. Penney, elected to receive 100% of his retainer in cash. Upon his departure from our Board, Mr. Zacharia's August 27, 2013 RSU grant was forfeited and as of December 31, 2013, Mr. Zacharia had no outstanding equity.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of April 1, 2014, regarding the beneficial ownership of our common stock by:
• each person known to us to own beneficially more than 5% of the outstanding shares of any class of our voting securities;
• each of our directors;
• each of our named executive officers; and
• all of our directors and current executive officers as a group.
Unless otherwise noted below, the address of each beneficial owner listed in the table below is 601 West 26th Street, New York, New York 10001.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own.
Applicable percentage ownership is based on 31,218,064 shares of Class A Common Stock and 25,734,625 Class B Common Stock outstanding as of April 1, 2014. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to stock options held by that person that are currently exercisable or exercisable within 60 days of April 1, 2014, and Class A Common Stock issuable upon the vesting of RSUs within 60 days of April 1, 2014 to be outstanding (ignoring the withholding of shares of common stock to cover applicable taxes). We did not deem these shares outstanding, however, for purpose of computing the percentage ownership of any other person.
Shares of Class B Common Stock may be converted on a one-for-one basis into shares of Class A Common Stock at the option of the holder. Therefore, we have assumed the conversion of shares of Class B Common Stock into shares of Class A Common Stock in order to determine the beneficial ownership of each of Martha Stewart, Alexis Stewart and the Martha Stewart Family Limited Partnership’s ownership of Class A Common Stock (and therefore all directors and executive officers as a group as Ms. Stewart falls into this group).
Total Voting Class A Common Stock Class B Common Stock Power(1) Name Shares % Shares % % Martha Stewart 28,670,905(2) 48.6 25,734,625 100.0 89.6 Alexis Stewart 28,607,421(3) 48.5 25,734,625 100.0 89.5 Martha Stewart Family Limited Partnership 25,734,625(4) 45.2 25,734,625 100.0 89.2 Royce & Associates, LLC 1,921,557(5) 6.2 — — * BlackRock, Inc. 1,891,270(6) 6.1 — — * Arlen Kantarian 178,961(7) * — — * William Roskin 167,871(8) * — — * Margaret M. Smyth 54,651(9) * — — * Pierre deVillemejane 25,508(10) * — — * Kenneth P. West 69,519(11) * — — * Daniel W. Dienst 24,000(12) * — — * Patricia Pollack 134,211(13) * — — * All directors and executive officers as a group (10 persons) 29,368,465(14) 48.5 25,734,625 100.0 89.7
* The percentage of shares beneficially owned does not exceed 1%.
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(1) Percentage total voting power represents voting power with respect to all shares of our Class A Common Stock and Class B Common Stock, voting together as a single class. Each holder of Class B Common Stock is entitled to ten votes per share and each holder of Class A Common Stock is entitled to one vote per share of Class A Common Stock on all matters submitted to our stockholders for a vote, except as otherwise may be required by law. The Class B Common Stock is convertible at any time by the holder into shares of Class A Common Stock on a one-to-one basis. (2) These shares include (i) 98,082 shares of the Class A Common Stock held by Ms. Stewart, (ii) 2,050,000 shares of the Class A Common Stock that are subject to exercisable options and (iii) 29,816 shares of Class A Common Stock held by the Martha Stewart 1999 Family Trust, of which Ms. Stewart is the sole trustee and as to which she has sole voting and dispositive power. These shares also include (a) 25,734,625 shares of Class B Common Stock held by the Martha Stewart Family Limited Partnership (“MSFLP”), of which Ms. Stewart is the sole general partner, each of which is convertible at the option of the holder into one share of the Class A Common Stock and (b) 37,270 shares of Class A Common Stock held by the Martha Stewart 2000 Family Trust, of which Ms. Stewart is a co-trustee. In addition, Martha Stewart may be deemed to beneficially own 721,112 shares of Class A Common Stock held by the Martha and Alexis Stewart Charitable Foundation, for which Martha Stewart is a co-trustee and as to which she shares voting and dispositive power. (3) Includes 3,602 shares of Class A Common Stock owned directly by Alexis Stewart, as to which she has sole voting and dispositive power. In addition, Alexis Stewart may be deemed to beneficially own 721,112 shares of Class A Common Stock held by the Martha and Alexis Stewart Charitable Foundation, for which Alexis Stewart is a co-trustee and as to which she shares voting and dispositive power. Ms. Alexis Stewart may also be deemed to beneficially own 27,966,040 shares of Class A Common Stock pursuant to (i) a revocable proxy, dated as of October 6, 2004, whereby Martha Stewart appointed Alexis Stewart as her true and lawful proxy, attorney-in-fact and agent with respect to all of the securities of the Company that are owned by Martha Stewart from time to time, and (ii) a power of attorney, dated as of October 6, 2004, whereby MSFLP appointed Alexis Stewart as its true and lawful proxy, attorney-in-fact and agent with respect to all of the securities of the Company that are owned by MSFLP from time to time. These shares include the following: (i) 98,082 shares of the Class A Common Stock held by Martha Stewart, (ii) 2,050,000 shares of Class A Common Stock owned by Martha Stewart that are subject to exercisable options, and (iii) 25,734,625 of the Class B Common Stock, each of which is convertible at the option of the holder into one share of Class A Common Stock, and all of which are owned by MSFLP and indirectly owned by Martha Stewart as the sole general partner of MSFLP and as to all of which she is deemed to share voting and dispositive power. (4) Consists of 25,734,625 shares of the Class B Common Stock, each of which is convertible at the option of the holder into one share of the Class A Common Stock, all of which are owned by MSFLP and indirectly owned by Martha Stewart as the sole general partner of MSFLP and as to which MSFLP is deemed to share voting and dispositive power. (5) Consists of 1,921,557 shares of Class A Common Stock, which Royce & Associates, LLC holds sole voting power and sale disposition power. The address of Royce & Associates, LLC is 745 Fifth Avenue, New York, NY 10151. (6) Consists of 1,891,270 shares of Class A Common Stock, which BlackRock holds sole voting power and sale disposition power. The address of BlackRock, Inc. is 40 East 52nd Street, New York, NY 10022. (7) Consists of 84,454 shares of Class A Common Stock, options to acquire 70,507 shares of Class A Common Stock that are exercisable or will become exercisable within 60 days and 24,000 shares of Class A Common Stock issuable upon the vesting of RSUs within 60 days. (8) Consists of 73,720 shares of Class A Common Stock, options to acquire 70,151 shares of Class A Common Stock that are exercisable or will become exercisable within 60 days and 24,000 shares of Class A Common Stock issuable upon the vesting of RSUs within 60 days. (9) Consists of 30,651 shares of Class A Common Stock and 24,000 shares of Class A Common Stock issuable upon the vesting of RSUs within 60 days. (10) Consists of 1,508 shares of Class A Common Stock and 24,000 shares of Class A Common Stock issuable upon the vesting of RSUs within 60 days. (11) Consists of 19,519 shares of Class A Common Stock and options to acquire 50,000 shares of Class A Common Stock that are exercisable or will become exercisable within 60 days. (12) Consists of 24,000 shares of Class A Common Stock issuable upon the vesting of RSUs within 60 days. (13) Consists of 51,711 shares of Class A Common Stock, options to acquire 72,500 shares of Class A Common Stock that are exercisable or will become exercisable with 60 days and 10,000 shares of Class A Common Stock issuable upon the vesting of RSUs within 60. (14) Includes options to acquire 2,350,158 shares of Class A Common Stock that are exercisable or will become exercisable with 60 days.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our Class A Common Stock and Class B Common Stock to file with the SEC reports regarding their ownership and changes in ownership of our securities. We believe that, during 2013, our directors, executive officers, and 10% stockholders complied with all Section 16(a) filing requirements, with the exceptions noted below.
• A late Form 4 was filed for Allison Jacques on April 12, 2013 to report the sale of 8,022 shares of Class A Common Stock by Ms. Jacques on March 12, 2013.
In making these statements, we have relied upon the examination of copies of Forms 3, 4 and 5, and amendments to these forms, provided to us and the written representations of our directors, executive officers and 10% stockholders.
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PROPOSAL 2: ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
As required pursuant to Section 14A of the Exchange Act, the Board of Directors is asking you to approve, on an advisory basis, the executive compensation programs and policies and the resulting compensation of the named executive officers ("NEOs") listed in the 2013 Summary Compensation Table as described in this proxy statement.
Because the vote is advisory, the result will not be binding on the Compensation Committee and it will not affect, limit or augment any existing compensation or awards. The Compensation Committee will, however, take into account the outcome of the vote when considering future compensation arrangements.
We believe you should read the Compensation Discussion and Analysis and compensation tables and also consider the factors below in determining whether to approve this proposal.
Key Features of our Executive Compensation Program
The discretionary structure of our compensation program allows our Board and our Compensation Committee to determine pay based on a comprehensive view of the quantitative and qualitative factors they believe best reflect the results that will produce long-term business success. The correlation between our financial results and NEO compensation actually awarded demonstrates the success of this approach. For example, in 2013, given projected Adjusted EBITDA estimates, the Compensation Committee, together with management, determined that the Company would not award bonuses for fiscal year 2013.
We designed our compensation programs for NEOs to attract, motivate and retain the key executives who drive our success. Pay that reflects performance and alignment of that pay with the interests of our stockholders are the key principles that underlie our compensation program and decisions. In that regard, we:
• consider peer group competitive pay and practices in establishing compensation;
• have robust stock ownership guidelines that encourage our NEOs to act as owners with an equity stake in the Company thereby aligning their interests closely with stockholders;
• schedule and price stock option grants to promote transparency and consistency;
• pay reasonable salaries to our senior executives;
• award performance based equity that ties vesting to the performance of our Class A Common Stock;
• enhance retention by subjecting a significant percentage of total compensation to multi-year vesting;
• do not include excise tax gross-ups in change in control termination benefits; and
• do not encourage unnecessary and excessive risk taking.
Although the vote is non-binding, the Board and the Compensation Committee value the opinions of the stockholders and will review the voting results and consider the outcome of the say-on-pay vote and stockholder concerns, along with other relevant factors, when making compensation decisions.
In accordance with the wishes of our stockholders, we currently hold our say-on-pay vote every year. Accordingly, we are asking our stockholders to indicate their support for our named executive officer compensation as described in this proxy statement by voting “FOR” the following resolution at the Annual Meeting:
RESOLVED, that the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K in this proxy statement, including in the “Compensation Discussion and Analysis,” the compensation tables and the narrative discussion, is hereby approved.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS RESOLUTION.
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COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. The actual compensation programs that we adopt in the future may differ materially from the current or planned programs summarized in this discussion.
Overview
This Compensation Discussion and Analysis explains our compensation program as it pertains to our Chief Executive Officer (CEO), our Chief Financial Officer (CFO), and our three other most highly compensated executive officers. Throughout this document, these executives are collectively referred to as the ‘‘NEOs.’’ For fiscal year 2013, our named executive officers were:
Daniel W. Dienst Chief Executive Officer Kenneth P. West Chief Financial Officer Martha Stewart Founder, Chief Creative Officer Lisa Gersh Former Chief Executive Officer and President Daniel Taitz Former Chief Administrative Officer Patricia Pollack Senior Executive Vice President, Merchandising
Ms. Gersh stepped down as our Chief Executive Officer and President and resigned from our Board of Directors on February 7, 2013. Mr. Taitz served as our interim principal executive officer from February 7, 2013 until October 25, 2013, when Mr. Dienst was appointed as Chief Executive Officer. Mr. Taitz stepped down as Chief Administrative Officer on December 31, 2013. This Compensation Discussion and Analysis includes a discussion of Ms. Gersh and Mr. Taitz as they held their respective positions in 2013. For more information regarding the terms of the separation agreement entered into by Ms. Gersh and the Company, please see our Current Report on Form 8-K filed with the SEC on January 29, 2013. For more information regarding the letter agreement entered into by Mr. Taitz and the Company amending Mr. Taitz's employment agreement, please see our Current Report on Form 8-K filed with the SEC on December 17, 2013.
When we discuss in this Compensation Discussion and Analysis our compensation objectives for our NEOs for 2013 and prospectively, we generally are addressing only those NEOs who are continuing to serve as executive officers: Mr. Dienst and Mr. West, as our current CEO and CFO, respectively, and Ms. Stewart and Ms. Pollack.
The Compensation and Discussion Analysis is organized into three sections:
• Section 1 - Executive Summary
• Section 2 - Elements of 2013 Compensation
• Section 3 - Other Compensation Information
Section 1 - Executive Summary
We are a leading provider of original "how-to" information, inspiring and engaging consumers with unique lifestyle content and high-quality products. As such, our long-term success depends in part on our ability to attract, engage, motivate and retain highly talented individuals who are committed to our vision and strategy. One of the key objectives of our executive compensation program is to link executives’ pay to their performance and their advancement of our overall annual and long-term performance and business strategies. Other objectives include aligning our NEO's interests with those of our stockholders and encouraging high-performing executives to remain with MSO over the course of their careers. We believe that the amount of compensation for each NEO reflects
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experience, responsibilities, performance and service to MSO and our stockholders.
Our 2013 Performance and Impact on Compensation
The recently completed 2013 fiscal year was challenging for MSO as we continued our business and organizational transition to return the Company to profitability while continuing to generate unique and high-quality ideas, inspirations, content and products. We delivered a $54.5 million improvement in operating income from the prior year, growth in our Merchandising segment and impressive consumer engagement through our digital offerings. We also underwent several leadership changes. Following the resignation of Ms. Gersh in February 2013, we appointed Mr. Taitz as interim principal executive officer until Mr. Dienst was appointed as Chief Executive Officer in October 2013. Mr. Taitz subsequently stepped down as Chief Administrative Officer on December 31, 2013.
Financial highlights are summarized below:
2013 Results 2012 Results (in thousands, except per (in thousands, except per Financial Metric share amounts) share amounts) Revenues $160,675 $197,627 Operating loss $(1,897) (56,396)* Loss per share (basic and diluted) $(0.03) $(0.83)* * Includes a non-cash goodwill impairment charge
Business highlights include:
• We continue to engage consumers via social media, demonstrated by almost 9 million fans and followers across all of our platforms including 1 million fans on Facebook and almost 3 million followers on Twitter.
• In December 2013, Martha Stewart Living won Adweek's Hot List Award for Hottest Women's Magazine.
• For the second year in a row, Martha Stewart Living was recognized by Apple as one of the best newsstand apps of the year.
• After highly popular first and second seasons, the third season of Martha Stewart's Cooking School started airing on PBS in February 2014 and the third season of Martha Bakes started airing in April 2014.
• Unique visitors online and on mobile devices increased 13% in the fourth quarter of 2013 over the prior year.
• Total digital revenue for the full year 2013 grew 13% over the prior year period.
Although we have improved over the prior year, our 2013 results fell short of our expectations in most cases and had the following impact on compensation:
• Annual bonuses were not paid to our executive officers, including our named executive officers.
• Performance based restricted stock units granted prior to and in 2013 to certain of our NEOs and tied to the performance of the Company's stock did not vest.
Further, in conjunction with the amendment of her employment agreement and in an effort to return the Company to profitability, Ms. Stewart's base salary was reduced by 10% to $1.8 million.
For more information, please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC.
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Say-on-Pay
Since 2011, we have conducted an annual advisory vote on the compensation of our named executive officers. While this vote is not binding on us, the Board, or the Compensation Committee, we believe that it is important for our stockholders to have an opportunity to vote on this proposal on an annual basis as a means to express their views regarding our executive compensation philosophy, our compensation policies and programs, and our decisions regarding executive compensation, all as disclosed in this proxy statement. To the extent there is any significant vote against the compensation of our named executive officers, we will consider our stockholders’ concerns and the Compensation Committee will evaluate what actions are necessary to address those concerns.
At the 2013 Annual Meeting, our stockholders approved our 2012 named executive officer compensation with approximately 99% of the votes cast in favor of the proposal. The 99% vote in favor includes the stock ownership and voting control of Martha Stewart, mostly through her ownership of our Class B Common Stock. However, when the shares of Class A Common Stock that voted “against” the compensation of our named executive officers were considered in relation to the total number of shares of Class A Common Stock outstanding on the record date, those disapproving of our approach amounted to only 4% of the outstanding shares of Class A Common Stock. The Board and Compensation Committee reviewed these final vote results together with the other factors and data discussed in this Compensation Discussion and Analysis and determined that, given the significant level of support of our approach to compensation by the broader range of stockholders, no changes to our executive compensation policies and decisions were necessary. However, we regularly review our executive compensation to ensure compliance with our pay-for-performance philosophy.
We have determined that our stockholders should vote on a say-on-pay proposal each year, consistent with the recommendation of the Board and the preference expressed by our stockholders. Accordingly, our Board recommends that you vote FOR Proposal 3 at the Annual Meeting. For more information, see “Proposal 2 – Advisory Vote on the Compensation of our Named Executive Officers” in this proxy statement.
Compensation Philosophy & Objectives
Our compensation philosophy is designed to recognize and reward sustained achievement of business goals and results through the contributions of employees, including our executive officers. We believe that the achievement of our business goals depends on attracting and retaining executives with an appropriate combination of creative skill and managerial expertise. With respect to Ms. Stewart, in setting her compensation we recognize her instrumental contributions to the Company through her creative direction and the promotion of our brand. For executives other than Ms. Stewart, our compensation program is designed to: • attract, motivate and retain highly qualified employees; • establish short and long-term strategic and financial objectives; • reward performance with certain performance-based incentive compensation awarded upon achievement of our short and long-term objectives; • align our executives' interests with those of our stockholders; and • reflect the performance, experience, responsibilities and skill set of our executives.
Setting our Compensation
Our Compensation Committee is responsible for overseeing all aspects of our executive compensation programs, including executive salaries, payouts under our annual bonus plan, the size and structure of equity awards, and any executive perquisites. The Compensation Committee is solely responsible for determining the compensation of our NEOs and reviewing and approving the compensation of other executive officers.
In connection with it's responsibilities, the Compensation Committee engaged Frederic W. Cook & Co., Inc. (“FWC”) in 2013 as its independent compensation consultant to provide advice and recommendations on the amount and form of executive compensation. FWC was selected by and reports to the Compensation Committee and does not provide any other services to the Company. The Compensation Committee, after taking into consideration all factors relevant to FWC's independence, including, but not limited to factors specified in NYSE listing standards and Rule 10C-1(b) of the Exchange Act, confirmed that FWC is independent and determined that 26 Table of Contents
no conflicts of interest exist between FWC and the Company.
In performing the function of setting executive compensation, the Compensation Committee also relies on certain members of management, including our Chief Executive Officer, Chief Financial Officer and General Counsel and Corporate Secretary to provide information regarding our executive officers, their roles and responsibilities and the general performance of the Company and business segments. Management presents performance measures and targets for our NEOs as well as other executive officers and recommends any changes to salaries, bonuses, equity grants and other compensation matters for approval by the Compensation Committee. The Compensation Committee determines and approves changes in the Chief Executive Officer's compensation based on its review of his performance.
Recommendations to change an NEO’s base salary and/or annual incentive opportunity are based on various factors, including the judgment of our Chief Executive Officer and the Compensation Committee. We consider an NEO's responsibilities and any changes to those responsibilities, the skills and experience required for the job, individual performance, business performance, labor market conditions and peer company compensation levels.
Potential adjustments to compensation (including salary and annual incentive opportunities) are considered annually and upon significant role changes. Any adjustments are typically set at a Compensation Committee meeting early in the calendar year after the Board has reviewed performance for the past year and prospects for the year ahead, although compensation decisions may be made throughout the year for a variety of reasons.
Use of Comparative Market Data
We aim to compensate our executive officers at levels that are commensurate with competitive levels of compensation for executives in similar positions at a group of peer companies set forth below, with whom we compete for hiring and retaining executive talent (our "Peer Group"), although we do not attempt to link any single element of compensation to specific peer company percentiles or ratios. In 2011, the Compensation Committee asked FWC to provide a peer group proxy analysis taking into account industry competitors, companies with similar business models and company size. The Peer Group provided by FWC is used for monitoring of peer company compensation programs and levels. Our Peer Group currently includes the following companies:
1-800-Flowers.com Estee Lauder The New York Times
American Greetings Guess Ralph Lauren
Cablevision IAC/Interactivecorp Scholastic
Discovery Communications XO Group Inc. Scripps Networks Interactive
DreamWorks Animation Lifetime Brands Sirius XM Radio
Elizabeth Arden Fifth & Pacific Steve Madden
Perry Ellis Media General World Wrestling Entertainment
Meredith Corp.
Setting Ms. Stewart's Compensation
In determining Ms. Stewart’s compensation arrangements with the Company, the Compensation Committee primarily considers her role as the key on-air performer for a host of creative initiatives and her responsibilities, such as public appearances, on behalf of our merchandising partners, in addition to her role as Chief Creative Officer, especially with respect to our various publications.
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The terms of Ms. Stewart's compensation arrangement are set forth in her employment agreement, dated as of April 1, 2009, with the Company, which is structured essentially as a talent agreement. Ms. Stewart's original employment agreement provided for annual talent compensation of $2 million. This amount had been determined on the basis of Ms. Stewart’s length of service and experience, as well as the critical nature of her services to the Company. In addition, Ms. Stewart’s base salary recognizes that her aesthetic vision and creative direction and public association of her name and likeness with our publications and branded products provide incredible value to the Company and are integral to our success. On July 2, 2013, Ms. Stewart and the Company entered into a letter agreement (the “Letter Agreement”) which modified certain terms of her employment agreement effective as of July 1, 2013. Specifically, pursuant to the amendment, Ms. Stewart agreed to reduce her base salary by 10% to $1.8 million as part of an overall effort to return the Company to profitability.
The creative initiatives that are dependent on her services as a performer include:
• various television productions (e.g., Martha Bakes; Martha’s Cooking School);
• video segments on YouTube and other Internet channels;
• appearances in television commercials for our merchandising partners;
• appearances on behalf of the Company on nationally distributed broadcast shows such as the Today show;
• appearances on cable television broadcasts (e.g., CNBC); and
• her regularly scheduled radio show on Sirius XM Radio.
In addition to her role as a performer in our creative initiatives, the compensation terms of our agreement with Ms. Stewart recognize her role as the creative visionary and caretaker of our brand in the publication of our magazines, websites and books and in various merchandising initiatives. Ms. Stewart makes a substantial number of public appearances on behalf of our merchandising partners, as the featured celebrity for our own publications and websites and for promotional opportunities to further the Martha Stewart brand.
With respect to the various photo shoots, video productions and television interviews that Ms. Stewart is required to participate in for the benefit of the Company, it has historically been the Company’s practice to use properties that are beneficially owned by Ms. Stewart. This is because the Martha Stewart brand is often best personified by our use of her properties to demonstrate pet-care, gardening, kitchen layout and equipment, as well as crafts. For this reason, we have negotiated to use these properties pursuant to an Intangible Asset License Agreement with Ms. Stewart. Pursuant to the Letter Agreement and effective as of September 15, 2013, Ms. Stewart agreed to reduce payment under the Intangible Asset License Agreement by $300,000, to $1.7 million, as part of an overall effort to return the Company to profitability. The amounts payable by the Company under this agreement are reported in the All Other Compensation column in the Summary Compensation Table set forth below. For more information regarding this separate agreement, see "Certain Relationships and Related Person Transactions" elsewhere in this proxy statement.
By reason of her unique position as a performer and her unparalleled role in supporting and developing the Martha Stewart brand, which require her to undertake extensive travel, make a substantial number of on-camera and personal appearances and require her to be constantly in the public eye, we pay for a number of expenses to assist Ms. Stewart in fulfilling these Company responsibilities that, under SEC regulations, are required to be reported as perquisites in the All Other Compensation column of the Summary Compensation Table set forth below.
Published benchmark data appropriate for Ms. Stewart's unique role is difficult to ascertain. From time to time, we have consulted with industry executives familiar with talent compensation as well as reviewed relatively reliable estimates published in general circulation media as to what similar celebrities earn to help provide a context for negotiating Ms. Stewart’s base talent compensation. We believe that Ms. Stewart's base compensation is consistent with talent payments made to other celebrities. Further, as Ms. Stewart’s contributions are critical to the performance of the Company, and to reflect her responsibilities as our Chief Creative Officer, Ms. Stewart has an annual incentive opportunity that is based on the same overall financial targets that are established for our NEOs generally.
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Section 2 - Elements of 2013 Compensation
The principal elements of our executive compensation program are set forth in the following table and described in more detail below.
Compensation Element Characteristics Objectives Base Salary Annual fixed cash compensation Provide a competitive fixed level of cash compensation to attract and retain talented and skilled employees. Annual Bonuses Annual variable, performance- Motivate and reward the achievement of annual based cash compensation financial and other operating objectives and determined by achievement of individual performance to drive stockholder pre-established annual goals and value over time. individual performance Long Term Incentive Variable equity compensation in Align an employee's interest with that of Compensation the form of stock options, stockholders and motivate and reward profitable performance and premium priced growth and increases in stock price over time. stock options, restricted stock Aid in attraction and retention of key employees. units and performance restricted stock units Perquisites and Personal Limited perquisites and health Provide business-related benefits consistent Benefits and welfare benefits with industry practice and offer competitive benefits package.
Our executives receive a mix of base salary, the opportunity for performance-based annual bonuses, and long- term equity or equity-based awards. We arrive at total compensation levels by determining appropriate levels for each element. The relative weight of each element is determined by the Compensation Committee based on its assessment of the effectiveness of each element in supporting our short-term and long-term strategic objectives.
In determining compensation for our NEOs, our Compensation Committee considers many variables, including each executive’s respective experience. While not formulaic or exhaustive, the variables the Compensation Committee has considered in the past include:
• the experience, knowledge, and performance of the NEO in question;
• the competitive market for similar executive talent;
• how critical the retention of any particular executive is to achieving the Company’s strategic goals;
• the performance of the Company (and each of its operating segments) against internal performance targets;
• how well an executive works across business segments to promote overall corporate goals;
• future potential contributions of the executive;
• pre-existing employment agreements between the Company and an NEO; and
• compensation at former employers, in the case of new hires.
Based on this analysis the Compensation Committee makes determinations as to each element of the compensation package, weighing each component in its discretion based on the facts and circumstances surrounding each NEO’s employment agreement or annual review.
Base Salary
Our employees, including our NEOs, are paid a base salary commensurate with the responsibilities of their positions, the skills and experience required for the position, their individual performance, business performance, labor market conditions and with reference to peer company salary levels.
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The annual salary rates in effect at fiscal year end 2013 as compared to 2012 for our NEOs are listed below.
Named Executive Officer 2012 Salary Rate 2013 Salary Rate Percent Change Daniel W. Dienst (1) N/A $775,000 N/A Kenneth P. West $450,000 $500,000 11.1% Martha Stewart(2) $2,000,000 $1,800,000 -10.0% Lisa Gersh(3) $850,000 $850,000 0.0% Daniel Taitz $450,000 $500,000 11.1% Patricia Pollack $550,000 $550,000 0.0% ______(1) Mr. Dienst was appointed as Chief Executive Officer in October 2013. (2) Pursuant to the Letter Agreement, Ms. Stewart agreed to reduce her base salary by 10% to $1.8 million effective July 1, 2013 as part of an overall effort to return the Company to profitability. See the discussion above under "Setting Ms. Stewart's Compensation" for further information regarding Ms. Stewart's base salary. (3) Ms. Gersh stepped down as Chief Executive Officer and President on February 7, 2013.
In February 2013, the Compensation Committee approved an increase in Mr. Taitz and Mr. West's base salary in recognition of the additional responsibilities each of Mr. Taitz and Mr. West assumed upon Ms. Gersh's departure. Ms. Pollack did not receive an increase in her base salary.
Annual Bonuses
In general, annual cash bonuses for our NEOs and other executive officers are determined under our Annual Incentive Plan. The Annual Incentive Plan is an "at risk" bonus compensation program designed to foster a performance-orientated culture, where individual performance is aligned with the Company's financial objectives. Our Annual Incentive Plan provides guidelines for the calculation of annual non-equity, incentive based compensation that is subject to the Compensation Committee's oversight and modification.
In the first quarter of each fiscal year, the Compensation Committee establishes target bonuses for the Chief Executive Officer and then, with input from the Chief Executive Officer, establishes target bonuses for the other NEOs, based on the NEO’s position and responsibilities. The Compensation Committee has determined that achievement of a target level of consolidated income (loss) before interest income or expense, taxes, depreciation and amortization, adjusted for impairment, non-cash compensation expenses, restructuring charges and other income (expense) ("Adjusted EBITDA") is the relevant performance measure for determining bonuses to our NEOs and other executives. We believe Adjusted EBITDA provides an accurate view of the Company's financial performance and allows management to continue to focus on long term growth while controlling expenses.
When determining target bonuses for fiscal year 2013, given projected Adjusted EBITDA estimates, uncertainty regarding the outcome of certain litigation and our continued management transition, the Compensation Committee, together with management, determined that the Company would not award bonuses for fiscal year 2013. The Compensation Committee and management revisited this decision during the third quarter of 2013 and after reviewing the financial performance of the Company at that point, reaffirmed their decision. Therefore, in 2013, no bonuses were paid to our executive officers, including our NEOs, under our bonus program.
The table below presents the target bonus in dollars and expressed as a percentage of base salary for each of our NEOs as set forth in their respective employment agreement or offer letter, as applicable.
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Target Bonus as a Actual Bonus Target 2013 % of 2013 Base Payout as a % of Named Executive Officer Bonus Salary Base Salary Daniel W. Dienst (1) N/A N/A 0% Kenneth P. West(2) $375,000 75% 0% Martha Stewart $1,000,000 56% 0% Lisa Gersh(3) N/A N/A 0% Daniel Taitz $375,000 75% 0% Patricia Pollack $275,000 50% 0% ______(1) Pursuant to the terms of his employment agreement, Mr. Dienst will be eligible for annual performance-based target bonuses of 75% of his Base Salary commencing on January 1, 2014. (2) Pursuant to the terms of his employment agreement, any bonus received by Mr. West will be paid out 67% in cash and 33% in equity. (3) Ms. Gersh left the Company in February 2013 and was not eligible for an annual bonus for 2013. However, pursuant to her employment agreement, she was eligible for an annual performance-based target bonus of 100% of her Base Salary.
Long Term Incentive Compensation
Long term incentives represent a significant proportion of compensation at the Company and are designed to reward participants the way stockholders are rewarded: through growth in the value of our Class A Common Stock. Our executive officers, including our NEOs, receive either stock options, performance or premium priced stock options, restricted stock units ("RSUs") or performance restricted stock units ("PRSUs") or a combination of the four. Regardless of the form of award, the overarching purpose of the long-term incentive grants is to align executives' interests with those of our stockholders, reward employees for enhancing stockholder value and attract and retain our executives.
Long term incentive awards are typically granted annually but the Compensation Committee may award options, performance or premium priced stock options, RSUs or PRSUs at other times during the year to further reward executives, including our NEOs, or to encourage retention of our executives, including NEOs. In February 2014, we established an Equity Committee, consisting of Mr. Dienst, who is authorized to approve grants of restricted stock, restricted stock units and stock options pursuant to our Omnibus Stock and Option Compensation Plan in an aggregate amount of up to $100,000 per quarter in connection with the negotiation and execution of employment letters with newly hired employees or employees who are not Section 16 employees receiving a promotion. No single grant made under this delegation can exceed 20,000 stock options or 10,000 RSUs.
All equity awards granted since 2008 have been made pursuant to our Omnibus Stock and Option Compensation Plan. For more information about the equity grants made to our NEOs in 2013, see "Grants of Plan-Based Awards in Fiscal 2013" and "Summary Compensation Table" below.
Stock Options
Stock options are granted at an exercise price equal to the closing price of our Class A Common Stock on the grant date. We do not issue stock options with accelerated vesting features, except as specified in certain employment agreements.
Although we are required to recognize a charge for the value of an option when granted that might be disproportionate to the value received by the recipient upon exercise, we believe the granting of options is performance based and aligns the interests of recipients with those of stockholders because the recipient only realizes value if our Class A Common Stock appreciates above the grant date price.
Restricted Stock Units
We grant RSUs, which are the right to receive shares of our Class A Common Stock, that are subject to continued employment through the applicable vesting date. RSUs are granted to executive officers, including our NEOs, to serve primarily as a retention mechanism and to award individual performance.
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In April 2013, in order to recognize the critical importance of retaining key employees, we granted RSUs to certain key employees. The RSUs were tailored to vest in one year in order to balance the objectives of retaining employees deemed critical to achieving key short-term deliverables with respect to our financial performance and the long-term stability of the organization.
Performance Restricted Stock Units
In the last several years, the Compensation Committee has placed a greater emphasis on granting PRSUs to reinforce the Company's pay for performance approach to compensation. Performance restricted stock units provide the recipient the right to receive shares of our Class A Common Stock if, and only if, our stock price hits certain pre-established stock price targets for 30 consecutive trading days during a pre-defined performance period, subject to continued employment through the applicable vesting date. We believe performance restricted stock units reward growth in our stock price and align the interests of our executives, including NEOs, with those of our stockholders.
Performance and Premium Priced Options
When considered appropriate, the Compensation Committee has determined to grant stock options that have performance based vesting or that have an exercise price in excess of the fair market value of our Class A Common Stock at the date of grant. In 2013, in connection with his appointment as Chief Executive Officer, the Compensation Committee approved a stock option grant for Mr. Dienst in respect of 1,000,000 shares. Seventy- five percent (75%) of the options subject to this grant were awarded with an exercise price in excess of the fair market value of a share of Class A Common Stock on the date of grant. As the new Chief Executive Officer, the Compensation Committee determined that it was appropriate to award Mr. Dienst a substantial opportunity to benefit from appreciation in the value of the Company’s Class A Common Stock, so long as such award also included a substantial incentive to increase the stock’s value. For example, for Mr. Dienst to receive any compensation in respect to twenty-five percent (25%) of the options subject to this grant, the stock price must increase by over 145% from the grant date value, and such price must increase by over 180% from the grant date value for him to receive any compensation in respect to an additional twenty-five percent (25%) of the options subject to this award.
2013 Long Term Incentive Grants
In fiscal 2013, each of our NEOs received the following long-term equity grants:
Performance Restricted Named Executive Officer Stock Options Restricted Stock Units Stock Units Daniel W. Dienst (1) 1,000,000 424,000 800,000 Kenneth P. West(2) 80,000 50,000 50,000 Martha Stewart — — — Lisa Gersh N/A N/A N/A Daniel Taitz(3) 50,000 20,000 20,000 Patricia Pollack — 10,000 — ______(1) Mr. Dienst was granted 24,000 RSUs in August 2013 upon his appointment to our Board of Directors. In October 2013, in connection with his appointment as Chief Executive Officer, Mr. Dienst was granted (a) 250,000 options priced at $2.75, 250,000 options priced at $3.00, 250,000 options priced at $4.00 and 250,000 options priced at $5.00 with each tranche of options to vest ratably over three years; (b) 400,000 RSUs vesting ratably over three years; and (c) 200,000 PRSUs vesting if and only if the trailing average closing price ("TACP") of the Company's Class A Common Stock is at least $6 during any 30 consecutive trading days during the period beginning on October 28, 2013 and ending on December 31, 2016 (the "Performance Period"), 200,000 PRSUs vesting if and only if the TACP of the Company's Class A Common Stock is at least $8 during any 30 consecutive trading days during the Performance Period, 200,000 PRSUs vesting if and only if the TACP of the Company's Class A Common Stock is at least $10 during any 30 consecutive trading days during the Performance Period and 200,000 PRSUs vesting if and only if the TACP of the Company's Class A Common Stock is at least $12 during any 30 consecutive trading days during the Performance Period. (2) In March 2013, in recognition of the additional responsibilities Mr. West assumed upon Ms. Gersh's departure, Mr. West was granted 50,000 options and 20,000 RSUs, each to vest ratably over two years, and 20,000 PRSUs vesting if and only if the TACP of the Company's Class A Common Stock is at least $6 during any 30 consecutive trading days before September 6, 2014. In December 2013, in recognition of his performance during 2013 and to encourage retention, Mr. West was granted 30,000 options vesting ratably over three years, 30,000 RSUs cliff vesting on September 6, 2015 and 30,000 PRSUs, vesting if and only if the TACP of the Company's Class A Common Stock is at least $5 32 Table of Contents
during any 30 consecutive trading days before September 6, 2014. (3) In March 2013, in recognition of the additional responsibilities Mr. Taitz assumed upon Ms. Gersh's departure, Mr. Taitz was granted 50,000 options and 20,000 RSUs, each to vest ratably over two years, and 20,000 PRSUs vesting if and only if the TACP of the Company's Class A Common Stock is at least $6 during any 30 consecutive trading days before August 22, 2014. Upon Mr. Taitz's resignation from the Company on December 31, 2013 and pursuant to the applicable option and RSU agreements between the Company and Mr. Taitz, Mr. Taitz's 2013 option and RSU grant accelerated vesting and his PRSU grant was forfeited.
Perquisites and Personal Benefits
We do not typically provide perquisites to our NEOs other than Ms. Stewart. As is noted above, because of her role as a performer, her responsibilities promoting the Martha Stewart brand and her personal appearances and other on-air responsibilities for the benefit of our merchandising partners, we pay for a number of expenses for Ms. Stewart that are characterized as perquisites. As is described above, we have also entered into a contractual arrangement with Ms. Stewart to use properties that she beneficially owns to promote the Martha Stewart brand, including through creative initiatives produced by the Company, such as various television programs and photo shoots for our merchandising partners and publications. For more information on these benefits, payments and expenses, see the "Summary Compensation Table" and “Certain Relationships and Related Person Transactions–Transactions with Martha Stewart” below.
Ms. Stewart and the other NEOs are eligible to participate in the Company’s 401(k) plan on the same terms as other eligible management-level employees, which includes receiving Company matching contributions.
Section 3 - Other Compensation Information
The prior two sections of this CD&A were intended to describe how we think about compensation and how that affects our pay practices. Other compensation related details that may be important to our investors are described below.
Risk Considerations
The Compensation Committee has reviewed our compensation policies and practices and has determined that our compensation policies and practices do not encourage risk-taking or create risks that are reasonably likely to have a material adverse effect on the Company. Factors considered in making this determination included:
(1) that our compensation mix for employees, including executives, recognizes that while long-term success is key, annual business and individual performance and adequate fixed compensation are also essential;
(2) that target annual cash incentives are based on Adjusted EBITDA targets and on individual contributions; (3) that annual cash incentive bonuses of named executive officers are capped at a maximum of 150% of the target bonus opportunity and that no such target bonus may exceed 100% of base salary;
(4) that equity and equity-based awards have a retentive element and typically vest ratably over a three- or four-year period in the case of stock options and over a two-, three- or four-year period in the case of RSUs; and that a high percentage of equity awards are based on performance criteria;
(5) that executives are subject to stock ownership guidelines, linking executives with the long-term interests of stockholders; and
(6) that we have internal controls over financial reporting, and the measurement and calculation of compensation goals, and other financial, operational, and compliance policies and practices are designed to keep our compensation programs from being susceptible to manipulation by any employee, including our NEOs.
Timing of Equity Award Grants
Pursuant to a policy adopted by the Compensation Committee in 2008, the effective grant date for all equity awards to employees (including NEOs) determined during the course of any calendar month is the first business
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day following the calendar month in which the grant is approved by the Compensation Committee or Equity Committee, as applicable, unless otherwise specified by our Board of Directors or the Compensation Committee. All equity awards are issued and priced based on the closing price of our Class A Common Stock on that first business day of the month.
Stock Ownership Requirements
To align our executive officers' interests with those of our stockholders, the Board has instituted stock ownership requirements under our Corporate Governance Guidelines. Under our employee stock ownership/retention guidelines, each executive officer must attain and retain the following ownership requirements within a five-year period from becoming an executive officer. The targets apply to shares owned outright.
Principal Executive Officer: 60,000 shares All other executive officers: 20,000 shares
Officers who do not meet the ownership test are required to hold 75% of their vested shares (net of shares withheld for tax obligations) until such time as the applicable target is achieved. This requirement does not, however, apply to shares granted as part of a bonus payment.
Currently, all of our executive officers are either in compliance with our stock ownership requirements or are within the five-year period to attain and retain the requisite shares.
Transactions in Company Securities
Our policy on securities law compliance prohibits our directors, officers or employees from investing in derivatives of our securities, including trading in puts, calls and options, or other similar hedging activities related to our Common Stock without the prior approval of our Board. We also have an insider trading policy in place that prohibits our employees from trading in MSO shares during certain prescribed blackout periods.
We also allow our directors and executive officers to adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information. As of March 31, 2014, Ms. Stewart had entered into a 10b5-1 plan that provides for periodic sales as part of investment diversification and estate planning purposes.
Separation Arrangements
In line with our efforts to attract and retain executives with creative skill and managerial excellence, we have entered into employment agreements with Mr. Dienst, Ms. Stewart and Mr. West that provide for severance payments in connection with certain termination events. Ms. Pollack does not have an employment agreement, but in accordance with the Company’s severance policy, as of April 1, 2014, Ms. Pollack was entitled to 24 weeks of base salary in the event of termination without cause.
Further, consistent with best practices, none of our NEOs are entitled to excise tax gross-up payments. Mr. Dienst's employment agreement provides for a “best net” approach, whereby a "change in control" payment is limited to the threshold amount under Section 280G of the Code if the net benefit to Mr. Dienst would otherwise be greater than receiving the full value of the "change in control" payment and paying the excise tax.
These separation arrangements are described below under "Employment Agreements and Compensatory Arrangements" and “Potential Payments Upon Termination or Change in Control.”
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In 2013, in accordance with their respective employment agreements, Ms. Gersh and Mr. Taitz were entitled to receive certain severance payments as well as accelerated vesting of certain of their respective equity awards. For more information on these payments, please see "Potential Payments Upon Termination or Change in Control."
Tax Considerations
The Compensation Committee also oversees compliance with Internal Revenue Code Section 162(m), which generally disallows a tax deduction to public companies for compensation over $1 million paid to certain NEOs, subject to certain exceptions. The Compensation Committee believes, however, that in certain circumstances, factors other than tax deductibility take precedence when determining the forms and levels of executive compensation most appropriate and in the best interests of the Company and our stockholders. Accordingly, the Compensation Committee has from time to time approved elements of compensation for certain officers that are not fully deductible and reserves the right to do so in the future, when appropriate.
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COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on its review and discussions with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.
Members of the Compensation Committee
William Roskin (Chairperson) Pierre deVillemejane Arlen Kantarian
The Compensation Committee Report above does not constitute “soliciting material” and will not be deemed “filed” or incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act that might incorporate our SEC filings by reference, in whole or in part, notwithstanding anything to the contrary set forth in those filings.
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EMPLOYMENT AGREEMENTS AND COMPENSATORY ARRANGEMENTS
The material terms of the employment agreements and compensatory arrangements with our NEOs aside from Ms. Gersh and Mr. Taitz are set forth below. For a summary of payments to Ms. Gersh and Mr. Taitz upon their departure from the Company, see "Potential Payments Upon Termination or Change of Control" below.
Martha Stewart
Ms. Stewart is employed as our Founder and Chief Creative Officer pursuant to an amended and restated employment agreement dated April 1, 2009, which was subsequently amended on July 9, 2012 and further amended on July 2, 2013 (the "July 2013 Amendment"). Ms. Stewart's employment agreement, as amended, generally provides for the following key terms:
• the term continues through June 30, 2017;
• annual talent compensation of $2,000,000, which pursuant to the July 2013 Amendment was reduced to $1,800,000;
• an annual cash bonus opportunity, with a target award equal to $1,000,000 (the "Target Amount") (with a maximum cash bonus opportunity equal to 150% of her Target Amount), based on the achievement of goals established by the Compensation Committee for each calendar year;
• if Ms. Stewart serves as on-air talent on shows other than The Martha Stewart Show produced after April 1, 2012 and such new programming requires her services as a performer in excess of the commitment previously required for The Martha Stewart Show, she is entitled to additional compensation to be determined by mutual agreement of Ms. Stewart and the Board (or if they cannot agree, by an independent expert), as well as 10% of the adjusted gross revenues (as defined in the agreement) associated with re-runs of such shows;
• reimbursement of certain expenses, including those related to business travel and entertainment, automobiles, wellness and beauty and personal security, as set forth in a founder expense policy; and
• participation in employee benefit plans, policies, programs and arrangements provided generally to similarly situated employees of the Company.
If the Company terminates Ms. Stewart’s employment without "cause" or she terminates her employment for "good reason," she would be entitled to a lump-sum payment equal to the sum of: (a) talent compensation and accrued vacation pay through the date of termination, (b) $3,000,000, and (c) the higher of (1) $5,000,000 or (2) three times the highest annual bonus paid with respect to any fiscal year beginning during the term of the agreement. In such cases, the Company must also continue to provide Ms. Stewart, for the greater of the remaining term of the agreement or three years following the date of termination, the same medical, hospitalization, dental and life insurance programs to which she was otherwise entitled under the agreement. Upon a termination by the Company without "cause" or her termination for "good reason", the Company would also be required to continue to provide Ms. Stewart with the use of automobiles and drivers and to provide her offices and assistants for three years.
The agreement contains customary confidentiality, non-competition, non-solicitation, non-disparagement and indemnification provisions. Under the agreement, Ms. Stewart cannot compete with the Company or solicit its employees during her term of employment. In addition, if Ms. Stewart’s employment is terminated by the Company for "cause" or by Ms. Stewart without "good reason", the non-competition and non-solicitation restrictions continue for 12 months after the termination of employment. The non-disparagement provisions, which preclude both the Company and Ms. Stewart from making disparaging or derogatory statements about the other in communications that are public or that may be reasonably expected to be publicly disseminated to the press or the media, apply during her term of employment and for two years thereafter in all events.
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Daniel W. Dienst
On October 28, 2013, the Company entered into an employment agreement with Mr. Dienst in connection with his appointment as Chief Executive Officer of the Company. Mr. Dienst's employment agreement generally provides for the following key terms:
• three year term, commencing on October 28, 2013 and ending on December 31, 2016, with automatic one-year renewals thereafter unless either party provides written notice of non-renewal at least 90 days prior to the expiration of the term;
• an annual base salary of $775,000, subject to increase (but not decrease) at the discretion of the Compensation Committee;
• commencing January 1, 2014, an annual cash bonus opportunity, with a target award equal to 75% of his base salary (with a maximum cash bonus opportunity equal to 150% of his base salary), based on the achievement of goals established by the Compensation Committee for each calendar year;
• one-time grant of options to purchase 1,000,000 shares of the Company’s Class A Common Stock, 250,000 of which shall have an exercise price of $2.75 (the “$2.75 Tranche”), 250,000 of which shall have an exercise price of $3.00 (the “$3.00 Tranche”), 250,000 of which shall have an exercise price of $4.00 (the “$4.00 Tranche”) and the remaining 250,000 of which shall have an exercise price of $5.00 (the “$5.00 Tranche,” and collectively with the $2.75 Tranche, the $3.00 Tranche and the $4.00 Tranche, the “Option Tranches”), which options will vest as to one-third of each Option Tranche on each of December 31, 2014, December 31, 2015 and December 31, 2016, subject to Mr. Dienst’s continued employment with the Company;
• one-time grant of 400,000 restricted stock units vesting as to 133,333 of the shares on each of December 31, 2014 and December 31, 2015, and as to 133,334 of the shares on December 31, 2016, subject to Mr. Dienst’s continued employment with the Company;
• one-time grant of 800,000 performance restricted stock units, which restricted stock units will vest as to 200,000 of the shares at such time as the trailing average closing price of the Class A Common Stock during any 30 consecutive trading days during the term of the employment agreement has been at least $6, as to an additional 200,000 of the shares at such time as the trailing average closing price of the Class A Common Stock during any 30 consecutive trading days during the term of the employment agreement has been at least $8, as to an additional 200,000 of the shares at such time as the trailing average closing price of the Class A Common Stock during any 30 consecutive trading days during the term of the employment agreement has been at least $10, and as to the final 200,000 of the shares at such time as the trailing average closing price of the Class A Common Stock during any 30 consecutive trading days during the term of the employment agreement has been at least $12, subject to Mr. Dienst’s continued employment with the Company; and
• participation in employee benefit plans, policies, programs and arrangements provided generally to similarly situated employees of the Company and reimbursement of all reasonable business expenses in accordance with Company policies relating to such expenses.
If the Company terminates Mr. Dienst without “cause” or he resigns for “good reason,” subject to his execution of a mutually satisfactory release and compliance with the covenants described below, Mr. Dienst will be entitled to any earned but unpaid portion of his base salary and the following: (1) twelve months’ base salary paid in the form of salary continuation commencing within 60 days of termination (or in the form of a cash lump sum payment payable within two and a half months after termination if Mr. Dienst is terminated after a “change of control”); (2) a pro-rated bonus (so long as his targets have been met and bonuses are paid generally to similarly situated executives); (3) accelerated vesting of any outstanding unvested RSUs (provided that only 50% of any outstanding unvested RSUs shall vest if Mr. Dienst is terminated on or prior to January 1, 2015); (4) accelerated vesting of any outstanding unvested options (with no change in the strike price of such options); (5) an extension of the period to exercise any options (to the extent otherwise exercisable) for 18 months following his termination; (6) an extension of the period to satisfy the performance conditions associated with Mr. Dienst’s PRSUs for 18
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months following his termination; and (7) payment of COBRA health insurance premiums for up to 12 months following termination (unless earlier eligible to receive subsequent employer-provided coverage).
If the Company does not renew the Employment Agreement upon expiration of its term, Mr. Dienst will be entitled to an extension of the period to satisfy the performance conditions associated with his PRSUs for 12 months following his termination and an extension of the period to exercise any options (to the extent otherwise exercisable) for 12 months following his termination.
Mr. Dienst's employment agreement contains customary confidentiality, non-competition, non-solicitation, non- disparagement and indemnification provisions. Under the agreement, Mr. Dienst cannot compete with the Company for a 12 month period after termination. The non-solicitation covenant also extends for 12 months after termination.
Kenneth P. West
Mr. West is employed as our Chief Financial Officer pursuant to an employment agreement dated September 6, 2011. Mr. West's employment agreement generally provides for the following key terms:
• three year term, commencing on September 6, 2011 and ending on September 6, 2014;
• an annual base salary of $450,000, subject to increase (but not decrease) at the discretion of the Compensation Committee, which was increased to $500,000 effective February 2013 and as of January 1, 2014 was increased to $525,000;
• commencing on January 1, 2012, an annual cash bonus opportunity, with a target award equal to 75% of his base salary (the "Target Amount") (with a maximum cash bonus opportunity equal to 150% of the Target Amount), based on the achievement of goals established by the Compensation Committee for each calendar year, which such bonuses to be paid 67% in cash and 33% in equity; and
• participation in employee benefit plans, policies, programs and arrangements provided generally to similarly situated employees of the Company and reimbursement of all reasonable business expenses in accordance with Company policies relating to such expenses.
If the Company terminates Mr. West without “cause” or he resigns for “good reason,” subject to his execution of a mutually satisfactory release and compliance with the covenants described below, Mr. West will be entitled to any earned but unpaid portion of his base salary and the following: (1) twelve months’ base salary paid in the form of salary continuation commencing within two and a half months of separation of service; (2) a pro-rated bonus (so long as his targets have been met and bonuses are paid generally to similarly situated executives); (3) accelerated vesting of any outstanding unvested RSUs that would have otherwise vested within 12 months of the date of termination or within 24 months after a "change of control", as applicable, (unless otherwise provided for in an RSU agreement); (4) accelerated vesting of any outstanding unvested options that would have otherwise vested within twelve months of the date of termination or within 24 months after a "change of control", as applicable, (unless otherwise provided for in an option agreement); and (5) continued medical coverage at active employee rates until the earliest of (x) 12 months following termination, (y) the end of his employment term, or (z) the date he is eligible to receive subsequent employer-provided coverage.
The agreement contains customary confidentiality, non-competition, non-solicitation, non-disparagement and indemnification provisions. Under the agreement, Mr. West cannot compete with the Company for a 12 month period after termination. The non-solicitation covenant also extends for 12 months after termination.
Patricia Pollack
Ms. Pollack is employed as Senior Executive Vice President - Merchandising as an at-will employee pursuant to an offer letter dated August 5, 2008. Ms. Pollack's employment agreement generally provides for the following key terms:
• an initial base salary of $350,000, which base salary was increased in June 2011 pursuant to a promotion to $550,000;
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• an annual cash bonus opportunity, with a target award equal to 50% of her base salary to be determined in accordance with the annual incentive plan; and
• participation in employee benefit plans, policies, programs and arrangements provided generally to similarly situated employees of the Company and reimbursement of all reasonable business expenses in accordance with Company policies relating to such expenses.
See "Separation Arrangements" above for a description of Ms. Pollack's entitlement to severance.
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SUMMARY COMPENSATION TABLE
The Summary Compensation Table and the accompanying tables show the compensation of Daniel W. Dienst, who was our Chief Executive Office beginning in October 2013, Lisa Gersh, who was our Chief Executive Officer and President through February 2013, Kenneth P. West, who is our Chief Financial Officer and served in that capacity during all of 2013, and Martha Stewart, Daniel Taitz and Patricia Pollack, who were our three highest compensated other executive officers serving in that capacity on the last day of 2013.
Name and Stock Option All Other Principal Position Year Salary ($) Bonus ($) Awards ($)(1) Awards ($)(2) Compensation ($) Total ($) Lisa Gersh(3) Former Chief Executive Officer and (4) President 2013 127,500 — — — 1,275,357 1,402,857
2012 796,154 — 429,337 280,558 5,576 1,511,625
2011 403,846 200,000 1,731,500 1,416,538 8,019 3,759,903 Daniel W. Dienst Chief Executive Officer 2013 120,160(5) — 1,474,000(6) 780,066 125(7) 2,374,351 Kenneth P. West Chief Financial Officer 2013 490,769 — 224,900 106,553 9,972(8) 832,195
2012 450,000 — — — 8,742 458,742
2011 128,077 30,000 214,600 173,521 382 573,580 Martha Stewart Founder/Chief Creative Officer 2013 1,907,692 — — 2,886,586(9) 4,794,278
2012 2,000,000 — — — 3,460,406 5,460,406
2011 2,000,000 — — 266,362 3,235,438 5,501,800 Daniel Taitz(10) Former Chief Administrative Officer 2013 490,769 — 59,200 54,940 508,892(11) 1,113,801
2012 450,000 — 91,500 — 7,992 549,492 2011 147,115 50,000 332,700 281,558 430 811,803 Patricia Pollack Senior Executive Vice President, (12) Merchandising 2013 550,000 — 25,000 — 11,378 586,378
2012 550,000 — — — 10,174 560,174 2011 460,000 100,000 254,500 35,515 11,078 861,093
(1) Amounts represent the aggregate grant date fair value of stock awards as computed in accordance with FASB ASC Topic 718. For the assumptions used to determine the grant date fair value, see Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Please also refer to the Grants of Plan-Based Awards in 2013 table for information on stock awards made in 2013. These amounts do not represent the actual value that may be realized by the NEOs. (2) Amounts represent the aggregate grant date fair value of option awards computed in accordance with FASB ASC Topic 718. For the assumptions used to determine the grant date fair value, see Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Please also refer to the Grants of Plan-Based Awards in 2013 table for information on option awards made in 2013. These amounts do not represent the actual value that may be realized by the NEOs. (3) Ms. Gersh served as our Chief Executive Officer and President until February 7, 2013. The amount reported in the Salary column represents her base salary for fiscal 2013, reflecting a partial year of service in that capacity. For
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additional information on Ms. Gersh’s separation from the Company, see “Potential Payments Upon Termination or Change in Control.” (4) Ms. Gersh’s other compensation consisted of $850,000 in severance payments made in 2013, $425,000 in accrued severance payments paid in the form of salary continuation as of February 2014 and imputed income with respect to term life insurance coverage. (5) Mr. Dienst's salary includes $15,833 of cash payments paid to Mr. Dienst in connection with his service on our Board prior to his appointment as our Chief Executive Officer in October 2013. (6) Mr. Dienst's stock award includes $60,000 in the form of RSUs granted to Mr. Dienst in connection with his appointment to our Board in August 2013 and prior to his appointment as our Chief Executive Officer. (7) Mr. Dienst's other compensation consists of imputed income with respect to term life insurance coverage. (8) Mr. West’s other compensation consists of matching contribution to the 401(k) plan and imputed income with respect to term life insurance coverage. (9) Ms. Stewart’s 2013 other compensation of $2,886,586 consists of (i) $1,729,707 in expenses incurred in connection with the Intangible Asset License Agreement, which allows for our use of certain intangible assets related to Ms. Stewart and the use of various real properties owned by Ms. Stewart; (ii) $634,532 for security services; (iii) $64,949 for the portion of personnel costs for individuals performing work for Ms. Stewart for which we were not reimbursed; (iv) $127,955 for the cost of drivers for non-business usage; (v) $16,749 for imputed income with respect to term life insurance coverage and excess liability insurance premiums; (vi) $174,722 for expenses related to personal fitness, wellness, beauty and wardrobe provided in her capacity as on-air and in-person talent and (vii) $130,262 for utilities and telecommunication services and (viii) vendor/advertiser/merchandising partner supplied samples and products with no incremental cost to the Company. These expenses are paid and benefits are provided in accordance with her Employment Agreement with the Company, as amended. That agreement provides that Ms. Stewart is entitled to reimbursement for all business, travel, entertainment, security and communications expenses incurred (i) prior to July 1, 2013 on a basis no less favorable than in effect immediately prior to April 1, 2009 and (ii) after July 1, 2013 in accordance with a founder expense policy. For further information regarding these payments, see "Compensation Discussion and Analysis - Section 1-Executive Summary - Setting Ms. Stewart's Compensation." For further information regarding the Intangible Asset License Agreement, see “Certain Relationships and Related Person Transactions - Transactions with Martha Stewart.” (10) Mr. Taitz stepped down as Chief Administrative Officer on December 31, 2013. For additional information on Mr. Taitz's separation from the Company, see “Potential Payments Upon Termination or Change in Control.” (11) Mr. Taitz’s other compensation consists of $500,000 in severance payments accrued in 2013, matching contribution to the 401(k) plan and imputed income with respect to term life insurance coverage. (12) Ms. Pollack’s other compensation consists of matching contribution to the 401(k) plan, imputed income with respect to term life insurance coverage and excess liability insurance premiums.
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GRANTS OF PLAN-BASED AWARDS IN 2013
All Other All Other Exercise Grant Date Stock Option or Fair Value Estimated Possible Payouts Awards: Awards: Base of Stock Estimated Possible Payouts Under Under Equity Incentive Plan Number of Number of Price and Non-Equity Incentive Plan Awards (1) Awards Shares of Securities of Option Option(2)
Name and Grant Approval Threshold Target Maximum Threshold Target Maximum Stock or Underlying Awards Awards Type of Award Date Date(3) ($) ($) ($) (#) (#) (#) Units (#) Options (#) ($/Sh) ($) (4) Lisa Gersh n/a n/a — — — — — — — — — — Daniel W. Dienst n/a n/a — — — — — — — — — — RSUs 8/27/2013 8/27/2013 24,000(5) 60,000 (6) Stock Options 10/28/2013 10/22/2013 250,000 2.75 237,924 (6) Stock Options 10/28/2013 10/22/2013 250,000 3.00 223,158 (6) Stock Options 10/28/2013 10/22/2013 250,000 4.00 176,212 (6) Stock Options 10/28/2013 10/22/2013 250,000 5.00 142,772 (7) RSUs 10/28/2013 10/22/2013 400,000 960,000 (8) PRSUs 10/28/2013 10/22/2013 200,000 188,000 (8) PRSUs 10/28/2013 10/22/2013 200,000 124,000 (8) PRSUs 10/28/2013 10/22/2013 200,000 84,000 (8) PRSUs 10/28/2013 10/22/2013 200,000 58,000 Kenneth P. West n/a n/a 251,250 376,875 123,750 185,625 (9) PRSUs 3/01/2013 02/20/2013 20,000 49,600 (10) RSUs 3/01/2013 02/20/2013 20,000 10,000 (11) Stock Options 3/01/2013 02/20/2013 50,000 2.48 54,940 (12) PRSUs 12/16/2013 12/16/2013 30,000 47,700 (13) RSUs 12/16/2013 12/16/2013 30,000 117,600 (14) Stock Options 12/16/2013 12/16/2013 30,000 3.92 51,613 Martha Stewart n/a n/a 0 1,000,000 1,500,000 0 0 0 0 0 0 0 (15) Daniel Taitz n/a n/a 375,000 562,500 PRSUs 3/01/2013 02/20/2013 20,000 49,600 RSUs 3/01/2013 02/20/2013 20,000 9,600 Stock Options 3/01/2013 02/20/2013 50,000 2.48 54,940 Patricia Pollack n/a n/a 275,000 (16) RSUs 4/1/2013 02/20/2013 10,000 25,000
(1) Amounts represent target amounts payable to each NEO in 2013. For Ms. Stewart and Messrs. West and Taitz, the target and maximum bonus amounts are provided in accordance with the terms of their employment agreements. In the case of Ms. Stewart, her target bonus opportunity is $1,000,000; with a maximum opportunity of 150% of her target. In the case of Messrs. West and Mr. Taitz, such target bonus is 75% of the officer’s base salary (the "Target Amount"), with a maximum opportunity equal to 150% of the Target Amount. In the case of Mr. West, 67% of his bonus is payable in cash and 33% is payable in stock options and/or RSUs which vest ratably over a three year period. Accordingly, 67% of Mr. West’s target and maximum bonus is reflected in the “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards” columns and 33% of Mr. West’s target and maximum bonus is reflected in the “Estimated Possible Payouts Under Equity Incentive Plan” columns. With respect to Ms. Pollack and pursuant to her offer letter, her target bonus opportunity is 50% of her base salary. Pursuant to his employment agreement, commencing January 1, 2014, Mr. Dienst has a target bonus of 75% of his base salary, with a maximum opportunity of 150% of his base salary. (2) Amounts represent the aggregate grant date fair value of stock awards as computed in accordance with FASB ASC Topic 718. For the assumptions used to determine the grant date fair value, see Note 9 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Performance RSUs are valued using the Monte Carlo Simulation method which takes into account assumptions such as volatility of our Class A Common Stock, the risk-free interest rate based on the contractual term of the award, the expected dividend yield, the vesting schedule, and the probability that the market conditions of the award will be achieved.
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(3) In accordance with our policy on the timing of equity award grants, the effective grant date for all equity awards determined during the course of any calendar month is the first business day following the calendar month in which the grant is approved by our Compensation Committee or Equity Committee, as applicable, unless otherwise specified by our Board of Directors or the Compensation Committee. (4) Ms. Gersh served as our Chief Executive Officer and President until February 2013 and was not eligible for any bonus in 2013. (5) Mr. Dienst was granted 24,000 RSUs in connection with his appointment to our Board of Directors in August 2013 and prior to his appointment as Chief Executive Officer. These RSUs will vest on the earlier of our 2014 Annual Meeting or May 31, 2014. (6) Represents a grant of options made to Mr. Dienst in connection with his appointment as our Chief Executive Officer: 83,333 of these options will vest on each of December 31, 2014 and December 31, 2015. The remaining 83,334 of these options will vest on December 31, 2016. (7) Represents a grant of RSUs made to Mr. Dienst in connection with his appointment as our Chief Executive Officer: 133,333 of these time-vested RSUs will vest on each of December 31, 2014 and December 13, 2015. The remaining 133,334 of these time-vested RSUs will vest on December 31, 2016. (8) Represents a grant of PRSUs made to Mr. Dienst in connection with his appointment as our Chief Executive Officer: 200,000 of the PRSUs will vest if and only if the trailing average closing price of the Company's Class A Common Stock is at least $6 during any 30 consecutive trading days during the period beginning on October 28, 2013 and ending on December 31, 2016 (the "Performance Period"). 200,000 of the PRSUs will vest if and only if the trailing average closing price of the Company's Class A Common Stock is at least $8 during any 30 consecutive trading days during the Performance Period. 200,000 of the PRSUs will vest if and only if the trailing average closing price of the Company's Class A Common Stock is at least $10 during any 30 consecutive trading days during the Performance Period. 200,000 of the PRSUs will vest if and only if the trailing average closing price of the Company's Class A Common Stock is at least $12 during any 30 consecutive trading days during the Performance Period. (9) 100% of the PRSUs will vest if and only if the trailing average closing price of the Company's Class A Common Stock is at least $6 during any 30 consecutive trading days before September 6, 2014. (10) 10,000 of these time-vested RSUs vested on March 1, 2014. The remaining 10,000 restricted stock units will vest on March 1, 2015. (11) 25,000 of these options vested on March 1, 2014. The remaining 25,000 options will vest on March 1, 2015. (12) 100% of these PRSUs will vest if and only if the trailing average closing price of the Company's Class A Common Stock is at least $5 during any 30 consecutive trading days beginning on December 16, 2013 and ending on September 6, 2014. (13) 100% of these RSUs will vest on September 6, 2015. (14) 10,000 of these options will vest on each of December 16, 2014, December 16, 2015 and December 16, 2016. (15) Each of Mr. Taitz's March 2013 awards of RSUs and options were scheduled to vest in equal installments over two years. Upon his resignation from the Company on December 31, 2013 and pursuant to the respective award agreements, all unvested RSUs and options from the March 2013 award that had not vested as of December 31, 2013 vested on such date. Mr. Taitz's PRSUs were forfeited upon his resignation. (16) 100% of these RSUs vested on April 1, 2014.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2013
Option Awards (1) Stock Awards Equity Equity Incentive Incentive Plan Plan Awards: Awards: Equity Number of Market or Incentive Unearned Payout Plan Awards: Market Shares, Value Number of Number of Number of Value of Units or of Unearned Securities Number of Securities Shares or Shares or Other Shares, Units Underlying Securities Underlying Units of Units of Rights or Other Unexercised Underlying Unexercised Option Stock That Stock That That Rights That Options Unexercised Unearned Exercise Option Have Not Have Not Have Not Have Not (#) Options (#) Options Price Expiration Vested Vested Vested Vested Name Grant Date Exercisable Unexercisable (#) ($) (1) Date (#) ($) (2) (#) ($) (2) Lisa Gersh(3) Daniel W. Dienst 8/27/2013 24,000(4) 100,800 10/28/2013 250,000(5) 2.75 10/27/2023 10/28/2013 250,000(5) 3.00 10/27/2023 10/28/2013 250,000(5) 4.00 10/27/2023 10/28/2013 250,000(5) 5.00 10/27/2023 10/28/2013 400,000(6) 1,680,000 10/28/2013 800,000(7) 3,360,000 Kenneth P. West 9/6/2011 25,000(8) 6.00 9/5/2021 9/6/2011 25,000(8) 8.00 9/5/2021 9/6/2011 25,000(8) 10.00 9/5/2021 9/6/2011 25,000(8) 12.00 9/5/2021 9/6/2011 25,000(9) 50,000(9) 3.08 9/5/2021 9/6/2011 33,333(10) 139,999 9/6/2011 60,000(11) 252,000 3/1/2013 50,000(12) 2.48 2/28/2023 3/1/2013 20,000(13) 84,000 3/1/2013 20,000(14) 84,000 12/16/2013 30,000(15) 3.92 12/15/2023 12/16/2013 30,000(16) 126,000 12/16/2013 30,000(17) 126,000 Martha Stewart 3/3/2008 750,000 7.04 3/2/2015 3/2/2009 850,000 1.96 2/28/2019 3/1/2010 225,000(16) 75,000(18) 5.48 2/28/2020 3/1/2011 99,000(17) 51,000(19) 3.95 2/28/2021 (20) Daniel Taitz 8/22/2011 66,667(20) 3.15 3/31/2014 3/1/2013 50,000(20) 2.48 3/31/2014 Patricia Pollack 3/2/2009 37,500 1.96 2/28/2019 3/1/2010 11,250(21) 3,750(21) 5.48 2/28/2020 3/1/2011 13,200(22) 6,800(22) 3.95 2/28/2021 6/1/2011 17,000(23) 71,400 4/1/2013 10,000(24) 42,000
(1) All options were issued under our Omnibus Stock and Option Compensation Plan (the "Stock Plan"), with the exception of Ms. Stewart’s 750,000 options which expire on March 2, 2015, which were issued from the Martha Stewart Living Omnimedia, Inc. 1999 Amended and Restated Stock Compensation Plan (the “Prior Plan”). Options are granted at an exercise price equal to the fair market value on the date of grant. Under the Stock Plan, fair market value is defined as the closing price of Class A Common Stock on the date of grant. Under the Prior Plan, fair market value is defined as the closing price of Class A Common Stock on the last business day before the grant.
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(2) Market value is based on the $4.20 closing market price of the Class A Common Stock on December 31, 2013, the last day of fiscal 2013. (3) In connection with her departure from the Company and the terms of her employment agreement, on February 7, 2013, Ms. Gersh became fully vested in time-based equity awards which were otherwise to vest within one year from her departure date and any remaining shares subject to such awards were forfeited. As of December 31, 2013, Ms. Gersh had no outstanding equity awards. For further detail on the terms of Ms. Gersh's departure from the Company, see "Potential Payments Upon Termination or Change in Control." (4) Represents the grant made to Mr. Dienst in connection with his appointment to our Board in August 2013 and prior to his appointment as our Chief Executive Officer. 100% of these RSUs will vest on the earlier of the 2014 Annual Meeting or May 31, 2014. (5) Represents options granted in connection with Mr. Dienst's appointment as Chief Executive Officer of the Company. One-third of these options will vest on each of December 31, 2014, December 31, 2015 and December 31, 2016. (6) Represents RSUs granted in connection with Mr. Dienst's appointment as Chief Executive Officer of the Company. One-third of these RSUs will vest on each of December 31, 2014, December 31, 2015 and December 31, 2016. (7) Represents PRSUs granted in connection with Mr. Dienst's appointment as Chief Executive Officer of the Company. 200,000 of the PRSUs will vest if and only if the trailing average closing price of the Class A common stock (the "Common Stock") during any 30 consecutive trading days during period beginning October 28, 2013 and ending on December 31, 2016 (the "Dienst Performance Period") has been at least $6, as to an additional 200,000 of the shares at such time as the trailing average closing price of the Common Stock during any 30 consecutive trading days during the Dienst Performance Period has been at least $8, as to an additional 200,000 of the shares at such time as the trailing average closing price of the Common Stock during any 30 consecutive trading days during the Dienst Performance Period has been at least $10, and as to the final 200,000 of the shares at such time as the trailing average closing price of the Common Stock during any 30 consecutive trading days during the Dienst Performance Period has been at least $12. (8) These options will vest if and only if the trailing average price during any consecutive 30 trading days is at least the stated option price during the period beginning on September 6, 2011 and ending on September 6, 2014. (9) 25,000 of these options vested on September 6, 2013. The remaining 50,000 options will vest in equal portions on each of September 6, 2014 and September 6, 2015. (10) The unvested portion of this grant will vest ratably on each of September 6, 2014 and September 6, 2015. (11) 25% of these PRSUs will vest if and only if the trailing average price during any consecutive 30 trading days is at least $8 during the period beginning on September 6, 2011 and ending on September 6, 2014; 25% will vest if and only if the trailing average price during any consecutive 30 trading days is at least $10 during the period beginning on September 6, 2011 and ending on September 6, 2014; 25% will vest if and only if the trailing average price during any consecutive 30 trading days is at least $12 during the period beginning on September 6, 2011 and ending on September 6, 2014; and 25% will vest if and only if the trailing average price during any consecutive 30 trading days is at least $14 during the period beginning on September 6, 2011 and ending on September 6, 2014. (12) 25,000 of these options vested on March 1, 2014. The remaining 25,000 options will vest on March 1, 2015. (13) 10,000 of these RSUs vested on March 1, 2014. The remaining 10,000 options will vest on March 1, 2015. (14) 100% of these PRSUs will vest if and only if the trailing average price during any consecutive 30 trading days is at least $6 during the period beginning on September 6, 2011 and ending on September 6, 2014. (15) 10,000 of these options will vest on each of December 16, 2014, December 16, 2015 and December 16, 2016. (16) 100% of these RSUs will vest on September 6, 2015. (17) 100% of these PRSUs will vest if and only if the trailing average price during any consecutive 30 trading days is at least $5 during the period beginning on December 16, 2013 and ending on September 6, 2014. (18) This option grant fully vested on March 1, 2014. (19) This option grant fully vested on March 1, 2014. (20) In connection with his departure from the Company and the terms of his employment agreement, on December 31, 2013 Mr. Taitz accelerated vesting in certain of his equity grants and equity that did not vest was forfeited. At December 31, 2013, Mr. Taitz had outstanding options which he subsequently exercised in March 2014. As of April 1, 2014, Mr. Taitz has no outstanding equity. For further detail on the terms of Mr. Taitz's departure from the Company, see "Potential Payments Upon Termination or Change in Control." (21) This option grant fully vested on March 1, 2014. (22) This option grant fully vested on March 1, 2014. (23) The unvested portion of this grant will vest on June 1, 2014. (24) 100% of these RSUs vested on April 1, 2014.
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OPTION EXERCISES AND STOCK VESTED DURING 2013
Option Awards Stock Awards Number of Number of Shares Shares Acquired Value Realized Acquired on Value Realized on Exercise on Exercise Vesting on Vesting Name (#) ($) (#) ($)(1) (2) Lisa Gersh — — 66,667 194,001 — — 64,395 187,389 — — 25,000 72,750 (3) Daniel Taitz — — 16,667 42,168 — — 10,000 25,300 — — 16,667 70,001 — — 10,000 42,000 — — 20,000 84,000 Kenneth P. West — — 16,667 38,834 Patricia Pollack — — 15,000 37,200 — — 16,500 41,250
(1) Value realized was calculated based on the closing price of the Class A Common Stock on the date of vesting. (2) Represents shares that were issued upon vesting of RSUs on February 7, 2013 in connection with Ms. Gersh's departure from the Company and the terms of her employment agreement. For further detail on the terms of Ms. Gersh's departure from the Company, see "Potential Payments Upon Termination or Change in Control." (3) Represents shares that were issued upon vesting of RSUs on December 31, 2013 in connection with Mr. Taitz's departure from the Company and the terms of his employment agreement. For further detail on the terms of Mr. Taitz's departure from the Company, see "Potential Payments Upon Termination or Change in Control."
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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The tables below reflect the amount of compensation that would have been owed to each of our NEOs in the event of employment termination or change of control on December 31, 2013. Ms. Gersh and Mr. Taitz departed the Company in fiscal 2013. Potential payments to Ms. Gersh and Mr. Taitz upon termination or change in control are not set forth in tabular form below. Instead, actual payments made to Ms. Gersh and Mr. Taitz as a result of their departure from the Company are described separately under "Payments made to Ms. Gersh and Mr. Taitz" below.
Regardless of the reason for an NEO's termination of employment, he/she may be entitled to receive amounts earned during the term of employment. Such amounts include, through the date of termination:
• earned but unpaid salary;
• benefits (including accrued vacation);
• unreimbursed business expenses; and
• the ability to exercise vested stock options for a limited period of time.
The amounts of compensation due upon various termination situations set forth in the following tables reflect the specific terms and conditions for each NEO in his or her employment agreement as described above under “Employment Agreements and Compensatory Arrangements." The amounts below were calculated using the following assumptions:
• the tables do not include the value of vested but unexercised stock options as of December 31, 2013;
• benefit continuation expense was calculated using the Company’s costs for medical, dental, hospitalization and life insurance coverage for each NEO as in effect on December 31, 2013, except where otherwise specified;
• our pay period ended on, and included pay for December 31, 2013 and that there was no accrued vacation at such date;
• performance restricted stock units that did not meet specific performance requirements were forfeited upon termination; and
• options with exercise prices that exceeded the closing price of our Common Stock on December 31, 2013 would not result in a benefit had the vesting of these options been accelerated, and therefore such options are not included in the tables.
The actual amounts that would be paid upon an NEO's termination of employment or a change of control can be determined only at the time of any such event. Due to the number of factors that affect the nature and amount of any benefits provided upon such an event, any actual amounts paid or distributed may be lower or higher than reported below.
Value of Accelerated Equity Awards(2) Benefit Restricted Cash Severance Continuation Stock and Daniel W. Dienst:(1) ($) ($) Options ($) RSUs ($) Total ($) Change in Control (3) 750,000 20,798 712,500 1,680,000 3,163,298 Termination by Company without “cause”/by employee for “good reason” 750,000 20,798 712,500 840,000 2,323,298 Termination for cause — — — — — Disability — — — — — Death — — — — — All other — — — — —
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Value of Accelerated Equity Awards(2) Benefit Restricted Cash Severance Continuation Stock and Kenneth P. West:(1) ($) ($) Options ($) RSUs ($) Total ($) Change in Control(3) 500,000 6,529 198,000 140,003 844,532 Termination by Company without “cause”/by employee for “good reason” 500,000 6,529 142,000 154,001 802,530 Termination for cause — — — — — Disability — — — — — Death — — — — — All other — — — — —
Value of Accelerated Equity Awards(2) Benefit Restricted Cash Severance Continuation Stock and Martha Stewart: ($) ($) Options ($) RSUs ($) Total ($) Change in Control — — 12,750 — 12,750 Termination by Company without “cause”/ by employee for “good reason” (4) 8,000,000 16,747 — — 8,016,747 Termination for cause — — — — — Disability (4) 6,300,000 — — — 6,300,000 Death (4) 6,300,300 — — — 6,300,000 All other — — — — —
Value of Accelerated Equity Awards(2) Benefit Restricted Cash Severance Continuation Stock and Patricia Pollack: ($) ($) Options ($) RSUs ($) Total ($) Change in Control — — 1,700 1,700 Termination by Company without “cause”/by employee for “good reason” (5) 253,846 — — — 243,269 Termination for cause — — — — — Disability — — — — — Death — — — — — All other — — — — —
(1) The employment agreements for Mr. Dienst and Mr. West provide for a pro rata bonus for the year of termination if performance targets are met and bonuses are paid to similarly situated executives, with such bonuses to be paid at the time such other bonuses are paid. As no bonuses were paid for the fiscal year ended December 31, 2013, no additional bonus amount would have been payable to these individuals as of December 31, 2013. (2) Represents the value associated with the acceleration of the vesting of equity awards. The value is based on the closing stock price of the Class A Common Stock on December 31, 2013, which was $4.20. The value of the options is the difference between $4.20 and the applicable exercise price. (3) Represents amounts payable in lieu of amounts payable upon a “Termination by Company without ‘cause’/ by employee for ‘good reason’” if the “Termination by Company without ‘cause’/ by employee for ‘good reason’” occurs after a “change in control.” (4) Under Ms. Stewart’s employment agreement, in the event of her death, the Company remains obligated to pay the annual amount of her talent compensation (less long-term disability payments) until June 30, 2017. If she is disabled, the annual amount of her talent compensation continues unless the agreement is terminated, in which event the Company remains obligated to pay the talent compensation (less long-term disability payments) until June 30, 2017.
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Upon a termination by the Company without cause or her termination for good reason, the Company would also be required to continue to provide Ms. Stewart with the use of automobiles and drivers and to provide her with offices and assistants for three years following such a termination. The above table does not include any value for use of automobiles and drivers, offices and assistants by Ms. Stewart for a three-year period following such a termination, or payments that would result from the simultaneous termination of the Intangible Asset License Agreement or payments due under the Intellectual Property License Agreement. For more information, see “Certain Relationships and Related Person Transactions – Transactions with Martha Stewart.” (5) Under the Company’s severance policy at December 31, 2013, Ms. Pollack was entitled to 24 weeks of salary, subject to execution of a release in favor of the Company.
Payments Made to Ms. Gersh and Mr. Taitz
Lisa Gersh
Ms. Gersh stepped down as the Company’s Chief Executive Officer and President and resigned from the Company’s Board on February 7, 2013. In connection with the terms of her employment agreement, on her departure date of February 7, 2013, Ms. Gersh became vested in any time-based equity awards which were otherwise to vest within one year of her departure date. Accordingly, the following equity became vested on February 7, 2013:
• 100,000 options with an exercise price of $4.85 from the 300,000 options granted on June 6, 2011;
• 66,667 options with an exercise price of $3.08 from the 200,000 options granted on June 6, 2012;
• 66,667 RSUs from the 200,000 RSUs granted on June 6, 2011;
• 25,000 RSUs from the 75,000 RSUs granted on June 6, 2012; and
• 64,395 RSUs from the 64,395 RSUs granted on June 6, 2012.
The value of the accelerated vesting of her RSUs was $454,140 and her options was $0.00 as her vested options were underwater based on the closing price of the Class A Common Stock on February 7, 2013, which was $2.91. On the date of her departure, Ms. Gersh forfeited all unvested performance restricted stock units that had not achieved the applicable performance measures.
Further, in accordance with her employment agreement, Ms. Gersh was also entitled to receive cash severance payments of up to a total of 18 months’ salary ($1,275,000). Of this amount, 12 months of her base salary ($850,000) was paid in April 2013. The remaining 6 months’ salary ($425,000) was due in the form of salary continuation, starting on February 7, 2014, but is subject to offset by compensation received from subsequent employment. As of March 28, 2014, Ms. Gersh has been paid $130,769 in salary continuation.
Ms. Gersh was also entitled to continued medical coverage at active employee rates but did not elect to receive such benefits.
Daniel Taitz
Mr. Taitz resigned from the Company effective December 31, 2013. In connection with the terms of his employment agreement and the equity award agreements entered into in connection with his equity grants, on his departure date, Mr. Taitz became vested in certain equity awards. Accordingly, the following equity became vested on December 31, 2013:
• 33,333 options with an exercise price of $3.15 from the 100,000 options granted on August 22, 2011 (of which 33,334 options had previously vested);
• 50,000 options with an exercise price of $2.48 from the 50,000 options granted on March 1, 2013;
• 16,667 RSUs from the 50,000 RSUs granted on August 22, 2011 (of which 16,667 had previously vested);
• 10,000 RSUs from the 30,000 RSUs granted on August 22, 2012 (of which 10,000 had previously
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vested); and
• 20,000 RSUs from the 20,000 RSUs granted on March 1, 2013.
The value of the accelerated vesting of his RSUs was $196,001 and his options was $121,000 based on the closing price of the Class A Common Stock on December 31, 2013, which was $4.20. On the date of his departure, Mr. Taitz forfeited all unvested performance restricted stock units that had not achieved the applicable performance measures.
Further, in accordance with his employment agreement, Mr. Taitz was also entitled to receive cash severance payments of up to a total of 12 months’ salary ($500,000), paid in the form of salary continuation.
Mr. Taitz is also entitled to continued medical coverage at active employee rates for 12 months after his departure from the Company, for an annual cost to the Company of $9,595.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS Policies and Procedures Regarding Transactions with Related Persons
In July 2010, we adopted written related person transaction policies and procedures to further the goal of ensuring that any related person transaction is properly reviewed, approved or ratified, if appropriate, and fully disclosed in accordance with applicable rules and regulations. Our related persons policy provides that we will only enter into or ratify a transaction with a related party when our Board of Directors, acting through our Audit Committee, determines that the transaction is in the best interests of the Company and our stockholders.
For the purposes of the policy, a related party means:
• a member of our board of directors (or a nominee to the board of directors);
• an executive officer;
• any person who is known to be the beneficial owner of more than 5% of any class of our securities;
• any immediate family member of the persons listed above; or
• any entity in which any of the persons listed above is employed, is a general partner or principal or in which such person has a 10% or greater beneficial ownership interest.
Transactions covered by our related person policies and procedures (“related person transactions”) include any transaction, arrangement or relationship in which a) the Company is a participant or b) any related person has or will have a direct or indirect interest.
Under our related person policies and procedures, a related person or employee proposing a potential related person transaction must notify the Chief Financial Officer or the General Counsel of the facts and circumstances of the proposed related party transaction. The Chief Financial Officer or the General Counsel, as applicable, will initially determine whether the proposed transaction constitutes a related person transaction under our policies and procedures. If the transaction is determined to be a related person transaction, the Chief Financial Officer or the General Counsel, as applicable, will then assess whether the aggregate amount of such transaction exceeds $9,500. If the proposed transaction does not exceed $9,500, the Chief Financial Officer or the General Counsel, as applicable, may approve the transaction and must present a list of all such approved transactions to the Audit Committee at the next regularly scheduled quarterly meeting.
If the proposed transaction exceeds $9,500, it will be submitted to the Audit Committee for pre-approval prior to its consummation. In determining whether to approve or ratify a related person transaction, the Audit Committee will consider all of the relevant facts and circumstances of the proposed transaction in making its determination, including, among other factors it deems appropriate:
• the benefits to the Company of the transaction;
• the nature of the related person's interest in the transaction;
• the availability of other comparable products or services;
• the terms of the proposed transaction; and
• whether the transaction is in the ordinary course of the Company’s business.
If the transaction involves a member of the Audit Committee, that Audit Committee member will not participate in the action regarding whether to approve or ratify the transaction.
All related person transactions for 2013 were approved consistent with our policies and procedures.
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Related Persons Transactions
Transactions with Martha Stewart
Intangible Asset License Agreement
We are party to an intangible asset license agreement (the “IAL agreement”) with Lifestyle Research Center, LLC (“LRC”) (formerly known as MS Real Estate Management Company), an entity owned by Martha Stewart. Pursuant to the IAL, the Company paid an annual fee of $2.0 million to LRC for the perpetual, exclusive right to use certain intangible assets related to Ms. Stewart and her properties and to access various real properties owned by Ms. Stewart during the term of the agreement.
In July 2013, as part of an overall effort to return the Company to profitability, Ms. Stewart agreed to modify the IAL agreement pursuant to the Letter Agreement to reduce the annual licensing fee by $300,000 to $1.7 million, effective September 2013 and extending the term of the IAL from June 30, 2017 until September 15, 2017. LRC is responsible, at its expense, to maintain and landscape the real properties in a manner consistent with past practices; provided, however, that we are responsible for approved business expenses associated with security and telecommunications systems and security personnel related to Ms. Stewart at the properties, and must reimburse LRC for up to $100,000 of approved and documented household expenses. In 2013, the Company reimbursed LRC approximately $30,000 for approved and documented household expenses. For each of the years ended December 31, 2012 and 2011, the Company reimbursed LRC $30,000 and $100,000, respectively, for these expenses.
We also reimbursed LRC for certain costs borne by LRC associated with various Company business activities which were conducted at properties covered by the IAL agreement. During 2013 and 2012, the Company reimbursed LRC $25,000 and $30,000 for these costs. During 2011, reimbursements for these costs were insignificant.
The IAL agreement will terminate on any termination of Ms. Stewart’s employment. If Ms. Stewart’s employment is terminated by the Company other than for “Cause” or if Ms. Stewart terminates her employment for “Good Reason” (in each case as such term is defined in her Employment Agreement with the Company), then the Company would be obligated to pay LRC the annual licensing fee that would be payable through the remaining term of the IAL Agreement (i.e., until September 30, 2017). Were Ms. Stewart’s employment to terminate under such circumstances prior to the payment due under the IAL Agreement in September 2014, the Company would owe LRC a payment of $5,100,000.
Intellectual Property License and Preservation Agreement
We entered into an Intellectual Property License and Preservation Agreement with Ms. Stewart dated as of October 22, 1999, pursuant to which Ms. Stewart granted 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 agreement, we generally have the right to develop and register in our name trademarks that incorporate the Martha Stewart name, such as Martha Stewart Living, and to use these marks on an exclusive basis in and in connection with our businesses. If Ms. Stewart ceases to control the Company, we will continue to have the foregoing 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 Ms. Stewart ceases to control the Company.
In the event that we terminate Ms. Stewart’s employment without “cause” or she terminates her employment for “good reason,” each as defined in her employment agreement, the license to existing marks will cease to be exclusive and we will be limited in our ability to create new marks incorporating her name, likeness, image, publicity and signature. In these circumstances, Ms. Stewart would receive the right to use her name in other businesses that could directly compete with us, including with our magazine, television and merchandising businesses. In addition, if Ms. Stewart’s employment terminates under these circumstances, Ms. Stewart would receive in perpetuity a royalty of 3% of the revenues we derive from any of our products or services bearing any of the licensed marks. The Intellectual Property License and Preservation 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. The term of the license is perpetual; however, Ms. Stewart may terminate the license 53 Table of Contents
if we fail to make the royalty payments described above.
Transactions with J.C. Penney
On December 6, 2011, the Company and J. C. Penney, the principal operating subsidiary of J. C. Penney Company, Inc., entered into the following agreements, each dated as of December 6, 2011: (i) the J. C. Penney/ MSLO Agreement (the “Commercial Agreement”), (ii) the Securities Purchase Agreement (the “Securities Purchase Agreement”) and (iii) the Investor Rights Agreement (the “Investor Rights Agreement”).
Pursuant to these transactions J.C. Penney purchased 11,000,000 newly-issued shares of our Class A Common Stock, par value $0.01 per share, and one share of our Series A Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock") in exchange for cash of $38.5 million. In accordance with J.C. Penney’s ownership of our Series A Preferred Stock, J.C. Penney was entitled to designate two directors for election to our Board of Directors (the “Board”). Also in December 2011, we entered into a Commercial Agreement with J.C. Penney. The Commercial Agreement provided for an initial term that was to expire on January 28, 2023, unless earlier terminated in accordance with its terms. Pursuant to the Commercial Agreement, J.C. Penney will sell certain home products (the “Products”) through www.jcp.com and in J.C. Penney stores throughout the United States. J.C. Penney is required to pay a commission on all Product sales. The commission rate payable to us is within the range of commissions earned from similar programs in which we participate with non-related party partners. J.C. Penney is obligated to make minimum guaranteed payments against commissions generated on sales of the Products. The minimum guaranteed payment for any year is subject to increase if the actual commissions from the prior year exceed the minimum guaranteed payment for such year by a specified percentage. The Commercial Agreement also required J.C. Penney to pay an annual design fee to us and to commit to an annual marketing spend to promote the Products, some of which must be spent to advertise in our properties.
On October 21, 2013, the Company and J.C. Penney entered into the Third Amendment (the “Amendment”) to the Commercial Agreement. The Amendment reduced the categories of Products that were to be manufactured and sold by J.C. Penney, reduced the minimum guaranteed royalties and reduced the term of the Commercial Agreement to June 30, 2017. In addition, the Amendment provided for the return of the 11,000,000 shares of our Class A Common Stock held by J.C. Penney (the “Returned Shares”) and the one (1) share of our Series A Preferred Stock. Upon surrender by J.C. Penney of the Returned Shares and the Series A Preferred Stock, the Company retired these shares and J.C. Penney removed its Series A Designees from our Board. Upon cancellation of the Series A Preferred Stock, J.C. Penney is no longer entitled to designate for election any members of our Board.
Other Relationships
Margaret Christiansen, Ms. Stewart’s sister-in-law, is a Senior Vice President of the Company and received $174,662 in compensation in 2013.
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PROPOSAL 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The charter of the Audit Committee of the Board of Directors provides in relevant part that the Audit Committee shall:
"have the sole authority to appoint and replace (as appropriate) the independent auditor, and be directly responsible for the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting). The independent auditor shall report directly to the Audit Committee."
In accordance with its charter, each year the Audit Committee evaluates the qualifications, performance and independence of the Company’s independent auditors, including a review and evaluation of the lead audit partner. The Audit Committee also assures the regular rotation of the lead audit partner and considers whether there should be regular rotation of the audit firm itself in order to assure the continuing independence of the independent auditors.
Based on its evaluation, the Audit Committee has appointed Ernst & Young LLP as the Company’s independent registered public accounting firm for 2014. Ernst & Young LLP served as the Company’s independent auditors for 2013 and prior years.
Although the Company’s bylaws do not require that stockholders ratify the appointment of the independent auditors, the Board has determined that the annual selection of the independent auditors would be so submitted for ratification as a matter of good corporate governance. If the stockholders fail to ratify the appointment, the Audit Committee will reconsider whether or not to retain Ernst & Young LLP.
Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting, will have the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions by stockholders.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
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AUDIT COMMITTEE MATTERS
Report of the Audit Committee
The primary purpose of the Audit Committee is to assist the Board in monitoring the integrity of the Company’s financial statements, the Company’s independent auditor’s qualifications and independence, the performance of the Company’s independent auditor and the Company’s compliance with legal and regulatory requirements. The Board, in its business judgment, has determined that all members of the Committee are “independent,” as required by listing standards of the NYSE applicable to Audit Committee members.
Management is responsible for the preparation, presentation and integrity of the Company’s financial statements, accounting and financial reporting principles and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditor for the Company’s 2013 fiscal year, Ernst & Young LLP, was responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards.
In performing its oversight role, the Audit Committee has reviewed and discussed the audited financial statements with management and the independent auditor as specified in its charter. The Audit Committee has also discussed with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T. In addition, the Audit Committee has received the written disclosures and letter from the independent auditor required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent auditor the independent auditor’s independence.
Based on the reviews and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee referred to in this report and in the charter, the Audit Committee recommended to the Board that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The members of the Audit Committee are not professionally engaged in the practice of auditing or accounting and are not necessarily experts in the fields of accounting or auditing, including in respect of auditor independence. Members of the Audit Committee rely without independent verification on the information provided to them and on the representations made by management and the independent auditor. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations, efforts and discussions referred to above do not assure that the audit of the Company’s financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles, or that Ernst & Young LLP is in fact “independent.”
Members of the Audit Committee
Margaret M. Smyth (Chairwoman) William Roskin Pierre deVillemejane The Audit Committee report above does not constitute “soliciting material” and will not be deemed “filed” or incorporated by reference into any of our filings under the Securities Act or the Exchange Act that might incorporate our SEC filings by reference, in whole or in part, notwithstanding anything to the contrary set forth in those filings.
Fees Billed by Ernst & Young
Ernst & Young LLP has served as our independent accounting firm since May 7, 2002. Our Audit Committee appointed Ernst & Young as our independent registered public accounting firm to perform the audit of our financial statements for 2013.
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The following table presents fees for professional services rendered by Ernst & Young LLP for the audit of the Company’s annual financial statements for each of 2013 and 2012 and the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q for those years, and fees billed for audit-related services, tax services and all other services rendered by Ernst & Young LLP for each of fiscal 2013 and 2012.
2013 2012 Audit fees(1) $ 797,900 $ 829,015 Audit-related fees(2) 28,000 28,000 Tax fees(3) 36,622 41,809 All other fees(4) 2,172 2,172 Total Fees $ 864,694 $ 900,996
(1) Audit fees include charges for audits of financial statements and internal control over financial reporting. (2) Principally for audits of the financial statements of the Company’s 401(k) employee benefit plan and other miscellaneous accounting and auditing matters. (3) Principally for corporate income tax compliance ($35,000 in 2013 and $15,000 in 2012), tax audits ($9,314 in 2012) and miscellaneous tax matters ($1,622 in 2013 and $17,495 in 2012). (4) Access fees to an online reference database ($2,172 in 2013 and 2012).
All audits, audit-related services and tax services performed in 2013 were pre-approved by the Audit Committee, which concluded that the provision of such services by Ernst & Young LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s Audit and Non-Audit Services Pre-Approval Policy provides for pre-approval of audit, audit-related and tax services on an annual basis and it also requires separate pre-approval for individual engagements anticipated to exceed pre-established thresholds. The policy authorizes the Audit Committee to delegate to one or more of its members pre-approval authority with respect to permitted services.
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STOCKHOLDER PROPOSALS
Proposal Number 4 is a proposal we received from our stockholders. If the proponent of this proposal, or representatives who are qualified under state law, are present at our Annual Meeting and submit the proposal for a vote, then the proposal will be voted upon. The stockholder proposal, including any supporting statements, is included exactly as submitted to us by the proponent of this proposal. The Board's recommendation on the proposal is presented immediately following our opposing statement to the proposal. We will promptly provide you with the address, and, to our knowledge, the number of voting securities held by the proponent of the stockholder proposal, upon receiving a written request directed to Martha Stewart Living Omnimedia, Inc., Attn: Corporate Secretary, 601 West 26th Street, New York, New York 10001.
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PROPOSAL 4: SPECIAL SHAREOWNER MEETINGS
Mr. Kenneth Steiner, 14 Stoner Avenue, 2M, Great Neck, New York, 11021, has advised us that he intends to propose a resolution at the Annual Meeting. Mr. Steiner has appointed Mr. John Chevedden of 2215 Nelson Avenue, No. 205, Redondo Beach, CA 90278 and/or Mr. Chevedden’s designee to act on his behalf relating to the proposed resolution.
Proposal 4 - Special Shareowner Meetings
Resolved, Shareowners ask our board to take the steps necessary unilaterally (to the fullest extent permitted by law) to amend our bylaws and each appropriate governing document to give holders in the aggregate of 10% of our outstanding common the power to call a special shareholder meeting.
This includes that such bylaw and/or charter text will not have any exclusionary or prohibitive language in regard to calling a special meeting that apply only to shareowners but not to management and/or the board (to the fullest extent permitted by law). This proposal does not impact our board's current power to call a special meeting.
Special meetings allow shareowners to vote on important matters, such as electing new directors that can arise between annual meetings. Shareowner input on the timing of shareowner meetings is especially important when events unfold quickly and issues may become moot by the next annual meeting. This proposal topic won more than 70% support at Edwards Lifesciences and SunEdison in 2013.
This proposal should also be more favorably evaluated due to our Company's clearly improvable corporate governance and environmental performance as reported in 2013:
GMI Ratings, an independent investment research firm, was concerned about our majority shareholder control - 86%-control by insiders. The top shareholders were the Stewart Family. This included shares held by Martha Stewart, her daughter, company employee Alexis Stewart, the Martha Stewart Family Limited Partnership and various family trusts. GMI gave our 5-member board a D - 2 executives were on our board.
GMI cited additional negative factors: Related Party Transactions Board Integrity Golden Hellos Severance Vesting One Share One Vote Revenue Recognition
GMI said limits on shareholder rights included: • Our board's unilateral ability to amend company bylaws without shareholder approval • lack of fair price provisions to help insure that all shareholders are treated fairly
Returning to the core topic of this proposal from the context of our clearly improvable corporate governance, please vote to protect shareholder value: Special Shareholder Meetings - Proposal 4.
MSO Opposing Statement
The Board has carefully considered the above proposal and believes that it is not in the best interests of stockholders. Consequently, the Board unanimously recommends that stockholders vote AGAINST the proposal for the following reasons:
The Board believes that it is not in the best interests of the stockholders or the Company to enable holders of only 10% of our outstanding common stock to have an unlimited ability to call a special meeting of stockholders for any purpose at any time. The proposal would permit a small group of minority stockholders to use the extraordinary measure of calling a special meeting to serve such group's narrow self-interests at the expense of the majority of the stockholders and the Company. For example, event-driven hedge funds or other activists may pursue a special meeting with the goal of being disruptive to the Company's business or to propose issues that facilitate their own short-term focused exit strategies. This concern is heightened if stockholders who may have a
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perspective substantially different from a majority of the stockholders could borrow shares from other stockholders for the sole purpose of meeting the required threshold necessary to call a special meeting. The Board and the Company believe that a special meeting should be held to cover extraordinary events only when fiduciary, strategic, significant transactional or similar considerations dictate that the matter be addressed on an expeditious basis, rather than waiting for the next annual meeting.
A special meeting also imposes significant burdens on the Company, consuming substantial management, legal, administrative and financial resources. Giving holders of as little as 10% of our outstanding common stock the unlimited power to call a special meeting opens the door to potential abuse and waste of corporate resources, can be disruptive to the Company's operations and can divert the focus of the Board and members of senior management from managing the Company in an effective manner. Moreover, convening a special meeting is an expensive and time-consuming event because of the costs associated with preparing required disclosure documents, printing and mailing costs and the time commitment required of the Board and senior management to prepare for and conduct the meeting.
Further, the suggestion that stockholders need the right to call special meetings to protect their interests in the case of extraordinary events involving the Company is simply misleading. We are subject to rules governing Delaware corporations and companies listed on the NYSE that already require us to submit certain significant matters to a stockholder vote for approval. For example, amendments to the Company’s Certificate of Incorporation, mergers, a sale of all or substantially all of the Company’s assets, increases in the number of authorized shares and the adoption of equity-based compensation plans all require a stockholder vote.
The Company is committed to good governance practices and has demonstrated accountability and responsiveness to the views and concerns of stockholders. We maintain open lines of communication with large and small stockholders, financial analysts and stockholder advisory services regarding important issues relating to the Company's business and governance. Our corporate governance policies ensure that the Board is held accountable and provide stockholders with access to the Board and ample opportunity to submit items for approval at annual meetings. The Board believes that the Company’s existing corporate governance policies provide an appropriate balance between ensuring that the Board is accountable to the stockholders and enabling the Board to effectively oversee the Company’s business for the long-term benefit of the stockholders. In particular, stockholders may communicate directly with any director, any Board committee or the full Board; propose director nominees to the Nominating and Corporate Governance Committee; and submit proposals for presentation at an annual meeting of the stockholders of the Company and for inclusion in the Company’s proxy statement for that annual meeting.
After careful consideration of this proposal, the Board has determined that it is not in the best interests of the stockholders or the Company to enable holders of only 10% of our outstanding common stock to have the ability to call a special meeting of stockholders for any purpose at any time.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "AGAINST" PROPOSAL 4.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-15395 MARTHA STEWART LIVING OMNIMEDIA, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 52-2187059 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
601 West 26th Street, New York, New York 10001 (Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (212) 827-8000 Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered Class A Common Stock, Par Value $0.01 Per Share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Table of Contents
Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the number of shares outstanding and using the price at which the stock was last sold on June 28, 2013, was $70,555,117.* * Excludes 12,212,492 shares of our Class A Common Stock, and 25,984,625 shares of our Class B Common Stock, held by directors, officers and 10% stockholders, as of June 30, 2013. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Company, or that such person controls, is controlled by or under common control with the Company.
Number of Shares Outstanding As of February 21, 2014 30,624,508 shares of Class A Common Stock 25,984,625 shares of Class B Common Stock
Documents Incorporated by Reference. Portions of Martha Stewart Living Omnimedia, Inc.’s Proxy Statement for Its 2014 Annual Meeting of Stockholders are Incorporated by Reference into Part III of This Report. Table of Contents
TABLE OF CONTENTS
PART I Item 1. Business 4 Overview 4 History 5 Publishing 5 Merchandising 7 Broadcasting 9 Intellectual Property 10 Available Information 10 Item 1A. Risk Factors 11 Item 1B. Unresolved Staff Comments 15 Item 2. Properties 16 Item 3. Legal Proceedings 16 Item 4. Mine Safety Disclosures 16 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Item 6. Selected Financial Data 19 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 37 Item 8. Financial Statements and Supplementary Data 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37 Item 9A. Controls and Procedures 37 Item 9B. Other Information 40 PART III Item 10. Directors, Executive Officers and Corporate Governance 40 Item 11. Executive Compensation 40 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 40 Item 13. Certain Relationships and Related Transactions, and Director Independence 40 Item 14. Principal Accountant Fees and Services 41 PART IV Item 15. Exhibits and Financial Statement Schedules 42 Signatures 47
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Index to Consolidated Financial Statements, Financial Statement Schedules and Other Financial Information F-1 Report of Independent Registered Public Accounting Firm F-2 Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 F-3 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2013, 2012 and 2011 F-4 Consolidated Balance Sheets at December 31, 2013 and 2012 F-5 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 F-7 Notes to Consolidated Financial Statements F-8 Financial Statement Schedule: II—Valuation and Qualifying Accounts for the years ended December 31, 2013, 2012 and 2011 F-30 Exhibit Index
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In this Annual Report on Form 10-K, unless otherwise noted, the terms “we,” “us,” “our,” “MSO” and the “Company” refer to Martha Stewart Living Omnimedia, Inc. and its subsidiaries. References to other companies may include their trademarks, which are the property of their respective owners.
FORWARD-LOOKING STATEMENTS
All statements in this Annual Report on Form 10-K, except to the extent describing historical facts, are “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by the use of statements that include phrases such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "potential" or "continue" or other similar references to future periods or the negative of these terms. Examples of forward-looking statements include, but are not limited to, statements we make regarding future financial performance, potential opportunities, expected product line changes, future acceptability of our content and our businesses, the success of our strategic initiatives and our anticipated growth. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include economic, business, competitive, national or global political, market and regulatory conditions and the other factors discussed in “Risk Factors” in Item 1A of this Annual Report on Form 10-K and those discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, as well as other factors. Therefore, we caution you against relying on any forward-looking statements. Any forward-looking statement made by us in this Annual Report on Form 10-K speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may occur and it is not possible for us to predict them all. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future development or otherwise, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in the reports we file with the Securities and Exchange Commission (the “SEC”).
PART I
Item 1. Business.
OVERVIEW
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and well- designed, high-quality products. We are organized into three business segments: Publishing, Merchandising and Broadcasting. This combination enables us to cross-promote our content and products.
The media and merchandise we create generally encompasses the following core areas:
• Cooking and Entertaining • Home Decorating • Weddings • Holidays and Celebrations • Pets (grooming, apparel, feeding and health) • Gardening and Outdoor Living • Crafts • Organizing, Office Products and Accessories
Our strategy to generate growth and profitability includes the following imperatives:
• Grow our merchandising business by leveraging our brand equity to diversify into new categories and distribution channels, and negotiate new partnerships that fully reward us for the value of our brands and our active role in product development and design, both domestically and internationally; and • Strengthen our media business by using our content across existing and new distribution channels, including international opportunities, and focusing on digital opportunities.
Our designed and branded products are currently available in thousands of retail outlets across the country including The Home Depot, Macy’s, J.C. Penney, PetSmart and Staples.
Total revenues from our three business segments were $160.7 million, $197.6 million and $221.4 million in 2013, 2012 and 2011, respectively. Our revenues from domestic sources were $153.1 million, $187.4 million and $211.6 million in 2013, 2012 and 2011, respectively. Our revenues from foreign sources (primarily from Canada) were $7.6 million, $10.2 million and 4 Table of Contents
$9.8 million in 2013, 2012 and 2011, respectively, which were principally comprised of international licensing of television and print content. In the future, we plan to grow international revenues from other areas of our business, primarily our merchandising business. Substantially all of our assets are located within the United States. For further detail of our segment results refer to Note 15, Industry Segments, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, which information is incorporated herein by reference.
As of February 7, 2014, we had approximately 388 full-time employees and 17 part-time employees.
HISTORY
Martha Stewart published her first book, Entertaining, in 1982. Over the next eight years she became a well-known authority on the domestic living arts, authoring eight more books on a variety of our core content areas. In 1990, Martha Stewart Living magazine launched with Ms. Stewart serving as its editor-in-chief and in 1993, Living, a weekly television program hosted by Ms. Stewart debuted. In late 1996 and early 1997, through a series of transactions, MSLO LLC (of which Ms. Stewart was the majority owner) acquired substantially all of the publishing, broadcasting, merchandising and licensing ventures bearing the Martha Stewart name and, in 1999, consolidated them into Martha Stewart Living Omnimedia. Immediately following these transactions, in October 1999, we consummated an initial public offering and were listed on the New York Stock Exchange under the symbol "MSO."
BUSINESS SEGMENTS
Our three business segments are described below. Additional financial information relating to these segments may be found in Note 15, Industry Segments, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, which information is incorporated herein by reference.
PUBLISHING
The Publishing segment is our largest business segment, accounting for 60% of our total revenues in 2013 and consists of operations related to magazine and book publishing and digital distribution, principally through our website, marthastewart.com. Revenues from magazine and digital advertising represented approximately 70% of the segment’s revenues in 2013, while circulation revenues represented approximately 26% of the segment’s revenues.
In 2012, we implemented several restructuring actions in our Publishing segment ("2012 Publishing Restructuring"), which included the transition of the print publication Everyday Food from a stand-alone title to a digital-focused brand distributed across multiple platforms. Everyday Food ceased publication as a stand-alone title with its December 2012 issue and beginning in 2013 was offered as an occasional insert to Martha Stewart Living subscribers. In addition, we discontinued publication of Whole Living with the January/February 2013 issue, and sold the related subscriber list in January 2013. Subsequent to the announcement of our 2012 Publishing Restructuring, we also reduced the frequency of Martha Stewart Living, starting in 2013, from twelve to ten issues per year. During December 2013, we underwent a further restructuring primarily in our Publishing segment in an effort to realign our business to focus on efficient content creation and other operational efficiencies.
Magazines
Martha Stewart Living, our flagship magazine, is the foundation of our publishing business. We published ten issues of Martha Stewart Living in 2013 with a rate base of 2.05 million. The magazine targets primarily the college-educated woman between the ages of 25 and 54 who owns her principal residence. Martha Stewart Living offers lifestyle inspirations and original how-to information in a highly visual, upscale editorial environment. The magazine, which is the leading publication for the Martha Stewart brand, has won numerous prestigious industry awards. In 2013, Martha Stewart Living won Ad Week's Hottest Women's Magazine and the National Magazine Award for General Excellence by the American Society of Magazine Editors. Martha Stewart Living generates a majority of our magazine revenues, largely from advertising and circulation.
Martha Stewart Weddings, a quarterly publication, targets the upscale bride and offers advice, ideas, inspiration and planning tools for brides. The magazine serves as an important vehicle for introducing young women to our brands. Martha Stewart Weddings is distributed primarily through newsstands.
Everyday Food was a digest-sized magazine and prior to the 2012 Publishing Restructuring, had been published ten times per year. Everyday Food ceased publication with its December 2012 issue and its content has been integrated into the pages of Martha Stewart Living and via daily instructional cooking videos through our website.
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Magazine Summary
Certain information related to our subscription magazines is as follows:
2011 2012 2013 2014 Title Rate Base Rate Base Rate Base Rate Base Martha Stewart Living 2,050,000 2,050,000 2,050,000 2,050,000 (1) (2) (2) (2) (2) Martha Stewart Weddings n/a n/a n/a n/a
(1) In addition to the quarterly publication, we anticipate producing two special issues of Martha Stewart Weddings in 2014, similar to 2013 and 2012, as compared to only one special issue of Martha Stewart Weddings in 2011. (2) Does not have a stated rate base, consistent with industry practice for weddings-focused magazines.
Special Interest Publications. In addition to our periodic magazines, we occasionally publish special interest magazine editions. Our special interest publications provide in-depth advice and ideas around a particular topic in one of our core content areas, allowing us to leverage our distribution network to generate additional revenues. Our special interest publications are sold at newsstands and may include advertising. In 2013, we published The Best of Martha Stewart Living Cakes and Cupcakes, Martha Stewart Halloween 2013, Martha Stewart Weddings Real Weddings Spring and Martha Stewart Weddings Real Weddings Winter.
Magazine Production, Distribution and Fulfillment. We print our domestic magazines under an agreement with R.R. Donnelly, which runs through 2017. In 2013, we purchased our paper through an agreement with Time Inc. and beginning in 2014, we will purchase paper under our agreement with R.R. Donnelly. In 2013, our paper prices declined from 2012. Based on recent information from our paper supplier, we expect prices to remain stable in the first half of 2014 and modestly increase in the second half of 2014. We use no other significant raw materials in our businesses. The vast majority of subscription copies of our magazines are delivered by the U.S. Postal Service. Postage rates for periodicals have been increasing since 2011, with the most recent increase of approximately 6% occurring in January 2014. Sales and marketing of the magazines to retailers is handled by Time Warner Retail Sales and Marketing, an affiliate of Time Inc. Billing, collection and distribution services for retail sales of the magazines are handled by Curtis Circulation Company. Both of these newsstand distribution agreements expire in June 2014. Subscription fulfillment services for our magazines are provided by Time Customer Service, another affiliate of Time Inc., under an agreement that expires in June 2017.
Digital
Websites
The award-winning marthastewart.com website is the flagship of our digital properties, offering a vast quantity of continually updated articles, recipes and videos developed from several Martha Stewart brands, including our magazine properties. The website provides engaging experiences in several lifestyle categories: food, entertaining, holidays, home and crafts. The website also serves as a gateway to our other properties, including marthastewartweddings.com, emerils.com and our American Made digital content. In 2013, we invested in a redesign of our website that allows for additional functionality. This, along with other recent enhancements such as a responsive website design, allows for improved user engagement and expanded advertising inventory, including optimized access from smartphones and tablets, which we believe led to growth in our audience and revenues in 2013. We also completed, in 2013, the conversion of over 2,600 hours of archived television shows featuring Martha Stewart, Emeril and other talent into digital format, making this content available for us to serve on our websites and thereby significantly expanding our online video library. In 2012, we launched several distribution and syndication partnerships for our digital video content and, in 2013, we experienced strong growth in in our audience for digital video. In 2013, our collective website properties saw an increase in unique visitors of an average of 9.9 million per month due to the significant increase of visitors accessing our content through mobile devices. However, similar with the industry-wide trend of lower average page views per unique visitor, we saw declines in average monthly page views to 76 million in 2013.
Digital Editions and Apps
Both of our magazines are available on multiple platforms. We produce digital editions available through Barnes & Noble's Nook, Amazon's Kindle Fire and through the Zinio platform. We also distribute iPad versions of Martha Stewart Living and Martha Stewart Weddings, which are available for sale as subscriptions or as single issues through a custom storefront in Apple's iTunes store. Digital editions, including iPad versions, currently account for approximately 4% of all our circulation. In addition to the digital editions of our magazines, we also produce numerous mobile and tablet applications to further distribution of our magazines and provide our content through creative, accessible platforms to accommodate the growing popularity of smartphones and tablet devices.
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Video Distribution
In 2013, we continued to expand our video distribution footprint through our video distribution partners. We distribute our long-form content through an agreement with Hulu, and distribute our short-form content through agreements with AOL, Yahoo and Blinkx Networks. We also entered into an agreement with Fullscreen to expand our presence on YouTube through branded channels and network distribution. Through these partnerships, we create and expand our branded channels, including Martha Stewart, Emeril and Everyday Food, on these websites, and increase the distribution of our video archive.
Books
We have a multi-year, multi-book agreement with The Crown Publishing Group to publish Martha Stewart branded books under the Clarkson Potter, Potter Style or Potter Craft imprints. In 2013, we published Meatless, Martha Stewart’s Favorite Crafts for Kids, Martha Stewart’s Cakes and Living the Good Long Life.
We have a multi-year agreement with HarperCollins Publishers to publish ten Emeril Lagasse branded books under the HarperStudio imprint, of which six have been delivered and accepted through December 31, 2013. Emeril’s Cooking with Power was published under this agreement in 2013.
Through our efforts in the books business and the rights we acquired related to Emeril’s book backlist, we now have a library of 98 published books.
Competition
Publishing is a highly competitive business in an industry undergoing rapid change. Our magazines, books, websites and digital apps compete not only with other similar products, but also with other mass media, websites and many other types of leisure-time activities. Competition for advertising dollars in magazine operations is primarily based on advertising rates, as well as editorial and aesthetic quality, the desirability of the magazine’s demographic, reader response to advertisers’ products and services and the effectiveness of the advertising sales staff. In addition, as a result of the shift from print to digital media, our magazines and books also increasingly face competition for audience and advertising from a wide variety of digital alternatives, including blogs and other do-it-yourself websites and digital applications, social media sites, digital advertising networks and exchanges, real-time bidding and other programmatic buying channels, and other new media formats. Martha Stewart Living competes for readers and advertising dollars with decorating, cooking and women's lifestyle magazines and websites. Martha Stewart Weddings competes for readers and advertising dollars primarily with wedding service magazines and websites. Our special interest publications can compete with a variety of magazines depending on the focus of the particular issue. Capturing advertising sales for our digital properties is highly competitive as well. Our website marthastewart.com competes with other do-it-yourself and how-to, food and lifestyle websites. Competition for digital advertising is based on the number of unique users we attract each month, the demographic profile of that audience and the number of pages they view on our site and audience response to advertisers' products and services and our challenge is to attract and retain users through an easy-to-use and content-relevant website.
Seasonality
Our Publishing segment can experience fluctuations in quarterly performance due to variations in the publication schedule from quarter to quarter and from year to year, timing of direct mail marketing efforts, delivery and acceptance of books under our long-term book contracts and variability of audience and traffic on marthastewart.com, as well as other seasonal factors. Advertising revenue in our magazines and on marthastewart.com is typically highest in the fourth quarter of the year due to higher consumer demand for our holiday content, and corresponding higher advertiser demand to reach our audience with their marketing messages. Certain newsstand costs vary from quarter to quarter, particularly newsstand marketing costs associated with the distribution of our magazines. These costs typically have a three-year life cycle, but can vary significantly throughout the term.
MERCHANDISING
Our Merchandising segment contributed 37% of our total revenues in 2013. The segment consists of operations related to the design of merchandise and related packaging, collateral and advertising materials, and the licensing of various proprietary trademarks in connection with retail programs conducted through a number of retailers and manufacturers. Pursuant to agreements with our retail and manufacturing partners, we are typically responsible for the design of all merchandise and/or related packaging, signage, advertising and collateral materials. Our retail partners source the products through a manufacturer base and are mostly responsible for the promotion of the products and our manufacturing partners source and/or produce the branded products occasionally together with other lines they make or sell. Our licensing agreements do not require us to maintain any inventory nor incur any significant expenses other than employee compensation and related overhead expenses.
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We regularly evaluate, with our licensing partners, the optimal assortment of product offerings. We own all trademarks for each of our branded merchandising programs and generally retain all intellectual property rights related to the designs of the merchandise, packaging, signage and collateral materials developed for the various programs. We also derive revenue from the licensing of talent services for television programming produced by third parties.
Select Retail Licensees
The Home Depot
In 2010, we launched the Martha Stewart Living product line at The Home Depot and in 2012, we renewed our agreement and extended the term of our partnership through March 2016. The Martha Stewart Living line is currently available at all of The Home Depot’s stores in the United States and Canada, as well as on www.homedepot.com and Home Decorators Collection catalog, online and at retail stores and encompasses a broad range of home decor, storage and organization products, outdoor furniture, window treatments, kitchen cabinetry, countertops and seasonal holiday decor. In 2014, we expect The Home Depot to discontinue sales of our paint tint product line as we have historically experienced softness in its sales.
Macy’s
In September 2007, we introduced the Martha Stewart Collection at Macy’s. Most of the Martha Stewart Collection offerings are currently available at the nearly 650 Macy’s stores in the United States that offer home products, as well on www.macys.com. The Martha Stewart Collection line encompasses a broad range of home goods, including bed and bath textiles, housewares, food preparation, furniture, tabletop and holiday decor. On December 31, 2013, we settled our legal dispute with Macy's. See Item 3. Legal Proceedings in this Annual Report on Form 10-K for discussion of litigation related to Macy's.
J.C. Penney
In December 2011, we entered into a strategic alliance with J.C. Penney Corporation, Inc., the principal operating subsidiary of J.C. Penney Company, Inc., (“J.C. Penney”) to launch certain home products in J.C. Penney department stores throughout the United States and through www.jcp.com. On October 21, 2013, we entered into an amendment to the initial agreement with J. C. Penney, which reduced the product categories that were to be manufactured and sold by J.C. Penney and reduced the term of the agreement to end on June 30, 2017. The line at J.C. Penney includes hard and soft window products and holiday decor. For further information regarding our relationship with J.C. Penney, see Note 8, Shareholders' Equity, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Select Manufacturing Licensees
Martha Stewart Crafts
In May 2007, we launched Martha Stewart Crafts, a paper-based crafting program with our manufacturing partner, Wilton Properties Inc. (formerly UCG Paper Crafts Properties Inc. and EK Success), at Michaels stores in the United States. The program consists of tools, embellishments, paper/albums, and other seasonal products. Distribution for this program has expanded to include multiple specialty and independent craft chains in the United States and internationally.
In 2011, we further expanded our Martha Stewart Crafts portfolio by introducing a line of craft paints with Plaid Enterprises and a line of yarns and looms with Orchard Yarn and Thread, Inc. (d/b/a Lion Brand Yarn).
Martha Stewart Pets
In July 2010, we launched the Martha Stewart Pets line, developed in partnership with Age Group Ltd. and sold at PetSmart stores. The program consists of a wide range of pet accessories, including apparel, collars, leashes, bedding, grooming supplies and toys. Our licensing agreement with Age Group expired December 31, 2013. Effective January 1, 2014, the Martha Stewart Pets line is licensed directly with PetSmart through January 31, 2017.
Martha Stewart Home Office
In December 2011, we began shipping products for Martha Stewart Home Office with Avery and in February 2012, we launched the line. The Martha Stewart Home Office line is sold currently at Staples in the United States and the United Kingdom, on www.staples.com, and at Officeworks in Australia. The line encompasses a range of home office products, including desk organization, journals, portable filing and pantry organization. In February 2014, we amended our agreement with Avery to terminate the agreement as of December 31, 2014. We are currently looking for a replacement partner for our home office line.
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Select Emeril Lagasse Manufacturing Licensees
Our Emeril Lagasse licensing agreements are primarily associated with partnerships with various food and kitchen preparation manufacturers that produce products under the Emeril Lagasse brand.
Emerilware
Introduced in August 2000, Emerilware by All-Clad consists of lines of high-quality, gourmet cookware and barbeque tools. We also have a line of Emerilware products by T-FAL, launched in November 2006, which consists of small kitchen appliances. These Emerilware products are available at department stores and specialty retail outlets across the United States.
Emeril’s Original
In September 2000, Emeril Lagasse introduced with B&G Foods, Emeril’s Original, a signature line of seasonings, salad dressings, basting sauces and marinades, mustards, salsas, pasta sauces, pepper sauces, spice rubs, cooking sprays and stocks available at supermarkets and specialty markets across the United States.
Emeril’s Gourmet Coffee
Launched in September 2007, Emeril’s Gourmet Coffee by Green Mountain Coffee is a single-cup coffee program comprised of flavored coffees inspired by Emeril Lagasse. The program is available in department and specialty stores nationwide, as well as in certain national hotel chains.
In addition to the stores where Emerilware, Emeril's Original and Emeril's Gourmet Coffee are available, these product lines were also sold through the Home Shopping Network until September 2013. Beginning in October 2013, these product lines are sold through QVC.
Other
In 2013, we launched a line of bagged coffees with White Coffee. In 2014, we plan to expand our food assortment with additional partnerships, including La Collina Toscana and CoPaK Solutions.
Competition
The retail business is highly competitive and the principal competition for all of our merchandising lines consists of mass- market, home improvement and department stores that compete with similar stores in which our Merchandising segment products are sold. Our merchandising lines also compete within the mass-market, home improvement and department stores that carry our product lines with other products offered by these stores in the respective product categories, including with products sold under our partners' private labels. Competitive factors include numbers and locations of stores, brand awareness, quality and price. We also compete with the internet businesses of these stores and other websites that sell similar retail goods.
Seasonality
Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of many product lines.
BROADCASTING
Our Broadcasting business segment accounted for 3% of our total revenues in 2013. The segment consists of operations relating to the production of television programming, the domestic and international distribution of our library of programming in existing and repurposed formats and the operations of our satellite radio channel. Certain revenue derived from the provision of talent services is recorded in our Merchandising segment. We generally own the copyrights in the programs we produce for television and radio distribution.
In 2012, we significantly restructured the operations of our Broadcasting segment, which included the termination of our live audience television production operations. Similar to 2013, we expect that the operations of this segment in 2014 and beyond will consist of television content library licensing, satellite radio operations and limited television production operations. Future revenues and assets from these operations are not expected to be significant.
In 2013, Martha Stewart's Cooking School season 2 and Martha Bakes seasons 1 and 2 aired on PBS. Revenues related to these television programs consisted of sponsorship revenues. Production costs for both seasons of Martha Bakes were minimal due to the reuse of prior content. New episodes of Martha Stewart's Cooking School season 3 began to air in January 2014, with related sponsorship revenue to be recognized during the three months ended March 31, 2014.
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Emeril Lagasse also provides various television services for us. In 2013, Emeril Lagasse hosted Emeril's Florida on the Cooking Channel (which has been renewed through 2014), returned as a co-host on Top Chef and continued providing talent services as the recurring Food Correspondent for Good Morning America.
On January 31, 2013, we entered into a new two-year agreement with Sirius XM Radio to produce approximately 10 hours of original programming each week. This agreement with Sirius XM Radio replaces our historical Martha Stewart Living Radio channel with a daily radio show hosted by Martha Stewart, and other MSLO talent, on SiriusXM Stars.
Competition
Broadcasting is a highly competitive business. Overall competitive factors in this segment include programming content, quality and distribution, as well as the demographic appeal of the programming. In addition, we compete to secure sponsorship dollars in order to support new programming content. Our television programs compete directly for viewers, distribution and/or advertising dollars with other lifestyle and how-to television programs, as well as with general programming on other television stations and all other competing forms of media. Our radio programs compete for listeners with similarly themed programming on both satellite and terrestrial radio.
Seasonality
Our Broadcasting segment experiences fluctuations in quarterly performance due to, among other things, the timing of our television seasons on PBS and the timing of international television licensing sales.
INTELLECTUAL PROPERTY
We use multiple trademarks to distinguish our various publications and brands, including Martha Stewart Living (the name of our flagship publication as well as the trademark for products sold at The Home Depot), Martha Stewart Collection (for goods sold at Macy’s), Martha Stewart Pets, Martha Stewart Crafts, Martha Stewart Weddings, Everyday Food and Emeril. These and numerous other trademarks are the subject of registrations and pending applications filed by us for use with a variety of products and other content, both domestically and internationally, and we continue to expand our worldwide usage and registration of related trademarks. We also register, both offensively and defensively, key domain names containing our trademarks, such as www.marthastewart.com, www.marthastewartweddings.com, www.emerils.com and www.everydayfood.com.
We regularly file copyrights regarding our proprietary designs and editorial content. We have also applied for, and in some instances are now the owners of, domestic and international design and utility patents covering certain of our Martha Stewart Crafts paper punches.
We regard our rights in and to our trademarks, our proprietary designs and editorial content as valuable assets in the marketing of our products. Accordingly, we vigorously police and protect our trademarks against infringement and denigration by third parties. We also work with our licensees to assure that our trademarks are used properly. We own and license the perpetual rights to the “Martha Stewart” portion of our marks pursuant to an agreement between us and Ms. Stewart, the description of which is incorporated by reference into Item 13 of this Annual Report on Form 10-K.
AVAILABLE INFORMATION
Our flagship website can be found on the Internet at www.marthastewart.com. Our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to these reports, as well as certain other forms we file with or furnish to the SEC, can be viewed and downloaded free of charge as soon as reasonably practicable after they have been filed with, or furnished to, the SEC by accessing www.sec.gov, or by visiting www.marthastewart.com and clicking on Investor Relations and SEC Filings. Please note that information on, or that can be accessed through, our website is not deemed “filed” with the SEC and is not incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), irrespective of any general incorporation language contained in such filing.
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Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, prospects, cash flows and the trading price of our common stock. Although the risks and uncertainties listed below are those that we consider significant, material risks and uncertainties that are not presently known to us may also adversely affect our operations.
Our success depends in part on the continued success of our brands and the reputation and popularity of Martha Stewart and Emeril Lagasse. Any adverse reactions to publicity relating to Ms. Stewart or Mr. Lagasse, or the loss of either of their services, could adversely affect our revenues, results of operations and our ability to maintain or generate a consumer base.
The brand identity that we have developed has significantly contributed to the success of our business. Maintaining and enhancing the “Martha Stewart Living” brand is critical to expanding our base of consumers, advertising relationships, and merchandising and licensing partners. Our brand may be negatively impacted by a number of factors, including the reputation of our content and products, our ability to adapt to technological changes, litigation, and the reputation and popularity of Martha Stewart. Maintaining and enhancing the “Martha Stewart Living” brand will depend largely on our ability to be a leader in providing life-style content and high quality products, which we may not do successfully. If we fail to maintain and enhance our brand, or if we incur excessive expenses in this effort, our business, operating results, and financial condition will be materially and adversely affected.
Further, while we believe there has been significant consumer acceptance for our products and services as stand-alone brands, the image, reputation, popularity and talent of Martha Stewart and Emeril Lagasse remain important factors of our success.
Ms. Stewart’s efforts, personality and leadership, including her services as an officer and director of MSO, have been, and continue to be, critical to our success. While in the past we have managed our business without her daily participation, an extended or permanent loss of her services due to disability, death or some other cause, or any repeated or sustained negative shifts in public or industry perceptions of her, could have a material adverse effect on our business. In July 2013 the Board of Directors of the Company and Ms. Stewart agreed to certain modifications to the employment agreement between Ms. Stewart and the Company, dated April 1, 2009, including extending the term of her employment through June 30, 2017.
In addition, in 2008 we acquired the assets relating to Emeril Lagasse’s businesses other than his restaurants and foundation (the “Emeril Assets”). The value of the Emeril Assets is largely related to the ongoing popularity and participation of Mr. Lagasse in the activities related to exploiting these assets. Therefore, the continued value of the Emeril Assets could be materially adversely affected if Mr. Lagasse were to lose popularity with the public or be unable to participate in our business for any reason, therefore potentially forcing us to write-down a significant amount of the value we paid for these assets.
Our management turnover creates uncertainty.
Our future success depends in large part upon our ability to attract and retain key management executives, as well as upon members of our creative, technology, and sales and marketing staffs. In the last several years, several members of our senior management team have left the Company and we have focused time and resources on recruiting the new members of our current management team, including our new Chief Executive Officer. The continued turnover of senior management and the loss of key members of our executive team could have a negative impact on our ability to manage and grow our business effectively. We may not be able to replace departed members of management in a timely manner, or at all, on acceptable terms and our search for replacements may cause uncertainty regarding the future of our business, impact employee hiring and retention, increase the volatility of our stock price and adversely impact our revenue, operating results and financial condition.
We may not be able to successfully implement our anticipated growth strategies.
As part of our strategy for growth, we seek to expand our brands and merchandise categories domestically as well as grow the international presence of our publications and merchandise programs. Such endeavors involve significant risks and uncertainties, including distraction of management from current operations and increased short-term costs without any current revenue, which may be dilutive to our earnings in the short term. Although we believe that our strategy will lead to long-term growth in revenue and profitability, we may not realize, in full or in part, the anticipated benefits. The failure to realize benefits, which may be due to our inability to execute plans, global or local economic conditions, competition, changes in the industries in which we operate and the other risks described herein, could have a material adverse effect on our business, financial condition and results of operations.
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We continue to expand our merchandising and licensing programs into new products and categories, the failure of which could diminish the perceived value of our brand, impair our ability to grow and adversely affect our prospects.
Our growth depends to a significant degree upon our ability to develop new or expand existing merchandising and licensing programs. In recent years, we have entered into several merchandising and licensing agreements, some of which include exclusivity provisions and a long-term duration. While we contractually require that our merchandising partners and licensees maintain the quality of our respective brands, we cannot be certain that our partners, 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 brands.
We are also not able to ensure that our expansion into new business areas will be met with approval from consumers nor can we guarantee that these programs will be fully implemented, or, if implemented, that they will be successful. We may be prohibited from seeking different channels for our products due to the exclusivity provisions and multi-year terms of these agreements and disputes with new or existing licensees may arise that could hinder our ability to grow or expand our product lines. Disputes with our licensing or merchandising partners may also prevent or delay our ability to collect the licensing revenue that we expect in connection with these products. If such developments occur or our merchandising programs are otherwise not successful, the value and recognition of our brands, as well as our business, financial condition and prospects, could be materially adversely affected. See Item 3. Legal Proceedings in this Annual Report on Form 10-K for details regarding the lawsuit brought by Macy’s Inc. and Macy’s Merchandising Group in 2012.
If we are unable to predict, respond to and influence trends in what the public finds appealing, our brands and business will be adversely affected.
The success of our brands and our business depends on our ability originate product trends and to provide creative, useful and attractive ideas, information, concepts, programming and content that strongly appeal to a large number of consumers, as well as distribute the content in a manner appealing to consumers. Our content and products are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to respond quickly and effectively to changes in consumer tastes and trends for ideas, information, concepts, programming, technology, content and products or if our new content or products are not accepted by our consumers, our competitors could introduce similar content or products in a more timely fashion which could hurt the strength of our brand and our business. Further, even if we are successful in anticipating shifts in consumer tastes and trends, we cannot be sure that our new ideas and content will have the appeal and garner the acceptance that they have in the past. Our failure to effectively predict, respond to or introduce new content or products that are accepted by consumers could result could have a material adverse effect on our financial condition.
Our continued growth is dependent on continuously developing and offering new products and services to our existing merchandising partners.
The continued growth of our business will depend in part on our ability to develop and offer new products and services to our existing merchandising partners that successfully gain market acceptance by addressing the needs of our current and future customers and remain consistent with the look and feel of our brands. Although we devote significant resources to meet this goal, there can be no assurance as to our continued ability to develop, launch and market successful new products or variants of existing products, nor can we guarantee that these products will be successful or profitable. In addition, both the launch and ongoing success of new products are costly and inherently uncertain, especially as to their appeal to consumers. Our failure to successfully launch new products could decrease demand for our existing products by negatively affecting consumer perception of our brands, as well have an adverse effect on our profitability from year to year based on the number and timing of new product launches.
We operate in two highly competitive businesses: Publishing and Merchandising, each of which subjects us to competitive pressures and other uncertainties.
We face intense competitive pressures and uncertainties in each of our two principal segments.
Our print and digital products face substantial competition for advertising revenues from a variety of sources, such as magazines, books, television, radio and other forms of traditional media; direct marketing; and advertising-supported digital products, including websites, digital applications and social media sites. Competition for advertising revenue in print publications is primarily based on advertising rates, editorial quality the nature and scope of readership, reader response to the promotions for advertisers’ products and services, the desirability of the magazines demographic and the effectiveness of advertising sales teams. Certain of our competitors have significantly greater resources than we do to attract and retain advertisers and we may not be able to compete effectively against them.
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In recent years, the advertising industry has experienced a secular shift toward digital advertising where competition is based on the number of unique users we attract each month, the demographic profile of that audience and the number of pages they view on our site. Digital advertising is less expensive and can offer more measurable returns than traditional print media. Digital advertising networks and exchanges, real-time bidding and other programmatic buying channels that allow advertisers to buy audiences at scale are also playing a more significant role in the advertising marketplace. Competition from all of these media and services, many of which charge lower rates than we do, as well as increased inventory in the digital marketplace, affect our ability to attract and retain advertisers and consumers and to maintain or increase our advertising rates, which could adversely affect advertising revenues.
Our Merchandising segment competitors consist of mass-market, home improvement and department stores that compete with similar stores in which our products are sold. Our merchandising lines also compete within the mass-market, home improvement and department stores that carry our product lines with other products offered by these stores in the same product categories we sell in, including with products sold under our partners' private labels. We also compete with the internet businesses of these stores and other websites that sell similar retail goods.
Our failure to meet competitive pressures could negatively impact our results of operations and financial condition.
We continually invest in our digital platforms and if we are unable to continue to drive and retain visitors to our digital platforms by offering creative, high-quality and engaging content nor effectively monetize our digital platforms, our business, financial condition and prospects could be materially adversely affected.
Technology in the publishing industry continues to evolve rapidly. Advances in technology have led to an increasing number of methods for delivery of content and have resulted in a wide variety of consumer demands and expectations, which are also rapidly evolving. Although we have made, and continue to make, investments in our website and digital properties in order to transition from traditional print publications to digital distribution of our content, we cannot be certain that the ongoing investments and changes we make will increase the number of visitors to our website or digital properties. If the number of visitors to our website and digital properties stagnate or decline, we may not be able to create sufficient advertiser interest in our digital platforms or to maintain or increase the advertising rates of the inventory on our digital platforms. Additionally, as described above, the range of advertising choices across digital products and platforms and the large inventory of available digital advertising space have historically resulted in significantly lower rates for digital advertising than for print advertising. Consequently, our digital advertising revenue may not be able to replace print advertising revenue lost as a result of the shift to digital consumption. A decrease in our customers’ advertising expenditures, reduced demand for our offerings or a surplus of advertising inventory could lead to a reduction in pricing and advertising spending, which could have a material adverse effect on our businesses, financial condition and results of operations.
Further, even if we are successful in enhancing and upgrading our website and other digital properties, we cannot guarantee that we will be able to create the variety and types of content, products and interactive experiences that meet rapidly changing consumer demand in a timely manner, if at all. Any such failure to do so could adversely affect user and customer experiences and reduce traffic driven to our websites.
We rely on third-party vendors in our Publishing segment and our business may be harmed if they are unable to honor their obligations to us on favorable terms.
We rely on third-party vendors, including paper suppliers, printers, subscription fulfillment houses, subscription agents and national newsstand wholesalers, distributors and retailers in the print portion of our Publishing segment. The industries in which our print related third-party vendors operate have experienced significant restructurings and consolidation in recent years, resulting in decreased availability of goods and services and competition. For our digital operations in our Publishing segment, we rely on third-party vendors for video advertising to deliver in-stream advertisements in our video content. If we are not successful in maintaining existing and creating new relationships, or if these third party vendors encounter technological or other impediments that would prevent them from delivering in-stream advertisements to our content, our ability to maintain or grow our business could be adversely impacted. Further disruptions in these industries may make our third-party vendors unable or unwilling to provide us with goods and services on favorable terms and may lead to greater dependence on certain vendors, increased prices, and interruptions and delays in the services provided by these vendors, all of which would adversely affect our business.
Our business has been and will continue to be affected by worldwide economic conditions and a failure of the economy to sustain its recovery or a renewed decline in consumer spending could materially adversely affect the value of our assets, our revenues and the results of our operations.
Many economic and other factors outside of our control, including consumer credit availability, increased unemployment, a downturn in housing sales and remodels and declines in consumer confidence and consumer spending, particularly 13 Table of Contents discretionary spending, have had an adverse impact on our revenues and results of operations. In our Merchandising segment, economic weakness and unfavorable consumer spending trends continue to impact spending on general merchandise and homes and home improvement projects-categories in which we license our brands-resulting in weaker revenues from our licensed products. If our merchandising partners experience declining revenues or other financial difficulties, this could result in their unwillingness to continue to sell our products, their inability to timely meet their royalty payment obligations to us, extended payment terms, reduced cash flows, greater expense associated with collection efforts, and increased bad debt expense. Further, if our merchandising partners experience severe financial difficulty, some may become insolvent and cease business operations, which would reduce the availability of our licensed products to consumers. We cannot predict the future health and viability of the companies with which we do business and upon which we depend for royalty revenues, advertising dollars and credit.
In our Publishing segment, we generate a significant portion of our revenues from advertising and we cannot control how much or where companies choose to advertise. Since 2009, we have seen a significant downturn in the availability of advertising dollars, and more competition for the reduced dollars causing us to experience a decline in advertising revenues. If advertisers continue to spend less money as a result of continued weak and uncertain economic conditions or if they advertise elsewhere in lieu of our magazines or websites our Publishing segment and advertising revenues will be materially adversely affected.
We may be adversely affected by fluctuations in paper, postage and distribution costs.
Paper represents a significant component of the print portion of our Publishing segment. Paper is a commodity and the prices have experienced volatility over the past several years. We generally purchase paper from major paper suppliers who adjust the price periodically and according to prevailing market prices. We have not entered, nor do we currently plan to enter, into long-term forward price or option contracts for paper. Accordingly, significant increases in paper prices would adversely affect our results of operations. Postage for magazine distribution is also one of our significant expenses. We primarily use the U.S. Postal Service to distribute magazine subscriptions. In recent years, postage rates have increased, and any significant future increase in postage prices could adversely affect our future results of operations.
Distribution of magazines to newsstands and bookstores is conducted primarily through companies known as wholesalers. Although we have not experienced any material increase in the price of services, wholesalers have previously advised us that they intend to increase the price of their services. Further, certain wholesalers have experienced credit and going concern risks and it is possible that other wholesalers may seek to increase the price of their services or discontinue operations. An increase in the price of our wholesalers’ services, or a disruption or delay in deliveries due to the need to change wholesalers, could have a material adverse effect on our results of operations.
We may be adversely affected by a continued weakening of newsstand sales.
The magazine industry has experienced a significant weakening of newsstand sales during the past few years. A prolonged decline in the circulation volume of our publications will adversely affect our financial condition and results of operations by further reducing our circulation revenue and causing us to either incur higher circulation expenses to maintain our rate bases, or to reduce our rate bases, which would in turn negatively impact our revenue.
Electronically stored data is subject to the risk of unauthorized access and if our data is compromised in spite of our attempts at protecting this data, we may incur significant costs, lost opportunities and damage to our reputation.
We maintain information necessary to conduct our business, including confidential, proprietary and personal information in digital form. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. We develop and maintain systems to prevent this from occurring, but the development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of intrusion, tampering and theft cannot be eliminated entirely, and risks associated with each of these remain. If our data systems are compromised or if the proprietary information of our customers or employees is misappropriated, our ability to conduct our business may be impaired, our reputation with our customers and employees may be injured resulting in loss of business or morale and we could be exposed to a risk of loss due to business interruption, or litigation.
Martha Stewart controls our Company through her stock ownership. As a result, Ms. Stewart has the ability to elect most of our board of directors, prevent or cause a change of control, or approve, prevent or influence certain actions by us.
As of February 21, 2014, Ms. Stewart beneficially owns, directly or indirectly, shares of the Company’s Class A Common Stock (with one vote per share) and Class B Common Stock (with 10 votes per share) having approximately 90% of the
14 Table of Contents outstanding voting power of our Common Stock and Ms. Stewart is our Chief Creative Officer and the Non-Executive Chairman of our Board. As a result of her stock ownership and position at the Company, Ms. Stewart has the ability to exercise significant control and influence over our business, including, without limitation, all matters requiring stockholder approval, including the election of directors, amendments to the certificate of incorporation and significant corporate transactions, such as a merger or other sale of our Company or its assets, for the foreseeable future. Moreover, Ms. Stewart’s concentrated control could, among other things, discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our businesses and stockholders.
Our intellectual property may be infringed upon or others may accuse us of infringing on their intellectual property, either of which could adversely affect our financial condition and our results of operations.
Our business is highly dependent upon our creativity, valuable brands, content and the resulting intellectual property. We believe our proprietary trademarks and other intellectual property rights are valuable to our continued success and our competitive position. We are susceptible to others imitating our products and infringing our intellectual property rights and imitation of our products or infringement of our intellectual property rights could diminish the value of our brands and assets or otherwise adversely affect our revenues and our business. Although we vigorously defend our intellectual property rights, we may not be able to successfully protect our proprietary rights especially in foreign countries where the laws do not protect intellectual property rights to the same extent the laws of the United States do. Further, if we are alleged to have infringed the intellectual property rights of another party, any resulting litigation could be costly and could damage our reputation. Litigation also diverts the time and resources of management, regardless of the merits of the claim. There can be no assurance that we would prevail in any litigation relating to our intellectual property. If we were to lose such a case, and be required to cease the sale of certain products or the use of certain technology or if we were forced to pay monetary damages, the results could adversely affect our financial condition and our results of operations.
We face risks arising from the restructuring of our operations and uncertainty with respect to our ability to achieve the estimated cost savings.
In order to operate more efficiently and position ourselves for future profitability, we have implemented restructuring plans in the past, which included consolidation of our publications, workforce reductions and other cost reduction initiatives, and we may undertake further workforce reductions or restructuring actions in the future. Restructuring activities are complex and if we do not successfully manage our current restructuring activities, or any other restructuring activities that we may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these actions include incurrence of restructuring charges, additional unexpected costs, changes in restructuring plans that increase or decrease the number of employees affected, adverse effects on employee morale and the failure to meet operational targets due to the loss of employees, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm our business. Because of these and other factors, we cannot predict whether we will realize the purpose and anticipated benefits of our restructuring measures, and if we do not, our business and results of operations may be adversely affected.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
Information concerning the location, use and approximate square footage of our principal facilities as of December 31, 2013, all of which are leased, is set forth below:
Approximate Area Location Use in Square Feet 601 West 26th Street Publishing segment editorial and production offices (includes magazines, New York, NY digital and books), advertising sales offices, product design facilities, photography studio, test kitchens, property storage, principal executive 221,630 and administrative offices and corporate offices
Satellite Sales Offices in Advertising sales offices Illinois and California 5,286
The leases for our offices and facilities expire between 2015 and 2018; some of these leases are subject to our renewal. During 2013, we consolidated our satellite advertising sales offices and continue to maintain a presence in Chicago and Los Angeles. In February 2014, in an effort to more efficiently utilize our primary office space, we vacated 47,592 square feet of the 221,630 square feet we lease at 601 West 26th Street.
We also have certain property rights under an intangible asset agreement covering our use of various residences 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, help generate ideas for new content available to all of our media outlets and serve as locations for photo spreads and video segments. The description of this intangible asset agreement is incorporated by reference into Item 13 and disclosed in the related party transaction disclosure in Note 11, Related Party Transactions, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
We believe that our existing facilities are well maintained and in good operating condition.
Item 3. Legal Proceedings
On January 23, 2012, Macy's Inc. and Macy's Merchandising Group, Inc. (collectively, “Macy’s”) filed a lawsuit against us in the Supreme Court of the State of New York, County of New York titled Macy's, Inc. and Macy's Merchandising Group, Inc. v. Martha Stewart Living Omnimedia, Inc. In such lawsuit, Macy's claimed that our planned activities under our commercial agreement with J.C. Penney materially breached the agreement between us and Macy's Merchandising Group, Inc. dated April 3, 2006 (the “Agreement”). Macy's sought a declaratory judgment, preliminary and permanent injunctive relief, and incidental and other damages. The Court entered a preliminary injunction on July 31, 2012 which limited our activities with J.C. Penney in certain respects. In November 2012, Macy's amended its complaint to assert a second claim which alleged additional breaches of the Agreement. In January 2013, the lawsuit was consolidated with an action titled Macy's Inc. and Macy's Merchandising Group, Inc. v. J.C. Penney Corporation, Inc. The trial of the consolidated cases began on February 20, 2013 and concluded on August 1, 2013.
On October 21, 2013, the Company and J.C. Penney entered into an amendment to their commercial agreement, narrowing the range of product categories covered by the commercial agreement and shortening the term of the commercial agreement. On December 31, 2013, the Company and Macy’s entered into a settlement agreement and release; the terms of which are not material to our financial statements. As part of the settlement agreement and release, the parties jointly sought an order from the Court, which was entered on January 13, 2014, ordering a stipulation of discontinuance with prejudice, dismissing all claims made by Macy’s against the Company in the lawsuit.
We are party to legal proceedings in the ordinary course of business, including product liability claims for which we are indemnified by our licensees. None of these proceedings is deemed material.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for the Common Stock
Our Class A Common Stock is listed and traded on The New York Stock Exchange (the “NYSE”). Our Class B Common Stock is not listed or traded on any exchange, but is convertible into Class A Common Stock at the option of its owner on a share-for-share basis. The following table sets forth the high and low sales price of our Class A Common Stock as reported by the NYSE for each of the periods listed.
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2012 2012 2012 2013 2013 2013 2013 High Sales Price $ 4.89 $ 3.94 $ 3.81 $ 3.24 $ 3.10 $ 2.67 $ 2.67 $ 4.47 Low Sales Price $ 3.70 $ 2.95 $ 2.87 $ 2.28 $ 2.43 $ 2.28 $ 2.26 $ 2.20
As of February 21, 2014, there were 7,429 record holders of our Class A Common Stock and one record holder of our Class B Common Stock. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.
Dividends
We do not pay regular quarterly dividends and do not currently intend to pay dividends in the future.
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.
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PERFORMANCE GRAPH
The following graph compares the performance of our Class A Common Stock during the period commencing on January 1, 2009 and ending on December 31, 2013, with that of the Standard & Poor's SmallCap 600 Index ("S&P SmallCap 600 Index") and with a peer group of companies engaged in multimedia and licensing businesses similar to ours. The peer group was revised in 2013 to include The E.W. Scripps Company and remove Kenneth Cole Productions. The following graph includes both the revised peer group ("New Peer Group") and peer group used in 2012 ("Old Peer Group").
The S&P SmallCap 600 Index is comprised of 600 domestic (United States) companies with a market capitalization in the range of $300 million to $1.4 billion in the financial, information technology, consumer discretionary and industrials sectors covering approximately 3% of the domestic equities market and is weighted by market capitalization. The New Peer Group selected by us, which is also weighted by market capitalization, is comprised of Gannett Co. Inc., Iconix Brand Group, Inc., The E.W. Scripps Company, Lifetime Brands, Inc., Meredith Corporation, Scholastic Corp. and XO Group Inc. The Old Peer Group, weighted by market capitalization, is comprised of Gannett Co. Inc., Iconix Brand Group, Inc., Kenneth Cole Productions, Lifetime Brands, Inc., Meredith Corporation, Scholastic Corp. and XO Group Inc. Kenneth Cole Productions was removed from the New Peer Group as it is no longer a publicly-traded company, and was replaced by The E.W. Scripps Company.
The graph assumes that $100 was invested in each of our Class A Common Stock, the S&P SmallCap 600 Index and the Peer Group at the closing prices on December 31, 2008 and assumes reinvestment of dividends. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
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Item 6. Selected Financial Data.
The information set forth below for the five years ended December 31, 2013 is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto incorporated by reference into Item 8 of this Annual Report on Form 10-K. The Notes to Selected Financial Data below include certain factors that may affect the comparability of the information presented below (in thousands, except share per share amounts).
2013 2012 2011 2010 2009 INCOME STATEMENT DATA REVENUES Publishing $ 96,493 $ 122,540 $ 140,857 $ 145,573 $ 146,100 Merchandising 59,992 57,574 48,614 42,806 52,566 Broadcasting 4,190 17,513 31,962 42,434 46,111 Total revenues 160,675 197,627 221,433 230,813 244,777 Operating loss (1,897) (56,396) (18,594) (8,663) (11,968) Net loss $ (1,772) $ (56,085) $ (15,519) $ (9,596) $ (14,578) PER SHARE DATA Loss per share: Basic and diluted—Net loss $ (0.03) $ (0.83) $ (0.28) $ (0.18) $ (0.27) Weighted average common shares outstanding: Basic and diluted 64,912,368 67,231,463 55,880,896 54,440,490 53,879,785 Dividends per common share $ — $ — $ 0.25 $ — $ — FINANCIAL POSITION Cash and cash equivalents $ 21,884 $ 19,925 $ 38,453 $ 23,204 $ 25,384 Short-term investments 19,268 29,182 11,051 10,091 13,085 Restricted cash and investments 5,072 — — — — Total assets 148,367 154,260 216,120 222,314 229,791 Long-term obligations — — — 7,500 13,500 Shareholders’ equity 70,475 95,516 147,947 139,033 143,820 OTHER FINANCIAL DATA Cash flow (used in)/ provided by operating activities $ (1,958) $ 239 $ (2,220) $ 1,872 $ (9,273) Cash flow provided by / (used in) investing activities 4,378 (18,918) 6,886 153 (9,617) Cash flow (used in) / provided by financing activities (461) 151 10,583 (4,205) (5,930)
NOTES TO SELECTED FINANCIAL DATA
Loss from continuing operations
2013 results include restructuring charges of approximately $3.4 million.
2012 results include a non-cash goodwill impairment charge related to the Publishing segment of approximately $44.3 million and restructuring charges of approximately $4.8 million.
2011 results include restructuring charges of approximately $5.1 million.
2010 results include the recognition of substantially all of the exclusive license fee of approximately $5.0 million from Hallmark Channel for a significant portion of our library of programming, as well as licensing revenue for other new programming delivered to Hallmark Channel.
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2009 results include a net benefit to operating loss of approximately $20 million from certain items including the revenue from Kmart of $14.5 million, the recognition of previously deferred Kmart Corporation royalties of $10.0 million as non-cash revenue, an incremental $3.9 million from the conclusion of our relationship with TurboChef Technologies, Inc., a $3.0 million cash receipt related to a make-whole payment and a non-cash impairment charge of $11.4 million related to a cost-based equity investment in United Craft MS Brands LLC recorded in the Merchandising segment.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes under Item 8 of this Annual Report on Form 10-K
EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and well- designed, high-quality products. We are organized into three business segments: Publishing, Merchandising and Broadcasting.
Our strategy to generate growth and profitability includes the following imperatives:
• Grow our merchandising business by leveraging our brand equity to diversify into new categories and distribution channels, and negotiate new partnerships that fully reward us for the value of our brands and our active role in product development and design, both domestically and internationally; and • Strengthen our media business by using our content across existing and new distribution channels, including international opportunities, and focusing on digital opportunities.
Summarized below are our operating results for years ended December 31, 2013, 2012 and 2011.
2013 2012 2011 Total Revenues $ 160,675 $ 197,627 $ 221,433 Total Operating Costs and Expenses (165,296) (254,023) * (240,027) Gain on Sale of Subscriber List, net 2,724 — — Total Operating Loss $ (1,897) $ (56,396) $ (18,594) * Publishing segment operating costs and expenses for 2012 included a non-cash goodwill impairment charge of $44.3 million.
We generate revenue from various sources such as advertising customers, magazine circulation and licensing partners. The Publishing segment is our largest business segment, accounting for 60% of our total revenues in 2013. Publishing segment revenues are comprised of advertising sales, magazine subscriptions and newsstand sales of Martha Stewart Living, Martha Stewart Weddings and special interest magazines, as well as royalties from our book business. Publishing segment revenue also includes advertising revenue generated from our digital properties, primarily marthastewart.com, as well as revenue derived from the digital distribution of our video content. Merchandising segment revenues are generated from the licensing of our trademarks and designs for a variety of products sold at multiple price points through a wide range of distribution channels. Our retail partnerships include our programs at The Home Depot, Macy's and J.C. Penney. Our wholesale partnerships include Avery for our Martha Stewart Home Office line (currently sold at Staples through the end of 2014), Wilton Properties and Plaid Enterprises for our Martha Stewart Crafts program (currently sold at Michael’s and other crafts stores) and Age Group for our Martha Stewart Pets line (currently sold at PetSmart), as well as with a variety of wholesale partnerships to produce products under the Emeril brand. Our wholesale license with Age Group for pets products expired December 31, 2013 and effective January 1, 2014, we have a direct retail partnership with PetSmart. Merchandising segment revenues are also derived from the licensing of talent services for television programming produced by third parties. Broadcasting segment revenues include our limited television production operations, television content library licensing and satellite radio operations.
We incur expenses primarily consisting of compensation and related charges across all segments. In addition, we incur expenses related to the physical costs associated with producing and distributing magazines, the editorial costs associated with creating content across our media platforms, the selling and promotion costs that support our advertising, marketing, circulation marketing and research efforts, the technology costs associated with our digital properties and the costs associated with producing and distributing our video programming. We also incur general overhead costs, including facilities and related expenses.
In 2012, we implemented several restructuring actions in our Publishing segment ("2012 Publishing Restructuring"), which included the transition of the print publication Everyday Food from a stand-alone title to a digital-focused brand distributed across multiple platforms. Everyday Food ceased publication as a stand-alone title with its December 2012 issue, and was issued as an occasional supplement to Martha Stewart Living subscribers in 2013. In addition, we discontinued 20 Table of Contents publication of Whole Living with the January/February 2013 issue, and sold the related subscriber list in January 2013. We also significantly restructured the Broadcasting segment in 2012 ("Broadcasting Restructuring"), which included the termination of our live audience television production operations. While future revenues and assets from these operations are not expected to be significant, we plan to continue reporting activities under the Broadcasting segment to provide historical context.
These 2012 restructuring initiatives in both segments impacted the comparability of the results for 2013 from the prior year. In particular, the 2012 Publishing Restructuring impacted the comparability of the Publishing segment's print advertising and circulation revenues, as well as production, distribution and editorial costs and selling and promotion expenses. Some of the cost savings achieved from the 2012 Publishing Restructuring have been and are expected to be partially offset by continued investment in our digital properties. The Broadcasting Restructuring impacted the comparability of the Broadcasting segment's advertising revenue, as well as all costs and expenses in the Broadcasting segment.
On October 21, 2013, we entered into an amendment with J.C. Penney, which, among other items, included the prospective reduction of the guaranteed minimum royalties, design fees and term set forth in the original commercial agreement dated December 6, 2011. In connection with this amendment, J.C. Penney also returned 11 million shares of our Class A Common Stock, resulting in an initial increase to deferred revenue of approximately $25 million that will be recognized as revenue ratably through the amended term (June 30, 2017). See Note 8, Shareholders' Equity in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further details.
Detailed segment operating results for 2013, 2012 and 2011 are summarized below.
2013 2012 2011 Segment Revenues: Publishing $ 96,493 $ 122,540 $ 140,857 Merchandising 59,992 57,574 48,614 Broadcasting 4,190 17,513 31,962 TOTAL REVENUES 160,675 197,627 221,433 Segment Operating Costs and Expenses: Publishing (113,998) (184,569) * (147,321) Merchandising (19,480) (18,097) (18,642) Broadcasting (2,035) (15,159) (36,702) TOTAL OPERATING COSTS AND EXPENSES Before Corporate Expenses and Gain on Sale of Subscriber List, Net (135,513) (217,825) (202,665) Publishing - Gain on sale of subscriber list, net 2,724 — — Operating Income / (Loss): Publishing (14,781) (62,029) (6,464) Merchandising 40,512 39,477 29,972 Broadcasting 2,155 2,354 (4,740) Total Segment Operating Income / (Loss) Before Corporate Expenses 27,886 (20,198) 18,768 Corporate Expenses ** (29,783) (36,198) (37,362) TOTAL OPERATING LOSS $ (1,897) $ (56,396) $ (18,594)
* Publishing segment operating costs and expenses for 2012 included a non-cash goodwill impairment charge of $44.3 million.
** Corporate expenses include unallocated costs of items such as compensation and related costs for certain departments, such as executive (including Martha Stewart, our Founder and Chief Creative Officer), finance, legal, human resources, corporate communications, office services and information technology, as well as allocated portions of rent and related expenses for these departments that reflect current utilization of office space. Unallocated Corporate expenses are directed and controlled by central management and not by our segment management, and therefore are not included as part of our segment operating performance.
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2013 Operating Results Compared to 2012 Operating Results
In 2013, total revenues decreased 19% from 2012 primarily due to the impact from both the 2012 Publishing Restructuring and Broadcasting Restructuring, as well as the negative impact on magazine circulation revenues from the change in frequency of Martha Stewart Living. Additionally, Broadcasting revenues declined from lower radio licensing fees and the inclusion in 2012 of television licensing revenue from programming on the Hallmark Channel featuring Emeril Lagasse, with no comparable revenue in 2013. These declines were partially offset by royalty revenue from J.C. Penney, with no comparable revenue in the prior year and higher digital advertising revenue.
Our operating costs and expenses before Corporate expenses included a non-cash goodwill impairment charge of $44.3 million in 2012 and included the net gain on the sale of the Whole Living subscriber list of $2.7 million in 2013, both in our Publishing segment. Excluding these two items, our operating costs and expenses before Corporate expenses in 2013 decreased $37.9 million or 22% from 2012. This decrease was due to the savings achieved from both the 2012 Publishing Restructuring and Broadcasting Restructuring, partially offset by costs associated with producing and distributing short-form video programming for our digital properties, as well as higher selling and promotion costs associated with the increase in digital advertising revenues.
Corporate expenses decreased 18% in 2013 as compared 2012, primarily due to reduced compensation related to executive management and lower headcount, as well as general cost savings. Corporate expenses were also lower due to a partial reimbursement from our insurance carrier associated with certain Macy's litigation costs.
2012 Operating Results Compared to 2011 Operating Results
In 2012, total revenues decreased 11% from 2011 due to a decline in print, television and digital advertising revenue and the inclusion in 2011 of revenue associated with the delivery of certain television companion programming to the Hallmark Channel. In addition, our circulation revenue declined due to lower subscription and newsstand revenues. These declines in revenues were partially offset by an increase in Merchandising segment revenues from new relationships in 2012.
In 2012, our operating costs and expenses before Corporate expenses and gain on sale of subscriber list, net, included a non-cash goodwill impairment charge of $44.3 million in our Publishing segment. Excluding the impairment charge, our operating costs and expenses before Corporate expenses in 2012 decreased $29.1 million or 14% from 2011, since we were no longer incurring television production costs associated with the Hallmark Channel companion programming, as well as lower production, distribution and editorial costs in our Publishing segment.
Television advertising revenues and production costs also declined due to the conclusion in September 2012 of our agreement with the Hallmark Channel to televise The Martha Stewart Show.
Corporate expenses decreased 3% in 2012 as compared 2011, primarily due to the inclusion in Corporate of $3.7 million of restructuring charges in 2011, compared to $1.9 million of restructuring charges in 2012. In addition, Corporate expenses decreased due to lower compensation costs related to executive management, partially offset by higher legal fees.
Liquidity
During 2013, our overall cash, cash equivalents, short-term investments and restricted cash and investments decreased $2.9 million from $49.1 million at December 31, 2012 to $46.2 million at December 31, 2013. Our operating loss of $(2.0) million in 2013 equaled our cash used in operating activities, with additional cash used for capital expenditures. We had no borrowings against our line of credit as of December 31, 2013, 2012 or 2011.
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RESULTS OF OPERATIONS
Comparison of years ended December 31, 2013 to 2012.
PUBLISHING SEGMENT
(in thousands) 2013 2012 Better / (Worse) Publishing Segment Revenues Print Advertising $ 44,128 $ 56,763 $ (12,635) Digital Advertising 23,355 20,752 2,603 Circulation 25,541 41,620 (16,079) Books 1,463 1,475 (12) Other 2,006 1,930 76 Total Publishing Segment Revenues $ 96,493 $ 122,540 $ (26,047)
Production, distribution and editorial (61,454) (79,548) 18,094 Selling and promotion (42,940) (49,797) 6,857 General and administrative (6,656) (8,254) 1,598 Depreciation and amortization (944) (742) (202) Restructuring charges (2,004) (1,971) (33) Goodwill impairment — (44,257) 44,257 Gain on sale of subscriber list, net 2,724 — 2,724 Operating Loss $ (14,781) $ (62,029) $ 47,248
The comparability of the Publishing segment results for 2013, as compared to 2012, was significantly impacted by the 2012 Publishing Restructuring, as well as the reduction in the frequency of Martha Stewart Living from twelve to ten issues per year, starting with the July/August 2013 issue. The impact of this frequency change of Martha Stewart Living resulted in two fewer issues during 2013, as compared to the prior year, which specifically impacted comparability of circulation revenues, as well as the physical costs associated with producing and distributing Martha Stewart Living.
Publishing segment revenues decreased 21% in 2013 from 2012. Print advertising revenue decreased $12.6 million primarily due to a $11.5 million impact from the 2012 Publishing Restructuring. Additionally, print advertising revenue declined due to lower advertising page rates for Martha Stewart Living. Despite the frequency change of Martha Stewart Living, total advertising pages for the ten issues in 2013 were equal to total advertising pages for the twelve issues of Martha Stewart Living in 2012. For Martha Stewart Weddings, advertising pages increased modestly in 2013 compared to 2012, fully offset by a decrease in advertising page rates. Digital advertising revenue increased $2.6 million in 2013 from 2012 due to a significant increase in video advertising units sold and modestly higher display advertising units sold, partially offset by lower rates for display advertising. Circulation revenue decreased $16.1 million due to a $10.5 million impact from the 2012 Publishing Restructuring. Additionally, the frequency change of Martha Stewart Living caused a negative impact of approximately $4.0 million. The remaining decline in circulation revenue was primarily due to lower newsstand unit sales of our special interest publications, Cakes and Cupcakes and Halloween, as compared to the special interest publications, Organizing and Halloween, sold during 2012, as well as softness in newsstand sales of Martha Stewart Weddings and Martha Stewart Living.
Production, distribution and editorial expenses decreased $18.1 million in 2013 from 2012 primarily due to the 2012 Publishing Restructuring, which eliminated approximately $16.7 million of physical costs and editorial expenses. Additionally, physical costs associated with producing and distributing Martha Stewart Living declined due to the frequency change of the magazine. The decreases from the 2012 Publishing Restructuring were partially offset primarily by higher expenses associated with our investment in producing short-form video programming for our digital properties and higher editorial staff and story costs. Selling and promotion expenses decreased $6.9 million in 2013 from 2012 primarily due to the 2012 Publishing Restructuring, which eliminated approximately $10.5 million of magazine circulation-related costs and advertising and marketing expenses. Additionally, selling and promotion expenses decreased due to lower magazine circulation costs for Martha Stewart Living, which benefited from the 2012 Publishing Restructuring as we redirected prior Everyday Food subscribers to Martha Stewart Living, thus reducing subscriber acquisition costs during 2013. These decreases in selling and promotion expenses were partially offset by higher selling and commission costs, as well as an increase in headcount, associated with the increase in digital revenues and higher costs for market research. General and administrative expenses decreased $1.6 million due to lower allocated rent expense, which was offset by an equal increase in our Merchandising 23 Table of Contents segment and Corporate rent allocation. Rent expense is charged to our segments to reflect utilization of office space. The reallocation of rent expense was the result of the 2012 Publishing Restructuring, reflecting the lower overall headcount of the restructured Publishing segment. Restructuring charges in 2013 represented employee severance costs related to our efforts to realign our business to focus on efficient content creation and other operational efficiencies. These 2013 restructuring charges were largely incurred in December 2013 and did not impact any of the operating costs and expenses described above, as we expect the benefit from lower compensation expense in 2014 and the future. Restructuring charges in 2012 represented employee severance costs associated with the 2012 Publishing Restructuring.
During 2012, we incurred a non-cash goodwill impairment charge of $44.3 million, which was the result of the Publishing segment experiencing slower than anticipated growth in advertising.
The net gain on the sale of Whole Living subscriber list was $2.7 million for 2013 with no comparable gain in the prior- year period. Pursuant to this sale, the subscription contracts for the print and digital editions of Whole Living, as well as the rights and benefits of the subscribers, were transferred to the buyer in exchange for cash. As a result of selling the Whole Living subscriber list, and thus transferring the subscription liability fulfillment obligation to the buyer, we also recognized the remaining deferred subscription revenue. See Note 14, Gain on Sale of Subscriber List, net in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further details.
MERCHANDISING SEGMENT
(in thousands) 2013 2012 Better / (Worse) Merchandising Segment Revenues Royalty and other $ 59,992 $ 57,574 $ 2,418 Total Merchandising Segment Revenues $ 59,992 $ 57,574 $ 2,418
Production, distribution and editorial (9,783) (11,251) 1,468 Selling and promotion (2,071) (2,143) 72 General and administrative (6,993) (4,570) (2,423) Depreciation and amortization (50) (52) 2 Restructuring charges (583) (81) (502) Merchandising Segment Operating Income $ 40,512 $ 39,477 $ 1,035
Merchandising segment revenues increased 4% in 2013 from 2012. Royalty and other revenues increased $2.4 million primarily due to the recognition of royalty revenue from our commercial agreement with J.C. Penney, with no comparable royalty revenue from J.C. Penney in the prior-year period. Also included in royalty and other revenues is the pro rata recognition of non-cash revenue that resulted from the value assigned to the 11 million shares of our Class A Common Stock returned from J.C. Penney. In addition, royalty revenues increased due to higher shipments of our pets products and our new vitamin products, Martha Stewart Essentials. The increases in royalty and other revenues were partially offset by lower royalties from The Home Depot (reflecting fewer styles offered of our patio products and lower sales of soft flooring), lower design fees from J.C. Penney, as well as the impact of certain expired partnerships and certain non-recurring prior-year period benefits with no comparable revenue during 2013.
Production, distribution and editorial expenses decreased $1.5 million in 2013 from 2012 due to a decrease in compensation related costs, primarily from the reduction of employees who had supported the J.C. Penney design efforts in 2012. General and administrative expenses increased $2.4 million due to higher allocated compensation expenses of $0.9 million associated with Emeril Lagasse for television programming produced by third parties that was previously recorded in the Broadcasting segment during 2012, as well as a reserve of $0.4 million for the collection of certain Macy's royalties. In addition, general and administrative expenses increased due to higher allocated rent expense of $1.0 million from the reallocation of rent charged to the Merchandising segment to reflect current utilization of office space. The increase in our Merchandising segment rent allocation was offset by a decrease in our Publishing segment rent allocation, as discussed above. Restructuring charges of $0.6 million for 2013 represented employee severance costs.
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BROADCASTING SEGMENT
(in thousands) 2013 2012 Better / (Worse) Broadcasting Segment Revenues Advertising $ 2,303 $ 9,908 $ (7,605) Licensing and other 1,887 7,605 (5,718) Total Broadcasting Segment Revenues $ 4,190 $ 17,513 $ (13,323)
Production, distribution and editorial (1,884) (12,548) 10,664 Selling and promotion (22) (513) 491 General and administrative (102) (894) 792 Depreciation and amortization (27) (388) 361 Restructuring charges — (816) 816 Broadcasting Segment Operating Income $ 2,155 $ 2,354 $ (199)
Broadcasting segment revenues decreased 76% in 2013 from 2012. Advertising revenue decreased $7.6 million primarily due to a $7.3 million impact from the Broadcasting Restructuring. In addition, in accordance with our accounting policy, we released $1.3 million in 2012 that had been previously reserved for audience underdelivery related to seasons 5 and prior of the The Martha Stewart Show under our syndication agreement with NBC. Partially offsetting these declines in advertising revenue was sponsorship revenue in 2013 related to Martha Stewart's Cooking School and Martha Bakes, each of which aired on PBS. Licensing and other revenue decreased $5.7 million primarily due to the inclusion of licensing revenues during 2012 associated with television programming on the Hallmark Channel featuring Emeril Lagasse, with no comparable revenue in the current year. In addition, licensing and other revenue reflected reduced radio licensing fees from our new agreement with Sirius XM, as well as lower international television licensing revenue.
Production, distribution and editorial expenses decreased $10.7 million in 2013 from 2012 primarily due to a $12.5 million impact from the Broadcasting Restructuring. During 2013, we incurred production, distribution and editorial expenses of $1.9 million primarily related to television production costs associated with Martha Stewart's Cooking School and Martha Bakes, as well as distribution and other fees associated with our television programming on PBS. In addition, we incurred costs related to our reduced radio programming. Selling and promotion expenses, as well as general and administrative expenses and depreciation and amortization, decreased due to the Broadcasting Restructuring. General and administrative expenses primarily consist of overhead costs associated with the production of our reduced radio programming. Restructuring charges of $0.8 million during 2012 primarily included employee severance costs related to the Broadcasting Restructuring.
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CORPORATE
(in thousands) 2013 2012 Better / (Worse)
General and administrative $ (26,194) $ (31,430) $ 5,236 Depreciation and amortization (2,737) (2,825) 88 Restructuring charges (852) (1,943) 1,091 Total Corporate Operating Costs and Expenses $ (29,783) $ (36,198) $ 6,415
Corporate operating costs and expenses decreased 18% in 2013 from 2012. General and administrative expenses decreased $5.2 million due to reduced compensation related to executive management and lower headcount. In addition, general and administrative expenses decreased due to lower executive recruiting costs and general cost savings including reduced travel and entertainment expenses and lower utilities costs. General and administrative expenses also declined due to a partial reimbursement from our insurance carrier associated with certain Macy's litigation costs. Corporate general and administrative expenses included higher allocated rent expense of $0.7 million from the reallocation of rent charged to reflect current utilization of office space. The increase in rent allocated to Corporate was offset by a decrease in our Publishing segment rent allocation, as discussed above. Restructuring charges in 2013 of $0.9 million represented employee severance costs. Restructuring charges in 2012 primarily included the costs associated with the departure of our former President and Chief Executive Officer, as well as other employee severance costs.
OTHER ITEMS
OTHER (EXPENSE) / INCOME, NET. Other expense, net, in 2013 included the net realized losses on certain of our short- term investments. Other income, net, included a gain on the sale of cost-based investments of $1.2 million for 2012 with no comparable gain in the current-year period.
INCOME TAX PROVISION. The income tax provision in 2013 of $(0.1) million was net of a non-recurring tax benefit of $1.3 million, which was attributable to the prior year impairment of goodwill, for which all tax basis had been previously amortized. We concluded that this adjustment was immaterial.
NET LOSS. Net loss was $(1.8) million for 2013, compared to a net loss of $(56.1) million for 2012, as a result of the factors described above.
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RESULTS OF OPERATIONS
Comparison of 2012 to 2011.
PUBLISHING SEGMENT
(in thousands) 2012 2011 Better / (Worse) Publishing Segment Revenues Print Advertising $ 56,763 $ 67,740 $ (10,977) Digital Advertising 20,752 23,366 (2,614) Circulation 41,620 46,109 (4,489) Books 1,475 1,814 (339) Other 1,930 1,828 102 Total Publishing Segment Revenues $ 122,540 $ 140,857 $ (18,317)
Production, distribution and editorial (79,548) (86,197) 6,649 Selling and promotion (49,797) (51,036) 1,239 General and administrative (8,254) (8,486) 232 Depreciation and amortization (742) (774) 32 Restructuring charges (1,971) (828) (1,143) Goodwill impairment (44,257) — (44,257) Publishing Segment Operating Loss $ (62,029) $ (6,464) $ (55,565)
Publishing segment revenues decreased 13% in 2012 from 2011. Print advertising revenue decreased $11.0 million primarily due to a decrease in advertising pages in Martha Stewart Living, along with slightly lower rates. Advertising pages also decreased slightly in Whole Living and Everyday Food magazines. These decreases were partially offset by an increase in advertising pages in Martha Stewart Weddings and the related special interest publications. In 2012, we published four special interest publications, two of which contributed significant advertising revenue—Martha Stewart Weddings Real Weddings and Martha Stewart Weddings Destination Weddings and Dream Honeymoons. In 2011, while we also published four special interest publications, only one contributed significant advertising revenue—Martha Stewart Weddings Destination Weddings and Dream Honeymoons. Digital advertising revenue decreased $2.6 million in 2012 from 2011 due to fewer advertising units sold and lower rates. Circulation revenue decreased $4.5 million due to lower subscription revenue per copy of Martha Stewart Living and Everyday Food, from increased reliance on third-party, lower revenue subscription sources, as well as lower newsstand sales of Martha Stewart Living and our other titles. Partially offsetting these declines was an increase in revenue related to the sales and distribution of our magazines digitally, on various tablet devices and platforms. In 2011, this revenue was classified as “Other”, as we did not include the digital circulation of our magazines toward our rate base guarantees to advertisers. Beginning in January 2012, we included digital circulation in our rate base guarantees, and therefore reclassified the sales from digital circulation as “Circulation” revenue. Revenue related to our books business decreased $0.3 million in 2012 from 2011 primarily due to one fewer manuscript delivered and accepted in 2012, as compared to 2011, related to our multi-book agreements with The Crown Publishing Group (Clarkson Potter) for Martha Stewart books. Other revenue increased $0.1 million due to sponsorship revenues related to a fourth quarter 2012 advertising and marketing event, American Made by Martha Stewart, that did not occur in 2011, largely offset by the reclassification in presentation of the digital distribution and sales of our magazine content on portable devices that is now included in "Circulation" revenue.
Production, distribution and editorial expenses decreased $6.6 million in 2012 from 2011 primarily due to a decline in paper, printing and distribution expenses from fewer magazine pages produced in Martha Stewart Living and lower pricing. The decrease in production, distribution and editorial expenses also reflected reduced art and editorial compensation and story costs to support the print and digital magazines. These decreases were partially offset by an increase in headcount and higher project costs to support the website and other digital initiatives, as well as an increase in paper, printing and distribution expenses from an increase in magazine pages produced in Martha Stewart Weddings and related special interest publications. Selling and promotion expenses decreased $1.2 million in 2012 from 2011 due to lower subscriber acquisition costs, which included a significant reduction of our direct mail campaigns. Additionally, selling and promotion expenses decreased due to lower renewal costs and lower newsstand marketing costs. Partially offsetting these decreases were higher compensation costs related to the investment in our advertising sales and marketing efforts, as well as the expenses associated with American Made by Martha Stewart, that did not occur in 2011. Restructuring charges in 2012 represented employee severance costs as compared to the restructuring charges in 2011, which included both employee severance costs and certain consulting costs. Restructuring charges increased $1.1 million in 2012 from 2011 as the result of the workforce reduction related to the 2012 27 Table of Contents
Publishing Restructuring. During 2012, we incurred a non-cash goodwill impairment charge of $44.3 million, which was the result of the Publishing segment experiencing slower than anticipated growth in advertising.
MERCHANDISING SEGMENT
(in thousands) 2012 2011 Better / (Worse) Merchandising Segment Revenues Royalty and other $ 57,574 $ 48,614 $ 8,960 Total Merchandising Segment Revenues $ 57,574 $ 48,614 $ 8,960
Production, distribution and editorial (11,251) (8,668) (2,583) Selling and promotion (2,143) (4,726) 2,583 General and administrative (4,570) (5,203) 633 Depreciation and amortization (52) (32) (20) Restructuring charges (81) (13) (68) Merchandising Segment Operating Income $ 39,477 $ 29,972 $ 9,505
Merchandising segment revenues increased 18% in 2012 from 2011. Royalty and other revenues increased $9.0 million primarily due to the recognition of design fees from our commercial agreement with J.C. Penney, royalties from our merchandising relationship with Avery, an increase in royalties from our retail agreement with Macy's and higher sales of our pets products with Age Group. Partially offsetting these increases was a decline in sales of our soft flooring line of products at The Home Depot.
Production, distribution and editorial expenses increased $2.6 million in 2012 from 2011 due to an increase in headcount to support our merchandising partners with expanded product design services. Selling and promotion expenses and related other revenue both declined approximately $2.6 million as a result of a decrease in reimbursable services that we provided to our partners for creative services projects. General and administrative expenses decreased $0.6 million due to lower compensation costs in 2012 as compared to 2011, as well as the inclusion in 2011 of legal and administrative fees associated with commercial agreements with certain of our partners. Partially offsetting this decrease was a one-time benefit in non-cash compensation expense in 2011 related to certain executive departures in the Merchandising segment, with no comparable benefit in 2012.
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BROADCASTING SEGMENT
(in thousands) 2012 2011 Better / (Worse) Broadcasting Segment Revenues Advertising $ 9,908 $ 15,201 $ (5,293) Licensing and other 7,605 16,761 (9,156) Total Broadcasting Segment Revenues $ 17,513 $ 31,962 $ (14,449)
Production, distribution and editorial (12,548) (32,219) 19,671 Selling and promotion (513) (1,446) 933 General and administrative (894) (1,967) 1,073 Depreciation and amortization (388) (470) 82 Restructuring charges (816) (600) (216) Broadcasting Segment Operating Income / (Loss) $ 2,354 $ (4,740) $ 7,094
Broadcasting segment revenues decreased 45% in 2012 from 2011. Advertising revenue decreased $5.3 million due to lower revenue from television integrations in 2012 from 2011 and due to the conclusion in September 2012 of our agreement with the Hallmark Channel to televise The Martha Stewart Show, which had contributed advertising revenue for twelve months in 2011, as compared to nine months in 2012. Additionally, advertising revenue from our radio business decreased $0.9 million as a result of our revised agreement with Sirius XM, effective January 1, 2012. The decreases in advertising revenue were partially offset by sponsorship revenue related to Martha Stewart’s Cooking School, a weekly series that debuted on PBS in October 2012. In addition, in accordance with our accounting policy, we released amounts previously reserved for audience underdelivery related to seasons 5 and prior of the The Martha Stewart Show under our syndication agreement with NBC.
Television licensing and other revenue decreased $9.2 million in 2012 from 2011 largely due to the inclusion of revenues associated with delivery of television companion programming to the Hallmark Channel during 2011, which delivery concluded in December 2011. Licensing revenue was also impacted by the reduced radio fees from our amended agreement with Sirius XM.
Production, distribution and editorial expenses decreased $19.7 million in 2012 from 2011 since we were no longer incurring television production costs associated with the Hallmark Channel companion programming such as were incurred in 2011. Additionally, television production costs for season 7 of The Martha Stewart Show on the Hallmark Channel were lower than television production costs for season 6, including the savings from having vacated our television studio facilities on June 30, 2012, and having ended airing of The Martha Stewart Show in September 2012. Radio production and editorial costs were also lower as the amount of original radio programming on the Martha Stewart Living Radio channel was lower in 2012 than in 2011. Selling and promotion expenses decreased $0.9 million primarily due to lower compensation costs related to a reduction in the television advertising sales staff. General and administrative expenses decreased $1.1 million due primarily to lower compensation costs from a reduction in headcount. Restructuring charges in 2012 primarily included employee severance costs related to the termination of our live audience television production operations, as compared to the restructuring charges in 2011, which included both employee severance costs and certain other non-recurring costs.
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CORPORATE
(in thousands) 2012 2011 Better / (Worse) Corporate Operating Costs and Expenses General and administrative $ (31,430) $ (30,985) $ (445) Depreciation and amortization (2,825) (2,702) (123) Restructuring charges (1,943) (3,675) 1,732 Total Corporate Operating Costs and Expenses $ (36,198) $ (37,362) $ 1,164
Corporate operating costs and expenses decreased 3% in 2012 from 2011. General and administrative expenses increased $0.4 million primarily due to higher professional fees, principally legal costs. The increase in general administrative expenses was partially offset by reduced compensation expense related to executive management. Restructuring charges in 2012 primarily included the costs associated with the departure of our former President and Chief Executive Officer. Also included in the restructuring charges in 2012 were other employee severance costs. Restructuring charges in 2011 included employee severance and other employee-related termination costs, as well as certain consulting and recruiting costs. Additionally, the 2011 restructuring charge of $3.7 million included an approximate $0.4 million reversal of non-cash equity compensation expense related to certain employee departures.
OTHER ITEMS
INTEREST INCOME / (EXPENSE), NET. Interest income was $1.2 million in 2012 compared to net interest expense in 2011 of $(0.2) million. In 2011, we completely repaid our then outstanding $9.0 million term loan balance.
OTHER INCOME, NET. Other income in 2012 included a gain on the sale of cost-based investments of $1.2 million. In 2011, other income included a gain on the sale of a cost-based investment of $7.6 million, partially offset by a $2.7 million other-than-temporary loss on cost-based investments. The loss on cost-based investments was related to writing down the carrying value of cost-based equity investments after concluding that these investments were substantially impaired.
NET LOSS. Net loss was $(56.1) million for 2012, compared to a net loss of $(15.5) million for 2011, as a result of the factors described above.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
During 2013, our overall cash, cash equivalents, short-term investments and restricted cash and investments decreased $2.9 million from $49.1 million at December 31, 2012 to $46.2 million at December 31, 2013. Our operating loss of $(2.0) million in 2013 equaled our cash used in operating activities, with additional cash used for capital expenditures.
In May 2013, we reduced our line of credit with Bank of America from $10.0 million to $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. Pursuant to the terms of the Amendment to Amended and Restated Loan Agreement between the Company and Bank of America, N.A. ("Amended Credit Agreement") and the related Pledge Agreement, the line of credit must be secured by cash or investment collateral, which we have presented as "Restricted cash and investments," a component of current assets on our consolidated balance sheets. See the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 7, Credit Facilities, for further discussion of the our line of credit with Bank of America. As of December 31, 2013, we had no borrowings against our line of credit. We believe that our available cash and cash equivalent balances and short-term investments, along with our line of credit, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months.
Operating Activities
Our cash inflows from operating activities are generated by our business segments from revenues, as described previously, which include cash from advertising and magazine customers and licensing partners. Operating cash outflows generally include: employee and related costs; physical costs associated with producing and distributing magazines; editorial costs associated with creating content across our media platforms; selling and promotion costs that support our advertising, marketing, circulation marketing and research efforts; technology costs associated with our digital properties; costs associated with producing and distributing our video programming; and costs of facilities.
Cash (used in) and provided by operating activities was $(2.0) million, $0.2 million and (2.2) million in 2013, 2012 and 2011, respectively. In 2013, operating activities included the recognition of certain deferred subscription liabilities, which reflected cash collected in prior periods. The recognition of these liabilities was largely due to the impact of the 2012 Publishing Restructuring, which allowed us to redirect prior Everyday Food subscribers to Martha Stewart Living. In addition, the gain on the sale of the Whole Living subscriber list in January 2013 included the release of $2.2 million of related deferred subscription liability. Cash from operating activities also decreased due to our operating loss, as discussed earlier. Partially offsetting these decreases to cash from operating activities was the collection of cash from J.C. Penney, which represented an advance of 2014 minimum royalties and thereby increased our deferred revenue as of December 31, 2013.
In 2012, cash from operating activities increased slightly, despite our operating loss, due to the collection of receivables from advertising and television license fees recorded in 2011, as well as a decrease in the amount of paper inventory. Additionally, our operating loss in 2012 included a goodwill impairment charge of $44.3 million in our Publishing segment that had no impact on our cash from operating activities. Cash provided by operating activities was partially offset by cash used to pay fees associated with the syndicated distribution of seasons 4 and 5 of The Martha Stewart Show. The other reductions in our accounts payable and accrued liabilities reflect the significant changes from the 2012 Publishing Restructuring and Broadcasting Restructuring.
In 2011, the $(2.2) million of cash used in operations was the result of our operating loss, as well as payments of certain non-recurring Broadcasting segment liabilities established in prior years and a delay in the timing of cash receipts from magazine subscription orders. These decreases in cash from operations in 2011 were partially offset by the collection of advertising and television license fee receivables and the receipt of an upfront advance payment related to our multi-book agreement with The Crown Publishing Group (Clarkson Potter) for Martha Stewart books.
Investing Activities
Our cash inflows from investing activities generally include proceeds from the sale of short-term investments. In 2012 and 2011, cash inflows from investing activities also included the proceeds from selling cost-based investments classified as other non-current assets. Investing cash outflows generally include payments for short- and long-term investments and additions to property, plant, and equipment.
Cash provided by and (used in) investing activities was $4.4 million, $(18.9) million and $6.9 million in 2013, 2012 and 2011, respectively. In 2013, cash provided by investing activities predominantly consisted of the net proceeds from the sales of short-term investments, as well as the cash portion associated with the sale of the Whole Living subscriber list during January
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2013. Partially offsetting the cash provided by investing activities were amounts used for incremental capital improvements to our information technology infrastructure and to our corporate office space.
In 2012, cash used in investing activities predominantly consisted of amounts used to purchase short-term corporate obligations and international bank securities, as well as for capital improvements to our information technology infrastructure. Partially offsetting the cash used in investing activities were the proceeds from the sales of short-term investments and from the sales of Ziplist and pingg common stock for aggregate cash consideration of $1.2 million.
In 2011, the $6.9 million of cash provided by investing activities was primarily due to the proceeds from selling our cost- based investment in the WeddingWire for $11.0 million. Those proceeds were partially offset by cash used for capital improvements to our information technology infrastructure and certain costs associated with our websites, as well as the net purchases of short-term investments.
Financing Activities
Cash flows (used in) and provided by financing activities were $(0.5) million, $0.2 million and $10.6 million in 2013, 2012 and 2011, respectively. In 2013, cash used in financing activities was primarily the result of securing our line of credit pursuant to the terms of our Amended Credit Agreement. In 2012, cash provided by financing activities represented proceeds from the exercise of stock options for our Class A Common Stock issued under our equity incentive plans.
In 2011, cash provided by financing activities was primarily the result of proceeds received from issuing 11.0 million shares of our Class A Common Stock and one share of Series A Preferred Stock to J.C. Penney in exchange for $38.5 million. See Note 8, Shareholders' Equity, in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further discussion. These proceeds were partially offset by the payment of a special one-time dividend of $16.7 million and the complete repayment of our outstanding $9.0 million term loan balance with Bank of America.
Debt
In May 2013, pursuant to the Amended Credit Agreement, we reduced our line of credit with Bank of America from $10.0 million to $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. The annual interest rate on outstanding amounts is equal to a floating rate of 1-month LIBOR Daily Floating Rate plus 1.85%. The unused commitment fee is equal to 0.25%. In connection with the Amended Credit Agreement, we entered into a Pledge Agreement, which provides that the line of credit must be secured by cash or investment collateral. This restricted amount is included in the line item "Restricted cash and investments," a component of current assets, on the consolidated balance sheets.The Amended Credit Agreement expires June 12, 2014, at which time any outstanding amounts borrowed under the agreement are then due and payable. As of December 31, 2013 and 2012, we had no outstanding borrowings against our line of credit or the predecessor line of credit, but had outstanding letters of credit of $1.6 million on both dates.
Cash Requirements
Our commitments consist primarily of leases for office facilities under operating lease agreements. Future minimum payments under our operating leases are summarized in the table below. See the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 12, Commitments and Contingencies, for further discussion.
(in thousands) Total
More Less than than Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years Other Operating Lease Obligations (1) $ 32,709 $ 8,244 $ 16,289 $ 8,176 $ — $ — Unrecognized Tax Benefits (2) 63 — — — — 63 Total $ 32,772 $ 8,244 $ 16,289 $ 8,176 $ — $ 63
(1) Operating lease obligations are shown net of sublease income in this table. During February 2014, in an effort to reduce overhead expenses and more efficiently utilize our office space, we vacated 47,592 square feet at our principal office facility. Reductions in future operating lease obligations of $6.3 million associated with the vacating of this space are not included in the table above as the related lease termination was not effective until mid-February 2014. See the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 12, Commitments and Contingencies, for further discussion of operating leases.
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(2) This amount represents expected payments with interest for uncertain tax positions as of December 31, 2013. We are not able to reasonably estimate the timing of future cash flows related to this liability, and therefore have presented this amount as “Other” in the table above. See the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 10, Income Taxes, for further discussion of income taxes.
In addition to our contractual obligations, we expect to use less than $2.0 million in cash in 2014 for capital expenditures primarily for continued upgrades to our corporate information technology and leasehold improvements to our office space.
Seasonality and Quarterly Fluctuations
Our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules (see chart below) and seasonality of certain types of advertising. In addition, advertising revenue on marthastewart.com and our other websites is tied to traffic, among other key factors, and is typically highest in the fourth quarter of the year. Certain newsstand costs vary from quarter to quarter, particularly newsstand marketing costs associated with the distribution of our magazines. These costs typically have a three-year life cycle, but can vary significantly throughout the term. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to changes in product mix, new product launches and the performance of certain seasonal product lines.
Magazine Publication Schedule Year ended December 31, 2013 * 2012 * Martha Stewart Living * 10 Issues 12 Issues Martha Stewart Weddings 4 Issues 4 Issues Special Interest Publications 4 Issues 4 Issues
* As part of the 2012 Publishing Restructuring, we transitioned the print publication Everyday Food from a stand-alone title to a digital-focused brand distributed across multiple platforms. In addition, we discontinued publication of Whole Living with the January/February 2013 issue, and sold the related subscriber list in January 2013. We also reduced the frequency of Martha Stewart Living from twelve to ten issues per year, starting with the July/August 2013 issue.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2013, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources.
RELATED PARTY TRANSACTIONS
In December 2011, J.C. Penney purchased 11,000,000 newly-issued shares of our Class A Common Stock, par value $0.01 per share, and one share of our Series A Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock") in exchange for cash of $38.5 million. In accordance with J.C. Penney’s ownership of our Series A Preferred Stock, J.C. Penney was entitled to designate two directors for election to our Board of Directors (the “Board”). Also in December 2011, we entered into a Commercial Agreement with J.C. Penney. The Commercial Agreement provided for an initial term that was to expire on January 28, 2023, unless earlier terminated in accordance with its terms. Pursuant to the Commercial Agreement, J.C. Penney will sell certain home products (the “Products”) through www.jcp.com and in J.C. Penney stores throughout the United States. J.C. Penney is required to pay a commission on all Product sales. The commission rate payable to us is within the range of commissions earned from similar programs in which we participate with non-related party partners. J.C. Penney is obligated to make minimum guaranteed payments against commissions generated on sales of the Products. The minimum guaranteed payment for any year is subject to increase if the actual commissions from the prior year exceed the minimum guaranteed payment for such year by a specified percentage. The Commercial Agreement also required J.C. Penney to pay an annual design fee to us and to commit to an annual marketing spend to promote the Products, some of which must be spent to advertise in our properties.
On October 21, 2013, the Company and J.C. Penney entered into the Third Amendment (the “Amendment”) to the Commercial Agreement. The Amendment reduced the categories of Products that were to be manufactured and sold by J.C. Penney, reduced the minimum guaranteed royalties and reduced the term of the Commercial Agreement to June 30, 2017. In addition, the Amendment provided for the return of the 11,000,000 shares of our Class A Common Stock held by J.C. Penney (the “Returned Shares”) and the one (1) share of our Series A Preferred Stock. Upon surrender by J.C. Penney of the Returned Shares and the Series A Preferred Stock, the Company retired these shares and J.C. Penney removed its Series A designees from our Board. Upon cancellation of the Series A Preferred Stock, J.C. Penney is no longer entitled to designate for election any members of our Board. 33 Table of Contents
During the period January 1, 2013 through October 20, 2013, which was the last date J.C. Penney was a related party, we recorded revenues earned from J.C. Penney of $11.6 million. For the year ended December 31, 2012, we recorded $8.1 million in J.C. Penney revenues. These revenues from J.C. Penney represent the total amount earned from royalties, design fees, advertising, television sponsorships and creative services.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, deferred production costs, long-lived assets and accrued losses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that, of our significant accounting policies disclosed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, the following may involve the highest degree of judgment and complexity.
Revenue Recognition
We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances.
We participate in certain arrangements containing multiple deliverables. These arrangements generally consist of custom- created advertising programs delivered on multiple media platforms, as well as licensing programs which may also be supported by various promotional plans. Examples of significant program deliverables include print advertising pages in our publications and advertising impressions delivered on our website. Arrangements that were executed prior to January 1, 2010 are accounted for in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“ASC 605”). Because we elected to early adopt, on a prospective basis, Financial Accounting Standards Board (“FASB”) ASU No. 09-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force) (“ASU 09-13”), arrangements executed on or after January 1, 2010 are subject to the new guidance. ASU 09-13 updated the then existing multiple-element arrangement guidance in ASC 605.
The determination of units of accounting includes several criteria under both ASC 605 and ASU 09-13. Consistent with ASC 605, ASU 09-13 requires that we examine separate contracts with the same entity or related parties that are entered into on or near the same time to determine if the arrangements should be considered a single arrangement in the determination of units of accounting. While both ASC 605 and ASU 09-13 require that units delivered have standalone value to the customer, ASU 09-13 modified the separation criteria in determining units of accounting by eliminating the requirement to obtain objective and reliable evidence of the fair value of undelivered items. As a result of the elimination of this requirement, our significant program deliverables generally meet the separation criteria under ASU 09-13, whereas under ASC 605 they did not qualify as separate units of accounting.
For those arrangements accounted for under ASC 605, if we are unable to put forth objective and reliable evidence of the fair value of each deliverable, then we account for the deliverables as a combined unit of accounting rather than separate units of accounting. In this case, the arrangement fee is recognized as revenue as the earnings process is completed, generally over the fulfillment term of the last deliverable.
For those arrangements accounted for under ASU 09-13, we are required to allocate revenue based on the relative selling price of each deliverable which qualifies as a unit of accounting, even if such deliverables are not sold separately by us or other vendors. Determination of selling price is a judgmental process which requires numerous assumptions. The consideration is allocated at the inception of the arrangement to all deliverables based upon their relative selling prices. Selling prices for deliverables that qualify as separate units of accounting are determined using a hierarchy of: (1) vendor-specific objective evidence (“VSOE”), (2) third-party evidence, and (3) best estimate of selling price. We are able to establish VSOE of selling price for certain of our radio deliverables; however, in most instances we have allocated consideration based upon our best estimate of selling price. We established VSOE of selling price for certain radio deliverables by demonstrating that a substantial
34 Table of Contents majority of the recent standalone sales of those deliverables are priced within a relatively narrow range. However, our other deliverables generally are priced with a wide range of discounts/premiums as the result of a variety of factors including the size of the advertiser and the volume and placement of advertising sold to the advertiser. Our best estimate of selling price is intended to represent the price at which it would sell the deliverable if we were to sell the item regularly on a standalone basis. Our estimates consider market conditions, such as competitor pricing pressures, as well as entity-specific factors that are consistent with normal pricing practices, such as the recent history of the selling prices of similar products when sold on a standalone basis, the impact of the cost of customization, the size of the transaction, and other factors contemplated in negotiating the arrangement with the customer. The arrangement fee is recognized as revenue as the earnings process is completed, generally at the time each unit of accounting is fulfilled (i.e., when magazines are on sale or when the digital impressions are served).
Print advertising revenues are generally recorded upon the on-sale dates of the magazines and are stated net of agency commissions and cash and sales discounts. Subscription revenues are recognized on a straight-line basis over the life of the subscription as issues are delivered. Newsstand revenues are initially recognized based on estimates with respect to future returns, net of brokerage, and net of estimates of newsstand-related fees. We base our estimates on our historical experience and current market conditions. Books revenues are recorded as manuscripts are delivered to and/or accepted by our publisher. If sales on a unit basis were to exceed the initial royalty advanced for an individual title or in certain cases, advances on cross- collateralized titles, then further revenues would be recorded. Digital advertising revenues are generally based on the sale of impression-based and sponsorship advertisements, which are recorded in the period in which the advertisements are served.
Brand licensing-based revenues are accrued monthly based on the specific mechanisms of each contract. Payments are generally made by the Company's partners on a quarterly basis. Revenues are accrued based on estimated sales and adjusted as actual sales are reported by partners. These adjustments are typically recorded within three months of the initial estimates and have not been material. Any minimum guarantees are typically earned proportionately over the fiscal year.
Television revenues related to talent services are generally recognized when services are performed, regardless of when the episodes air. Licensing revenues from our radio programming are recorded on a straight-line basis over the term of the agreement.
We maintain reserves for all segment receivables, as appropriate. These reserves are adjusted regularly based upon actual results. Allowances for uncollectible receivables are estimated based upon a combination of write-off history, aging analysis, and any specific, known troubled accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.
Television Production Costs
Television production costs are capitalized and amortized based upon estimates of future revenues to be received and future costs to be incurred for the applicable television product. We base our estimates primarily on existing contracts for programs, historical advertising rates and ratings, as well as market conditions. Estimated future revenues and costs are adjusted regularly based upon actual results and changes in market and other conditions. In accordance with the accounting treatment associated with episodic television programming, we do not capitalize television production costs in excess of total contracted revenue.
Goodwill and Indefinite-Lived Intangible Assets
We review goodwill for impairment by applying a fair-value based test annually, or more frequently if events or changes in circumstances warrant, in accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”). Potential goodwill impairment is measured based upon a two-step process. In the first step, we compare the fair value of a reporting unit with our carrying amount including goodwill using a discounted cash flow (“DCF”) valuation method. The DCF analyses are based on the current operating budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other risks where appropriate. In addition, we analyze any difference between the sum of the fair values of the reporting units and our total market capitalization for reasonableness, taking into account certain factors, including control premiums.
If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired, thus rendering unnecessary the second step in impairment testing. If the fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of the reporting unit’s goodwill is compared to the carrying value of the goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
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Based on our quantitative assessment performed during the fourth quarter of 2013, the fair value of the goodwill within the Merchandising reporting unit exceeded its carrying value by more than 10%.
We review our trademarks, which are classified as intangible assets with indefinite useful lives within the Merchandising segment, for impairment by applying a fair-value based test annually or more frequently if events or changes in circumstances warrant, in accordance with ASC 350. We perform the impairment test by comparing the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. We estimate fair values based on the future expected cash flows, revenues, earnings and other factors, which consider reporting unit level historical results, current trends, and operating and cash flow projections. Significant judgments inherent in this analysis include estimating the amount of and timing of future cash flows and the selection of appropriate discount rates and long-term growth rate assumptions. Our estimates are subject to uncertainty, and may be affected by a number of factors outside our control, including general economic conditions, the competitive market and regulatory changes. If actual results differ from our estimate of future cash flows, revenues, earnings and other factors, we may record additional impairment charges in the future.
Based on our quantitative assessment performed during the fourth quarter of 2013, the fair value of our trademarks within the Merchandising reporting unit exceeded its carrying value by more than 20%.
Changes to our estimates and assumptions associated with the annual testing of our trademarks within our Merchandising reporting unit could materially affect the determination of fair value and could result in an impairment charge, which could be material to our financial position and results of operations. Increasing the discount rate we used by 1% would not have resulted in the carrying value exceeding the fair value for the trademarks within the Merchandising reporting unit.
Long-Lived and Definite-Lived Intangible Assets
We review long-lived tangible assets and intangible assets with definite useful lives for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable and exceeds their fair value, in accordance with ASC 360, “Property, Plant, and Equipment.” Using our best estimates based on reasonable assumptions and projections, we record an impairment loss to write down the assets to their estimated fair values if carrying values of such assets exceed their related undiscounted expected future cash flows. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value. We evaluate intangible assets with definite useful lives at the lowest level at which independent cash flows can be identified. We evaluate corporate assets or other long-lived assets at a consolidated entity or segment reporting unit level, as appropriate. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge, which could have a material adverse effect on our financial statements.
Deferred Income Tax Asset Valuation Allowance
We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. Our cumulative pre-tax loss in recent years represents sufficient negative evidence for us to determine that the establishment of a full valuation allowance against the deferred tax asset is appropriate. This valuation allowance offsets net deferred tax assets associated with future tax deductions, as well as carryforward items. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. See Note 10, Income Taxes, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for further discussion of income taxes.
Non-Cash Equity Compensation
We currently have a stock incentive plan that permits us to grant various types of stock-based incentives to key employees, directors and consultants. The primary types of incentives that have been granted under the plan are restricted shares of common stock, restricted stock unit awards and stock options. Restricted shares granted to employees are valued at the market value of traded shares on the date of grant. Performance-based awards are accrued as compensation expense based on the probable outcome of the performance condition, consistent with requirements of ASC Topic 718, Compensation—Stock Compensation. Service-based option awards are valued using a Black-Scholes option pricing model. We apply variable accounting to non-employee price-based restricted stock unit awards in accordance with the provisions of ASC Topic 718. The Black-Scholes option pricing model requires numerous assumptions, including expected volatility of our Class A Common Stock price and expected life of the option. Price-based options and price-based restricted stock unit awards are valued using the Monte Carlo Simulation method which takes into account assumptions such as expected volatility of our Class A Common Stock, the risk-free interest rate based on the contractual term of the award, expected dividend yield, vesting schedule, and the 36 Table of Contents probability that the market conditions of the award will be achieved. If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we adopt a different valuation model, the future period calculations of stock-based compensation expense may differ significantly from what we have recorded in the current period and could materially affect our financial statements.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
We are exposed to market rate risk for changes in interest rates as those rates relate to our investment portfolio. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We attempt to protect and preserve our invested funds by limiting default, market and reinvestment risk. To achieve this objective, we invest our excess cash in debt instruments of the United States Government and its agencies and in high-quality corporate issuers (including bank instruments and money market funds) and, by internal policy, limit both the term and amount of credit exposure to any one issuer. As of December 31, 2013, net unrealized gains and losses on these investments were not material. In 2013, we recorded approximately $0.8 million in interest income. Our future investment income may fluctuate due to changes in interest rates and levels of cash balances, or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates before their maturity.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth on pages F-1 through F-30 of this Annual Report on Form 10-K and is incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as of December 31, 2013. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2013 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2013 based on the framework in Internal Control—Integrated Framework (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our chief executive officer and chief financial officer concluded that our internal control over financial reporting was effective as of December 31, 2013 to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with United States generally accepted accounting principles.
The effectiveness of our internal control over financial reporting as of December 31, 2013, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included herein.
Evaluation of Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have determined that, during the fourth quarter of 2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.
We have audited Martha Stewart Living Omnimedia, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). Martha Stewart Living Omnimedia, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Martha Stewart Living Omnimedia, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2013 of Martha Stewart Living Omnimedia, Inc. and our report dated February 25, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York February 25, 2014
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Item 9B. Other Information.
None. PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is set forth in our Proxy Statement for our 2014 annual meeting of stockholders (our “Proxy Statement”) under the captions “PROPOSAL 1—ELECTION OF DIRECTORS—Information Concerning Nominees,” “INFORMATION CONCERNING EXECUTIVE OFFICERS,” “MEETINGS AND COMMITTEES OF THE BOARD—Code of Ethics” and “—Audit Committee,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and is hereby incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item is set forth in our Proxy Statement under the captions “MEETINGS AND COMMITTEES OF THE BOARD—Compensation Committee Interlocks and Insider Participation,” “COMPENSATION OF OUTSIDE DIRECTORS,” “DIRECTOR COMPENSATION TABLE,” “COMPENSATION COMMITTEE REPORT,” “COMPENSATION DISCUSSION AND ANALYSIS,” “SUMMARY COMPENSATION TABLE,” “GRANTS OF PLAN-BASED AWARDS IN 2013,” “EXECUTIVE COMPENSATION AGREEMENTS,” “OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2013,” “OPTION EXERCISES AND STOCK VESTED DURING 2013,” and “POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL” and is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item regarding beneficial ownership of our equity securities is set forth in our Proxy Statement under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and is hereby incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth certain information regarding our equity compensation plans as of December 31, 2013.
EQUITY COMPENSATION PLAN INFORMATION
Number of Securities Remaining Number of Securities Weighted- Available for Future to be Issued Exercise Price of Issuance Under upon Exercise of Outstanding Equity Compensatio Outstanding Options, n Plans (Excluding Options, Warrants Warrants and Securities Reflected and Rights Rights in Column (a) Plan Category (a) (b) (c) Equity Compensation plans approved by security holders: 6,243,758 (1) $ 5.23 6,517,550 (2) Equity Compensation plans not approved by security holders: — $ — N/A Total 6,243,758 N/A 6,517,550
(1) Includes 742,083 shares subject to awards the vesting of which are tied to service periods; and 970,000 shares subject to awards the vesting of which are tied to the satisfaction of pricing levels in respect of our Class A Common Stock. The weighted average exercise price reported in column (b) does not take these awards into account.
(2) Represents shares available for grant under the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is set forth in our Proxy Statement under the caption “CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS” and “MEETING AND COMMITTEES OF THE BOARD—Corporate Governance” and is hereby incorporated herein by reference. 40 Table of Contents
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in our Proxy Statement under the caption “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” and is hereby incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) Financial Statements and (2) the Financial Statement Schedule. See page F-1 of this Annual Report on Form 10-K.
(3) Exhibits:
Exhibit Number Exhibit Title 3.1 — Martha Stewart Living Omnimedia, Inc. Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1, as amended, file number 333-84001 (the “Registration Statement”)). 3.1.1 — Certificate of Designations of the Series A Preferred Stock of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to our Current Report on Form 8-K/A (file number 001-15395) filed on December 13, 2011). 3.2 — Fourth Amended and Restated By-Laws of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013). 4.1 — Warrant to purchase shares of Class A Common Stock, dated August 11, 2006 (incorporated by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2006 (the “September 2006 10-Q”)). 4.2 — Investor Rights Agreement dated as of December 6, 2011 by and between Martha Stewart Living Omnimedia, Inc. and J.C. Penney Corporation, Inc. (incorporated by reference to Exhibit 2 to the Schedule 13D (file number 001-15395) filed by J.C. Penney Company, Inc. on December 16, 2011). 4.3 — Certificate of Elimination of the Series A Preferred Stock of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013). 10.1† — 1999 Stock Incentive Plan (incorporated by reference to the Registration Statement), as amended by Exhibits 10.1.1, 10.1.2 and 10.1.3. 10.1.1† — Amendment No. 1 to the 1999 Stock Incentive Plan, dated as of March 9, 2000 (incorporated by reference to our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 1999 (the “1999 10-K”)). 10.1.2† — Amendment No. 2 to the Amended and Restated 1999 Stock Incentive Plan, dated as of May 11, 2000 (incorporated by reference to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2000). 10.1.3† — Amendment No. 3 to the Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to our Current Report on Form 8-K (file number 001-15395) filed on May 17, 2005 (the “May 17, 2005 8-K”)). 10.2† — 1999 Non-Employee Director Stock and Option Compensation Plan (incorporated by reference to the Registration Statement) as amended by Exhibit 10.2.1. 10.2.1† — Amendment No. 1 to the Martha Stewart Living Omnimedia, Inc. Non-Employee Director Stock and Option Compensation Plan (incorporated by reference to the May 17, 2005 8-K). 10.3 — Form of Intellectual Property License and Preservation Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.8 to the Registration Statement). 10.4† — Director Compensation Program (incorporated by reference to Exhibit 10.4 of our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 2011 (the “2011 10-K”)). 10.5 — Lease, dated August 20, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC (incorporated by reference to Exhibit 10.12 to the Registration Statement) as amended by Exhibits 10.6.1 and 10.6.2.
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Exhibit Number Exhibit Title 10.5.1 — First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.12.1 to our 1999 10-K). 10.5.2 — Sixth Lease Modification Agreement, dated as of June 14, 2007, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended March 31, 2008 (“March 2008 10-Q”)). 10.5.3* — Tenth Lease Modification Agreement, dated as of February 6, 2014, between RXR SL Owner LLC and Martha Stewart Living Omnimedia, Inc. 10.6* — Second Amendment, dated February 6, 2014, to the written agreement of lease dated as of February 2004, between RXR SL Owner LLC and Martha Stewart Living Omnimedia, Inc. 10.7† — Amended and Restated Employment Agreement, dated as of April 1, 2009, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (file number 001-15395) for the Quarter ended March 31, 2009 (“March 2009 10-Q”)). 10.7.1† — Letter Agreement, dated as of March 30, 2012, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended March 31, 2012 (“March 2012 10-Q”)). 10.7.2† — Letter Agreement, dated as of July 9, 2012, between Martha Stewart Living Omnimedia, Inc., Martha Stewart and MS Real Estate Management Company (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2012 (“September 2012 10-Q”)). 10.7.3† — Letter Agreement, dated as of July 2, 2013, between Martha Stewart Living Omnimedia, Inc., Martha Stewart and Lifestyle Research Center LLC (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (file number 001-15395) filed on July 3, 2013. 10.8 — Intangible Asset License Agreement, dated as of June 13, 2008, between Martha Stewart Living Omnimedia, Inc. and MS Real Estate Management Company (incorporated by reference to Exhibit 10.9 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2008), as amended by Exhibits 10.10.1 and 10.10.2. 10.8.1 — First Amendment, dated as of December, 2008, to the Intangible Asset License Agreement between MS Real Estate Management Company and Martha Stewart Living Omnimedia, Inc. dated as of June 13, 2008 (incorporated by reference to Exhibit 10.11.1 to our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 2009 (the “2009 10-K”)). 10.8.2 — Second Amendment, dated as of February 8, 2010, to the Intangible Asset License Agreement between MS Real Estate Management Company and Martha Stewart Living Omnimedia, Inc. dated as of June 13, 2008, as amended (incorporated by reference to Exhibit 10.11.2 to the 2009 10-K). 10.8.3 — Letter Agreement, dated as of July 9, 2012, between Martha Stewart Living Omnimedia, Inc. and MS Real Estate Management Company (incorporated by reference to Exhibit 10.1 to our September 2012 10-Q). 10.8.4 — Letter Agreement, dated as of July 2, 2013, between Martha Stewart Living Omnimedia, Inc., Martha Stewart and Lifestyle Research Center LLC (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (file number 001-15395) filed on July 3, 2013. 10.9† — Form of Restricted Stock Award Agreement for use under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file number 001-15395) filed on January 14, 2005). 10.10 — Publicity Rights Agreement, dated as of April 2, 2008, by and among Martha Stewart Living Omnimedia, Inc., MSLO Shared IP Sub LLC and Emeril J. Lagasse, III (incorporated by reference to Exhibit 10.4 to our March 2008 10-Q). 10.11 — Amended and Restated Loan Agreement, dated as of February 14, 2012, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.1 to our March 2012 10-Q).
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Exhibit Number Exhibit Title 10.11.1 — Amendment, dated January 11, 2013 to the Amended and Restated Loan Agreement, dated as of February 14, 2012, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. 10.11.2 — Amendment, dated May 9, 2013 to the Amended and Restated Loan Agreement, dated as of February 14, 2012, as amended, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2013). 10.11.3 — Pledge Agreement, dated May 9, 2013, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2013). 10.12 — Security Agreement, dated as of July 31, 2008, among Martha Stewart Living Omnimedia, Inc., MSLO Emeril Acquisition Sub LLC, and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to our September 2008 10-Q), as amended by Exhibits 10.18.1, 10.18.2, and 10.17.1. 10.12.1 — Waiver and Omnibus Amendment No. 1, dated as of June 18, 2009, to Loan Agreement dated as of April 4, 2008 by and among Bank of America, N.A., MSLO Emeril Acquisition Sub LLC and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2009). 10.12.2 — Amendment No. 2, dated as of August 7, 2009, to Security Agreement dated as of July 31, 2008 among Martha Stewart Living Omnimedia, Inc., Emeril Acquisition Sub LLC and Bank of America, (incorporated by reference to Exhibit 10.2 to our September 2009 10-Q). 10.13 — Continuing and Unconditional Guaranty dated as of April 4, 2008 executed by Martha Stewart Living Omnimedia, Inc., MSO IP Holdings, Inc., Martha Stewart, Inc., Body and Soul Omnimedia, Inc., MSLO Productions, Inc., MSLO Productions-Home, Inc., MSLO Productions-EDF, Inc. and Flour Productions, Inc. (incorporated by reference to Exhibit 10.8 to our March 2008 10-Q), as reaffirmed by Exhibit 10.22.1. 10.13.1 — Reaffirmation of Guaranty, dated as of August 7, 2009, executed by Martha Stewart Living Omnimedia, Inc., MSO IP Holdings, Inc., Martha Stewart, Inc., Body and Soul Omnimedia, Inc., MSLO Productions, Inc. MSLO Productions Home, Inc. MSLO Productions-EDF, Inc and Flour Productions, Inc. (incorporated by reference to Exhibit 10.3 to our September 2009 10-Q). 10.14 — Registration Rights Agreement, dated as of April 2, 2008, by and among Martha Stewart Living Omnimedia, Inc., Emeril's Food of Love Productions, L.L.C., emerils.com, LLC and Emeril J. Lagasse, III (incorporated by reference to Exhibit 10.9 to our March 2008 10-Q). 10.15† — Martha Stewart Living Omnimedia, Inc. Director Deferral Plan (incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 2008 (the “2008 10-K”)). 10.16† — Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (file number 001-15395) filed on May 20, 2008 (“May 20, 2008 8-K”)). 10.17† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Option Agreement and forms of related Notices (incorporated by reference to Exhibit 99.2 to our May 20, 2008 8-K). 10.18† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to our March 2011 10- Q). 10.19† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Unit Agreement for Directors (incorporated by reference to Exhibit 10.2 to our March 2011 10-Q). 10.20† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Grant Agreement (incorporated by reference to Exhibit 99.4 to our May 20, 2008 8-K). 10.21† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Appreciation Right Agreement and form of related Notice (incorporated by reference to Exhibit 99.5 to our May 20, 2008 8-K).
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Exhibit Number Exhibit Title 10.22† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Grant Agreement and form of related Acknowledgement (incorporated by reference to Exhibit 99.6 to our May 20, 2008 8-K). 10.23† — Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file number 001-15395) filed on February 12, 2009). 10.24† — Martha Stewart Living Omnimedia, Inc. Annual Incentive Plan (incorporated by reference to the Company's proxy statement filed in respect of its 2005 annual meeting of stockholders, dated as of April 7, 2005). 10.25† — Form of Martha Stewart Living Omnimedia, Inc. Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.1 to our June 2011 10-Q). 10.26† — Employment Agreement, dated as of May 24, 2011, between Martha Stewart Living Omnimedia, Inc. and Lisa Gersh (incorporated by reference to Exhibit 10.3 to our June 2011 10-Q). 10.26.1† — Letter Agreement dated December 19, 2012 between the Company and Lisa Gersh (incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K (file number 001-15395) filed on December 19, 2012). 10.27† — Employment Agreement, dated as of September 6, 2011, between Martha Stewart Living Omnimedia, Inc. and Kenneth P. West (incorporated by reference to Exhibit 10.4 to our September 2011 10-Q). 10.28† — Employment Agreement, dated as of August 22, 2011, between Martha Stewart Living Omnimedia, Inc. and Daniel Taitz (incorporated by reference to Exhibit 10.36 of our 2011 10-K). 10.28.1† — Letter Agreement between Martha Stewart Living Omnimedia, Inc. and Daniel Taitz, dated December 13, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file number 001-15395) filed on December 17, 2013. 10.29† — Employment Agreement, dated as of October 25, 2013, between Martha Stewart Living Omnimedia, Inc. and Daniel W. Dienst (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2013). 10.30 — Securities Purchase Agreement, dated as of December 6, 2011, by and between Martha Stewart Living Omnimedia, Inc. and J.C. Penney Corporation, Inc. (incorporated by reference to Exhibit 1 to the Schedule 13D (file number 001-15395) filed by J.C. Penney Company, Inc. on December 16, 2011). 10.31†* — Separation Agreement and General Release, dated as of February 19, 2014, between Martha Stewart Living Omnimedia, Inc. and Joseph Lagani. 10.32+ — JCP/MSLO Agreement, dated as of December 6, 2011, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.39 to our 2011 10-K), as amended by Exhibits 10.39.1 and 10.39.2. 10.32.1 — First Amendment, dated as of January 4, 2012, to the JCP/MSLO Agreement, dated as of December 6, 2011, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.39.1 of our 2011 10-K). 10.32.2 — Second Amendment, dated as of July 11, 2012, to the JCP/MSLO Agreement, dated as of December 6, 2011, by and between J. C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.2 to our September 2012 10-Q). 10.32.3+ — Third Amendment, dated as of October 21, 2013, to the JCP/MSLO Agreement, dated as of December 6, 2011, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013. 10.32.4 — Mutual Release of Claims, dated as of October 21, 2013, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013.
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Exhibit Number Exhibit Title 21* — List of Subsidiaries. 23.1* — Consent of Independent Registered Public Accounting Firm. 31.1* — Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* — Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* — Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS — XBRL Instance Document 101.SCH — XBRL Taxonomy Extension Schema Document 101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF — XBRL Taxonomy Extension Definition Linkbase Document 101.LAB — XBRL Taxonomy Extension Label Linkbase Document 101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document
† Indicates management contracts and compensatory plans.
+ Indicates that confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
* Indicates filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 25, 2014
MARTHA STEWART LIVING OMNIMEDIA, INC.
By: /s/ DANIEL W. DIENST Daniel W. Dienst Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Capacity
/s/ DANIEL W. DIENST Chief Executive Officer (Principal Executive Officer) Daniel W. Dienst
/s/ KENNETH P. WEST Chief Financial Officer (Principal Financial Officer) Kenneth P. West
/s/ ALLISON JACQUES Controller (Principal Accounting Officer) Allison Jacques
/s/ ARLEN KANTARIAN Director Arlen Kantarian
/s/ WILLIAM A. ROSKIN Director William A. Roskin
/s/ MARGARET M. SMYTH Director Margaret M. Smyth
/s/ MARTHA STEWART Director Martha Stewart
/s/ PIERRE DEVILLEMEJANE Director Pierre deVillemajane
Each of the above signatures is affixed as of February 25, 2014
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm F-2 Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 F-3 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2013, 2012 and 2011 F-4 Consolidated Balance Sheets at December 31, 2013 and 2012 F-5 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012, and 2011 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011 F-7 Notes to Consolidated Financial Statements F-8 Financial Statement Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2013, 2012 and 2011 F-30
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
F-1 Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Martha Stewart Living Omnimedia, Inc.
We have audited the accompanying consolidated balance sheets of Martha Stewart Living Omnimedia, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index on page F-1 of this Annual Report on Form 10-K. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Martha Stewart Living Omnimedia, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Martha Stewart Living Omnimedia Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 25, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York February 25, 2014
F-2 Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2013, 2012 and 2011 (in thousands except share and per share data)
2013 2012 2011 REVENUES Publishing $ 96,493 $ 122,540 $ 140,857 Merchandising 59,992 57,574 48,614 Broadcasting 4,190 17,513 31,962 Total revenues 160,675 197,627 221,433 Production, distribution and editorial (73,121) (103,347) (127,084) Selling and promotion (45,033) (52,453) (57,208) General and administrative (39,945) (45,148) (46,641) Depreciation and amortization (3,758) (4,007) (3,978) Restructuring charges (3,439) (4,811) (5,116) Goodwill impairment — (44,257) — Gain on sale of subscriber list, net 2,724 — — OPERATING LOSS (1,897) (56,396) (18,594) Interest income / (expense), net 792 1,202 (197) Other (expense) / income, net (583) 711 4,852 LOSS BEFORE INCOME TAXES (1,688) (54,483) (13,939) Income tax provision (84) (1,602) (1,580) NET LOSS $ (1,772) $ (56,085) $ (15,519) LOSS PER SHARE—BASIC AND DILUTED Net loss $ (0.03) $ (0.83) $ (0.28) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted 64,912,368 67,231,463 55,880,896
The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the Years Ended December 31, 2013, 2012 and 2011 (in thousands)
2013 2012 2011 Net loss $ (1,772) $ (56,085) $ (15,519) Other comprehensive loss: Unrealized loss on securities, net (41) (272) (48) Other comprehensive loss (41) (272) (48) Total comprehensive loss $ (1,813) $ (56,357) $ (15,567)
The accompanying notes are an integral part of these consolidated financial statements.
F-4 Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED BALANCE SHEETS December 31, 2013 and 2012 (in thousands except share and per share data)
2013 2012 ASSETS CURRENT ASSETS Cash and cash equivalents $ 21,884 $ 19,925 Short-term investments 19,268 29,182 Restricted cash and investments 5,072 — Accounts receivable, net 39,694 38,073 Paper inventory 2,901 4,580 Deferred television production costs 228 434 Other current assets 3,648 3,335 Total current assets 92,695 95,529 PROPERTY AND EQUIPMENT, net 7,961 10,738 GOODWILL, net 850 850 OTHER INTANGIBLE ASSETS, net 45,200 45,203 OTHER NONCURRENT ASSETS 1,661 1,940 Total assets $ 148,367 $ 154,260 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 12,464 $ 13,132 Accrued payroll and related costs 8,665 9,316 Current portion of deferred subscription revenue 7,632 13,168 Current portion of other deferred revenue 17,227 5,605 Total current liabilities 45,988 41,221 DEFERRED SUBSCRIPTION REVENUE 3,587 4,478 OTHER DEFERRED REVENUE 17,307 1,113 DEFERRED INCOME TAX LIABILITY 7,094 7,117 OTHER NONCURRENT LIABILITIES 3,916 4,815 Total liabilities 77,892 58,744 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY Series A Preferred Stock, zero issued and outstanding in 2013, 1 share issued and outstanding in 2012 — — Class A Common Stock, $0.01 par value, 350,000,000 shares authorized; 30,704,491 and 41,220,689 shares issued in 2013 and 2012, respectively; 30,645,091 and 41,161,289 shares outstanding in 2013 and 2012, respectively 307 412 Class B Common Stock, $0.01 par value, 150,000,000 shares authorized; 25,984,625 shares issued and outstanding in 2013 and 2012 260 260 Capital in excess of par value 342,213 340,586 Accumulated deficit (271,051) (244,529) Accumulated other comprehensive loss (479) (438) 71,250 96,291 Less: Class A treasury stock—59,400 shares at cost (775) (775) Total shareholders’ equity 70,475 95,516 Total liabilities and shareholders’ equity $ 148,367 $ 154,260
The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2013, 2012 and 2011 (in thousands)
Accumulated Capital in Other Class A Class B excess of Accumulated Comprehensive Class A Common Stock Common Stock par value Deficit Loss Treasury Stock Total Shares Amount Shares Amount Shares Amount Balance at December 31, 2010 28,813 $ 288 26,318 $ 263 $ 295,576 $ (156,201) $ (118) (59) $ (775) $139,033
Net loss — — — — — (15,519) — — — (15,519) Other comprehensive loss — — — — — — (48) — — (48) Conversion of shares 333 3 (333) (3) — — — — — — Issuance of shares in conjunction with stock option exercises 840 8 — — 1,704 — — — — 1,712 Issuance of shares of stock, restricted stock units and restricted stock, net of tax withholdings and restricted stock cancellations (32) — — — (78) — — — — (78) Issuance of shares of stock in connection with equity sale, net of expenses 11,000 110 — — 34,483 — — — — 34,593 Common stock dividends — — — — — (16,722) — — — (16,722) Non-cash equity compensation, net of cancellations — — — — 4,976 — — — — 4,976 Balance at December 31, 2011 40,954 409 25,985 260 336,661 (188,442) (166) (59) (775) 147,947
Net loss — — — — — (56,085) — — — (56,085) Other comprehensive loss — — — — — — (272) — — (272) Issuance of shares in conjunction with stock option exercises 78 1 — — 152 — — — — 153 Issuance of shares of stock and restricted stock units, net of tax withholdings 189 2 — — (159) — — — — (157) Common stock dividends — — — — — (2) — — — (2) Non-cash equity compensation, net of cancellations — — — — 3,932 — — — — 3,932 Balance at December 31, 2012 41,221 412 25,985 260 340,586 (244,529) (438) (59) (775) 95,516
Net loss — — — — — (1,772) — — — (1,772) Other comprehensive loss — — — — — — (41) — — (41) Issuance of shares in conjunction with stock option exercises 60 1 — — 115 — — — — 116 Issuance of shares of stock and restricted stock units, net of tax withholdings 424 4 — — (467) — — — — (463) Return and retirement of shares of stock - settlement with minority investor (11,000) (110) — — (24,750) — — — (24,860) Non-cash equity compensation, net of cancellations — — — — 1,979 — — — — 1,979 Balance at December 31, 2013 30,705 $ 307 25,985 $ 260 $ 342,213 $ (271,051) $ (479) (59) $ (775) $ 70,475
The accompanying notes are an integral part of these consolidated financial statements.
F-6 Table of Contents
MARTHA STEWART LIVING OMNIMEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2013, 2012 and 2011 (in thousands)
2013 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,772) $ (56,085) $ (15,519) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Non-cash revenue (1,840) (541) (1,062) Depreciation and amortization 3,758 4,007 3,978 Amortization of deferred television production costs 737 7,457 23,964 Impairment charge — 44,257 — Other-than-temporary loss on cost-based investments — 88 2,724 Non-cash equity compensation 1,979 3,939 5,020 Deferred income tax expense (23) 1,243 1,347 (Income) / loss on equity securities — — (15) Gain on sale of subscriber list, net (2,724) — — Gain on sales of cost-based investments — (1,165) (7,647) Other non-cash charges, net (544) 224 1,907 Changes in operating assets and liabilities Accounts receivable, net (1,621) 10,164 11,013 Paper Inventory 1,543 2,645 (1,916) Deferred television production costs (531) (7,891) (21,395) Accounts payable and accrued liabilities and other (479) (10,447) (6,041) Accrued payroll and related costs (651) 2,308 467 Deferred subscription revenue (4,240) (2,347) (3,270) Deferred revenue 4,796 (221) 2,241 Other changes (346) 2,604 1,984 Total changes in operating assets and liabilities (1,529) (3,185) (16,917) Net cash (used in) / provided by operating activities (1,958) 239 (2,220) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,090) (1,314) (2,879) Purchases of short-term investments (16,888) (38,113) (8,414) Sales of short-term investments 21,683 19,344 7,179 Proceeds from the sale of cost-based investment — 1,165 11,000 Proceeds from the sale of subscriber list, net 673 — — Net cash provided by (used in) investing activities 4,378 (18,918) 6,886 CASH FLOWS FROM FINANCING ACTIVITIES Repayment of long-term debt — — (9,000) Dividend paid — (2) (16,722) Proceeds from equity sale, net of expenses — — 34,593 Proceeds from exercise of stock options 116 153 1,712 Change in restricted cash (577) — — Net cash (used in) / provided by financing activities (461) 151 10,583 Net increase / (decrease) in cash 1,959 (18,528) 15,249 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,925 38,453 23,204 CASH AND CASH EQUIVALENTS, END OF YEAR $ 21,884 $ 19,925 $ 38,453
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Return of shares of stock in connection with settlement with minority investor $ 24,860 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Martha Stewart Living Omnimedia, Inc. (together with its wholly owned subsidiaries, the “Company”) is an integrated media and merchandising company providing consumers with inspiring lifestyle content and well-designed, high-quality products. The Company’s business segments are Publishing, Merchandising and Broadcasting. The Publishing segment primarily consists of the Company’s operations related to its magazines and books, as well as its digital operations which includes the content-driven website, marthastewart.com. The Merchandising segment consists of the Company’s operations related to the design and branding of merchandise and related collateral and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Broadcasting segment consists of the Company's limited television operations and its satellite radio operations. The Company significantly restructured its Publishing and Broadcasting segments; see Note 15, Industry Segments, for further discussion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent accounting standards
In November 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Income Taxes (Topic 740) ("ASU 2013-11"). The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted ASU 2013-11 on January 1, 2014 and does not expect ASU 2013-11 to have an impact on its consolidated financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” ("ASU 2013-02") which supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income" and 2011-12 "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" for all public organizations. The amendment requires an entity to provide additional information about reclassifications out of accumulated other comprehensive income. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. generally accepted accounting principles ("GAAP") to be reclassified to net income in its entirety in the same reporting period. The adoption of ASU 2013-02 concerns disclosure only. The Company adopted ASU 2013-02 effective January 1, 2013 and has presented the required disclosures in the Notes to Consolidated Financial Statements. See Note 4, Accumulated Other Comprehensive Loss, for further discussion.
Principles of consolidation
The consolidated financial statements include the accounts of all wholly owned subsidiaries. Investments in which the Company does not exercise significant influence over the investee are accounted for using the cost method of accounting. All intercompany transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with GAAP 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.
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Cash and cash equivalents
Cash and cash equivalents include cash equivalents that mature within three months of the date of purchase.
Short-term investments
Short-term investments include investments that have maturity dates in excess of three months, but generally less than one year, from the date of acquisition. See Note 3, Fair Value Measurements, for further discussion.
Paper inventory
Inventory consisting of paper is stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
Television production costs
Television production costs are capitalized and amortized based upon estimates of future revenues to be received and future costs to be incurred for the applicable television product. The Company bases its estimates primarily on existing contracts for programs, historical advertising rates and ratings, as well as market conditions. Estimated future revenues and costs are adjusted regularly based upon actual results and changes in market and other conditions. In accordance with the accounting treatment associated with episodic television programming, the Company does not capitalize television production costs in excess of total contracted revenue.
Property and equipment
Property 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 of the Company’s assets are as follows:
Building 5 years Furniture, fixtures and equipment 3 – 5 years Computer hardware and software 3 – 5 years Leasehold improvements life of lease
Goodwill and intangible assets
Goodwill
The components of goodwill as of December 31, 2013 and 2012 are set forth in the schedule below:
Publishing Merchandising Total Balance at December 31, 2011 $ 44,257 $ 850 $ 45,107 Impairment charge (44,257) (44,257) Balance at December 31, 2012 $ — $ 850 $ 850
Balance at December 31, 2013 $ — $ 850 $ 850
The Company reviews goodwill for impairment by applying a fair-value based test annually on October 1st, or more frequently if events or changes in circumstances warrant, in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other" ("ASC 350"). Potential goodwill impairment is measured based upon a two-step process. In the first step, the Company compares the fair value of a reporting unit with its carrying amount including goodwill using a discounted cash flow (“DCF”) valuation method. Future cash flows are discounted based on a market comparable weighted average cost of capital rate, adjusted for market and other risks where appropriate. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the reporting unit is considered not impaired, thus rendering unnecessary the second step in impairment testing. If the fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of the reporting unit's goodwill is compared to the carrying value of the goodwill. The implied fair value of
F-9 Table of Contents the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, the difference is recognized as an impairment charge.
During 2013 and 2012, the Company performed its annual fair-value based test for impairment on Merchandising segment goodwill in accordance with the methodology described above. There were no impairment charges recorded for the goodwill associated with the Merchandising segment as a result of these impairment tests.
During 2012, and in connection with the continued softness in the print publishing industry overall as well as steadily declining 2012 actual results as compared to the 2012 operating budget, the Company closely monitored the fair value of the Publishing segment. In September 2012, the Company gained visibility into the three months ending December 31, 2012, which indicated a further shortfall in Publishing segment advertising revenues as compared to the operating budget. Accordingly, the Company performed an interim review of goodwill for impairment as of September 30, 2012, which determined that the implied fair value of the Publishing reporting unit's goodwill was zero. Therefore, the Company recorded a non-cash goodwill impairment charge of $44.3 million for the three-month period ended September 30, 2012.
Intangible and long lived tangible assets
The components of intangible assets as of December 31, 2013, 2012 and 2011 are set forth in the schedule below, and are reported within the Merchandising and Broadcasting segments:
Accumulated amortization Trademarks Other intangibles — other intangibles Total Balance at December 31, 2011 $ 45,200 $ 6,160 $ (6,145) $ 45,215 Amortization expense — — (12) (12) Balance at December 31, 2012 $ 45,200 $ 6,160 $ (6,157) $ 45,203 Amortization expense — — (3) (3) Balance at December 31, 2013 $ 45,200 $ 6,160 $ (6,160) $ 45,200
The Company reviews its trademarks, which are classified as intangible assets with indefinite useful lives within the Merchandising segment, for impairment by applying a fair-value based test annually or more frequently if events or changes in circumstances warrant, in accordance with ASC 350. The Company performs the impairment test by comparing the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. The Company estimates fair values using the DCF methodology based on the future expected cash flows, revenues, earnings and other factors, which consider historical results, current trends, and operating and cash flow projections. The Company’s estimates are subject to uncertainty, and may be affected by a number of factors outside its control, including general economic conditions, the competitive market and regulatory changes. If actual results differ from the Company’s estimate of future cash flows, revenues, earnings and other factors, it may record impairment charges in the future. For 2013, 2012, and 2011, no impairment charges for intangible assets with indefinite useful lives were recorded.
The Company reviews long-lived tangible assets and intangible assets with definite useful lives for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable and exceeds their fair value, in accordance with ASC 360, “Property, Plant, and Equipment.” Using the Company’s best estimates based on reasonable assumptions and projections, the Company records an impairment loss to write down the assets to their estimated fair values if carrying values of such assets exceed their related undiscounted expected future cash flows. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value. The Company evaluates intangible assets with definite useful lives at the lowest level at which independent cash flows can be identified. The Company evaluates corporate assets or other long-lived assets at a consolidated entity or segment reporting unit level, as appropriate.
The Company amortizes intangible assets with definite lives over their estimated useful lives and reviews these assets for impairment.
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For the years ended December 31, 2013 and 2012, no impairment charges for long-lived tangible and intangible assets with definite useful lives were recorded.
Investments in other non-current assets
During 2012, the Company sold its cost-based investments for $1.2 million in cash. The carrying amounts of these investments had been written down to zero as of December 31, 2011, when the Company concluded that these investments were substantially impaired due to their continued operating losses, cash levels and inability to raise additional capital. Accordingly, during 2012, the Company recorded a gain of $1.2 million in connection with these sale transactions. These gains represent cash received in excess of carrying value and are included in Other Income on the Company’s 2012 consolidated statement of operations.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Allowances for uncollectible receivables are estimated based upon a combination of write-off history, aging analysis, and any specific, known troubled accounts.
Magazine advertising revenues are recorded based on the on-sale dates of magazines when the advertisement appears in the magazine and are stated net of agency commissions and cash and sales discounts.
Deferred subscription revenue results from advance payments for subscriptions received from subscribers and is recognized on a straight-line basis over the life of the subscription as issues are delivered.
Newsstand revenues are recognized based on the on-sale dates of magazines and are initially recorded based upon estimates of sales, net of returns, brokerage and estimates of newsstand-related fees. Estimated returns are recorded based upon historical experience.
Deferred book revenue results from advance payments received from the Company’s publishers and is recognized as manuscripts are delivered to and accepted by the publishers. Revenue is also earned from book publishing as sales on a unit basis exceed the advanced royalty.
Digital advertising revenues on the Company’s websites and on partner sites are generally based upon the sale of impression-based and sponsorship advertisements. Revenue generated from partner sites may be recorded gross or net of the partners' commissions, in accordance with the terms of the specific contracts. Digital advertising revenues are recorded in the period in which the advertisements are served.
Royalties from product designs and other Merchandising segment revenues are recognized on a monthly basis based on the specific mechanisms within each contract. Payments are typically made by the Company’s partners on a quarterly basis. Generally, revenues are recognized based on actual net sales, while any minimum guarantees are earned proportionately over the fiscal year.
Revenues related to television talent services for programming produced by third parties are generally recognized when services are performed, regardless of when the episodes air, within the Merchandising segment.
Television sponsorship revenues are generally recorded over the initial airing of new episodes. Licensing revenues from the Company’s radio programming are recorded on a straight-line basis over the term of the agreement.
Historically, the Company's Broadcasting segment included significant television production operations. In connection with those historical operations, the Company recognized television spot advertising, integration and licensing revenues. Television spot advertising beginning with season 6 of The Martha Stewart Show in September 2010 was sold by the Hallmark Channel, with net receipts payable to the Company quarterly. Since advertisers contracted with the Hallmark Channel directly, balance sheet reserves for television audience underdelivery were not required; however, revenues continued to be recognized when commercials were aired and were recorded net of agency commission and the impact of television audience underdelivery as determined by Hallmark Channel. Television integration revenues were recognized when the segment featuring the related product/brand immersion was initially aired. Television licensing revenues for content produced by the Company were recorded as earned in accordance with the specific terms of each agreement and were generally recognized upon delivery of the episodes to the licensee, provided that the license period began.
The Company participates in certain arrangements containing multiple deliverables. These arrangements generally consist of custom-created advertising programs delivered on multiple media platforms, as well as licensing programs which
F-11 Table of Contents may also be supported by various promotional plans. Examples of significant program deliverables include print advertising pages in the Company’s publications, custom-created video content and integration on the Company's websites as well as advertising impressions delivered on the Company’s and partner websites.
ASC Topic 605, Revenue Recognition ("ASC 605") and ASU 09-13 require that the Company examine separate contracts with the same entity or related parties that are entered into simultaneously or near the same time to determine if the arrangements should be considered a single arrangement in the determination of units of accounting. While both ASC 605 and ASU 09-13 require that units delivered have standalone value to the customer, ASU 09-13 modifies the separation criteria in determining units of accounting by eliminating the requirement to obtain objective and reliable evidence of the fair value of undelivered items. As a result of the elimination of this requirement, the Company’s significant program deliverables generally meet the separation criteria under ASU 09-13, whereas under ASC 605 they did not qualify as separate units of accounting.
For those arrangements accounted for under ASC 605, if the Company is unable to put forth objective and reliable evidence of the fair value of each deliverable, then the Company accounts for the deliverables as a combined unit of accounting rather than separate units of accounting. In this case, revenue is recognized as the earnings process is completed, generally over the fulfillment term of the last deliverable.
For those arrangements accounted for under ASU 09-13, the Company is required to allocate revenue based on the relative selling price of each deliverable which qualifies as a unit of accounting, even if such deliverables are not sold separately by either the Company itself or other vendors. Determination of selling price is a judgmental process that requires numerous assumptions. The consideration is allocated at the inception of the arrangement to all deliverables based upon their relative selling prices. Selling prices for deliverables that qualify as separate units of accounting are determined using a hierarchy of: (1) vendor-specific objective evidence (“VSOE”), (2) third-party evidence and (3) best estimate of selling price. The Company, in most instances, has allocated consideration based upon its best estimate of selling price. The Company’s deliverables are generally priced with a wide range of discounts/premiums as the result of a variety of factors including the size of the advertiser and the volume and placement of advertising sold to the advertiser. The Company’s best estimate of selling price is intended to represent the price at which it would sell the deliverable if the Company were to sell the item regularly on a standalone basis. The Company’s estimates consider market conditions, such as competitor pricing pressures, as well as entity- specific factors that are consistent with normal pricing practices, such as the recent history of the selling prices of similar products when sold on a standalone basis, the impact of the cost of customization, the size of the transaction, and other factors contemplated in negotiating the arrangement with the customer. The arrangement fee is recognized as revenue as the earnings process is completed, generally at the time each unit of accounting is fulfilled (i.e., when magazine advertisements are run or when the digital impressions are served).
Advertising costs
Advertising costs, consisting primarily of direct-response advertising, are expensed in the period in which the related advertising campaign occurs.
Earnings per share
Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur from the exercise of stock options and the vesting of restricted stock and restricted stock units and, in 2012 and 2011, the vesting of shares covered under a warrant. For the years ended December 31, 2013, 2012 and 2011, the shares of the Company’s $0.01 par value Class A common stock (“Class A Common Stock”) subject to options, the warrant, restricted stock and restricted stock units that were excluded from the computation of diluted earnings per share because their effect would have been antidilutive were 5,445,252, 5,883,719, and 7,345,060, respectively.
Equity compensation
The Company has issued stock-based compensation to certain of its employees. In accordance with the fair-value recognition provisions of ASC Topic 718, Share-Based Payments (“ASC Topic 718”) and SEC Staff Accounting Bulletin No. 107, compensation cost associated with employee grants recognized in the 2013, 2012 and 2011 was based on the grant date fair value. Employee stock option, restricted stock, and restricted stock unit ("RSU") awards with service period-based vesting triggers (“service period-based” awards) are amortized as non-cash equity compensation expense on a straight-line basis over the expected vesting period. The Company values service period-based option awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires numerous assumptions, including volatility of the Company’s Class A Common Stock and expected life of the option. Service period-based restricted stock and RSU awards are valued at the market value of traded shares on the date of grant. Recognition of compensation expense for awards intended to vest upon the achievement of certain adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) F-12 Table of Contents targets over a performance period (“performance-based” awards) is based on the probable outcome of the performance condition. Compensation cost is accrued if it is probable that the performance condition will be achieved and is not accrued if it is not probable that the performance condition will be achieved. Options and RSUs with Class A Common Stock price-based vesting triggers (“price-based” awards) are valued using the Monte Carlo Simulation method which takes into account assumptions such as volatility of the Company’s Class A Common Stock, the risk-free interest rate based on the contractual term of the award, the expected dividend yield, the vesting schedule, and the probability that the market conditions of the award will be achieved. Compensation expense for price-based awards is recognized over the respective award's derived service period as calculated under the Monte Carlo Simulation method.
Other
Certain prior year financial information has been reclassified to conform to the 2013 financial statement presentation.
3. FAIR VALUE MEASUREMENTS
The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are:
• Level 1: Observable inputs such as quoted prices for identical assets and liabilities in active markets obtained from independent sources.
• Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data. The fair value of the Company’s level 2 financial assets is primarily obtained from observable market prices for identical underlying securities that may not be actively traded. Certain of these securities may have different market prices from multiple market data sources, in which case a weighted average market price is used.
• Level 3: Unobservable inputs for which there is little or no market data and require the Company to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.
The following tables present the Company’s assets that are measured at fair value on a recurring basis:
December 31, 2013 Quoted Market Significant Prices in Active Other Significant Markets for Observable Unobservable Total Identical Assets Inputs Inputs Fair Value (in thousands) (Level 1) (Level 2) (Level 3) Measurements Short-term investments: Mutual funds $ 2,485 $ — $ — $ 2,485 U.S. government and agency securities — 2,233 — 2,233 Corporate obligations — 14,159 * — 14,159 Other fixed income securities — 361 — 361 International securities — 3,048 — 3,048 Municipal obligations 1,477 1,477 Total $ 2,485 $ 21,278 $ — $ 23,763
* Included in this amount is a $4.5 million corporate obligation which has been used to collateralize the Company's line of credit with Bank of America, and is included in the line item "Restricted cash and investments," a component of current assets, on the 2013 consolidated balance sheet. See Note 7, Credit Facilities, for further details.
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December 31, 2012 Quoted Market Significant Prices in Active Other Significant Markets for Observable Unobservable Total Identical Assets Inputs Inputs Fair Value (in thousands) (Level 1) (Level 2) (Level 3) Measurements Short-term investments: Mutual funds $ 2,507 $ — $ — $ 2,507 U.S. government and agency securities — 3,510 — 3,510 Corporate obligations — 12,796 — 12,796 Other fixed income securities — 588 — 588 International securities — 9,781 — 9,781 Total $ 2,507 $ 26,675 $ — $ 29,182
Assets measured at fair value on a nonrecurring basis
The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment, are initially measured at cost or fair value. In the event there is an indicator of impairment, such asset's carrying value is adjusted to current fair value only when an impairment charge is recognized. Such impairment charges incorporate fair value measurements based on Level 3 inputs.
The Company has no liabilities that are measured at fair value on a recurring basis.
4. Accumulated Other Comprehensive Loss
Comprehensive income / (loss), which is reported in the accompanying consolidated statements of shareholders' equity, consists of net income / (loss) and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income / (loss). For the Company, the components of other comprehensive income / (loss) consist of unrealized losses on securities, net. The total net loss realized from accumulated other comprehensive loss was $0.6 million, $0.4 million and $0.1 million for 2013, 2012 and 2011 respectively. These amounts have been presented as "Other (expense) / income, net," on the consolidated statements of operations.
5. ACCOUNTS RECEIVABLE, NET
The components of accounts receivable at December 31, 2013 and 2012 were as follows:
(in thousands) 2013 2012 Advertising $ 19,190 $ 21,220 Licensing 19,218 15,978 Other 2,134 2,492 40,542 39,690 Less: reserve for credits and uncollectible accounts 848 1,617 $ 39,694 $ 38,073
6. PROPERTY AND EQUIPMENT, NET
The components of property and equipment at December 31, 2013 and 2012 were as follows:
(in thousands) 2013 2012 Buildings $ 285 $ 280 Furniture, fixtures and equipment 5,541 5,420 Computer hardware and software 10,174 9,828 Leasehold improvements 26,310 26,151 Total Property and Equipment 42,310 41,679 Less: accumulated depreciation and amortization 34,349 30,941 $ 7,961 $ 10,738
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Depreciation and amortization expenses related to property and equipment were $3.8 million, $4.0 million and $3.9 million for 2013, 2012 and 2011, respectively. The Company's property and equipment are located domestically.
7. CREDIT FACILITIES
In May 2013, pursuant to the Amendment to Amended and Restated Loan Agreement between the Company and Bank of America, N.A., (the "Amended Credit Agreement"), the Company reduced its line of credit with Bank of America from $10.0 million to $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. The annual interest rate on outstanding amounts is equal to a floating rate of 1-month LIBOR Daily Floating Rate plus 1.85%. The unused commitment fee is 0.25%. In connection with the Amended Credit Agreement, the Company entered into a Pledge Agreement, which provides that the line of credit must be secured by cash or investment collateral of at least $5.0 million. As of December 31, 2013, the Company had restricted investments of $4.5 million and restricted cash of $0.6 million, the aggregate of which is included in the line item "Restricted cash and investments," a component of current assets, on the 2013 consolidated balance sheet.
The Amended Credit Agreement expires June 12, 2014, at which time any outstanding amounts borrowed under the agreement are then due and payable. As of December 31, 2013 and December 31, 2012, the Company had no outstanding borrowings against its line of credit or the predecessor line of credit, but had outstanding letters of credit of $1.6 million on both dates.
8. SHAREHOLDERS’ EQUITY
Return of Shares
On October 21, 2013, the Company and J.C. Penney Corporation, Inc. (“J.C. Penney”) entered into the Third Amendment (the “Amendment”) to the J.C. Penney/MSLO Agreement dated December 6, 2011 (the “Commercial Agreement”). The Amendment reduced the term of the Commercial Agreement, and provided for the return of the 11,000,000 shares of Class A Common Stock, par value $0.01 per share, of the Company held by J.C. Penney (the “Returned Shares”) and the one (1) share of the Company’s Series A Preferred Stock, par value $0.01 per share, held by J.C. Penney (the “Series A Preferred Stock”). Upon surrender by J.C. Penney of the Returned Shares and the Series A Preferred Stock, the Company retired these shares and J.C. Penney removed its Series A designees from the Board of Directors (the “Board”) of the Company. Upon cancellation of the Series A Preferred Stock, J.C. Penney is no longer entitled to designate for election any members of the Company’s Board.
The Company concluded that the Commercial Agreement and the Amendment should be considered one overall arrangement. Accordingly, the modification was accounted for at the fair value of the returned shares, at approximately $24.9 million based upon the closing price of the shares on October 21, 2013. In connection with this non-cash transaction, the Company recorded charges to accumulated deficit and Class A Common Stock of approximately $24.8 million and $0.1 million, respectively. Offsetting these charges was other deferred revenue of approximately $24.9 million. The other deferred revenue is being recognized on a straight-line basis as royalty revenue within the Merchandising segment over the amended term (June 30, 2017). During the fourth quarter of 2013, the Company recognized approximately $1.3 million in non-cash royalty revenue related to this transaction.
Common Stock
The Company has two classes of common stock outstanding. The $0.01 par value 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. Each share of Class B Common Stock entitles its holder to ten votes and is convertible on a one-for-one basis to Class A Common Stock at the option of the holder and automatically upon most transfers.
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9. EMPLOYEE BENEFIT AND SHARE-BASED COMPENSATION PLANS
Retirement Plans
The Company established a 401(k) retirement plan effective July 1, 1997, available to substantially all employees. An employee can contribute up to a maximum of 25% of compensation to the plan, or the maximum allowable contribution by the Internal Revenue Code, whichever is less. The Company chooses, annually, to match 50% of the first 6% of compensation contributed. Employees vest ratably in employer-matching contributions over a period of four years of service. The employer- matching contributions, net of forfeitures, totaled approximately $0.7 million, $0.8 million and $0.6 million in 2013, 2012 and 2011, respectively.
The Company does not sponsor any post-retirement or post-employment benefit plans.
Stock Incentive Plans
Prior to May 2008, the Company had several stock incentive plans that permitted the Company to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans were stock options and restricted shares of Class A Common Stock. The Compensation Committee of the Board was authorized to grant awards for up to a maximum of 10,000,000 underlying shares of Class A Common Stock under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the “1999 Plan”), and awards for up to a maximum of 600,000 underlying shares of Class A Common Stock under the Company’s Non-Employee Director Stock and Option Compensation Plan (the “Non-Employee Director Plan”).
In April 2008, the Board adopted the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (the “Stock Plan”), which was approved by the Company’s stockholders at the Company’s 2008 annual meeting in May 2008. The Stock Plan initially had 10,000,000 shares of Class A Common Stock available for issuance. In March 2012, the Board adopted an amendment to the Stock Plan, which was approved by the Company's stockholder's at the Company's annual meeting in May 2012. The amendment provided for an increase of 4,557,000 in the number of shares of Class A Common Stock available for award. The primary types of incentives that have been granted under the Stock Plan are stock options and RSUs. The number of shares available for grant under the Stock Plan as of December 31, 2013 was 6,517,550.
Compensation expense is recognized in: production, distribution and editorial; selling and promotion; general and administrative; and restructuring expense lines of the Company’s consolidated statements of operations. For 2013, 2012 and 2011, the Company recorded non-cash equity compensation expense of $2.0 million, $3.9 million, and $5.0 million, respectively.
Stock Options
Options which were issued under the 1999 Plan were granted with an exercise price equal to the closing price of Class A Common Stock on the most recent prior date for which a closing price was available, without regard to after-hours trading. Options granted under the Stock Plan are granted with an exercise price equal to the closing price of the Class A Common Stock on the date of grant. Stock options have a term not to exceed 10 years. The Compensation Committee determines the vesting period and terms for the Company’s stock options, which may include service period-based, performance-based, or price-based vesting triggers. Generally, service period-based employee stock options vest over a period typically ranging from two to four years. Service period-based non-employee director options generally vest over a one-year period from the date of grant. Performance-based and price-based options vest only when the specific vesting triggers of the award are achieved. Option awards do not provide for accelerated vesting upon retirement, death, or disability unless specifically included in the applicable award agreement. The amount of non-cash equity compensation expense the Company recognizes during a period is based on the portion of the option awards that are ultimately expected to vest. The Company estimates option forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.
Non-cash equity compensation expense derived from options for 2013, 2012 and 2011 was $0.8 million, $1.7 million and $2.9 million, respectively. As of December 31, 2013, there was $1.0 million of total unrecognized compensation cost related to stock options to be recognized over a weighted average period of 2.87 years. Such amounts will be adjusted for changes in estimated forfeitures. The intrinsic value (defined as the difference between the market price on the date of exercise and the grant date price) of options exercised during 2013 was insignificant; in 2012 and 2011 this value was $0.1 million and $2.1 million, respectively.
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Prior Plans:
Changes in outstanding options under the 1999 Plan and the Non-Employee Director Plan (collectively, the "Prior Plans") during 2013 were as follows:
Weighted- Number of Weighted average shares average remaining subject to exercise contractual options price term Outstanding as of December 31, 2012 1,900,000 $ 13.31 Cancelled—service period-based (1,025,000) 21.01 Options exercisable and outstanding as of December 31, 2013 875,000 $ 7.06 4.17
No stock options were granted under the Prior Plans in 2013, 2012 or 2011. Vesting of shares subject to stock options under the Prior Plans was completed in 2011. The total fair value of shares subject to stock options vested under the Prior Plans during 2011 was $0.9 million.
Stock Plan:
The fair value of employee service period-based option awards under the Stock Plan was estimated on the grant dates using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions:
2013 2012 2011 Risk-free interest rates 0.5% – 1.0% 0.4% – 0.6% 0.17% - 2.09% Dividend yields Zero Zero Zero Expected volatility 58.45% – 60.34% 61.80% – 63.48% 60.38% – 61.25% Average expected term 3.7 years 3.7 years 1.0 – 7.0 years Average fair market value per option granted $1.15 $1.79 $1.67
Changes in outstanding options under the Stock Plan during 2013 were as follows:
Number of shares Weighted Weighted-average subject to average remaining Aggregate options exercise price contractual term intrinsic value Outstanding as of December 31, 2012 5,126,684 $ 5.08 Granted—service period-based 1,190,000 3.77 Exercised—service period-based (60,000) 1.96 Cancelled—service period-based (1,875,009) 6.43 Cancelled—priced-based (725,000) 9.56 Outstanding as of December 31, 2013 3,656,675 $ 4.38 7.79 $3,624,040 Options exercisable at December 31, 2013 2,115,580 $ 4.03 6.14 $2,615,240
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The total fair value of shares subject to stock options vested under the Stock Plan during 2013, 2012 and 2011 was $1.4 million, $0.9 million and $2.5 million, respectively. Changes in the nonvested outstanding options are as follows:
Weighted- average grant- Shares date fair value Nonvested options outstanding at December 31, 2010 3,220,171 $ 2.23 Granted-service period-based 1,740,559 1.80 Granted-price-based 825,000 1.63 Vested-service period-based (1,482,837) 2.23 Forfeited or expired-service period-based (1,096,542) 2.18 Nonvested options outstanding at December 31, 2011 3,206,351 $ 1.89 Granted-service period-based 505,000 1.72 Vested-service period-based (635,758) 1.75 Forfeited or expired-service period-based (392,477) 2.36 Nonvested options outstanding at December 31, 2012 2,683,116 $ 1.79 Granted-service period-based 1,190,000 0.90 Vested-service period-based (937,875) 1.73 Forfeited or expired-service period-based (669,146) 1.82 Forfeited or expired-price-based (725,000) 1.71 Nonvested options outstanding at December 31, 2013 1,541,095 $ 1.32
Stock option award to Chief Executive Officer in 2013
During the fourth quarter of 2013, the Company issued an option award under the Stock Plan to its newly appointed Chief Executive Officer, as provided for in his employment agreement. The award includes only service period-based vesting triggers and consists of an option to purchase an aggregate of 1,000,000 shares of Class A Common Stock comprised of four equal tranches with varying exercise prices. The stated exercise prices for each 250,000 option tranche is $2.75, $3.00, $4.00 and $5.00. One-third of each option tranche vests as to approximately 333,333 shares on each of December 31, 2014, 2015 and 2016. Non-cash equity compensation expense of approximately $0.1 million was recorded for the year ended December 31, 2013 related to this award. As of December 31, 2013, there was $0.7 million of total unrecognized compensation cost related to this service period-based stock option award to be recognized over a period of 3 years.
Restricted stock and RSUs
Restricted stock represents shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. RSUs represent the contingent right to one share of Class A Common Stock. The Compensation Committee determines the vesting period and terms for the Company’s restricted stock and RSUs, which may include service period-based, performance-based, or price-based vesting triggers. Service period-based restricted stock and RSUs generally vest over a period typically ranging from two to four years. Performance-based and price-based RSUs vest only when the specific vesting triggers of the award are achieved. The amount of non-cash equity compensation expense the Company recognizes during a period is based on the portion of the restricted stock and RSU awards that are ultimately expected to vest. The Company estimates restricted stock and RSU forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Restricted stock and RSUs do not provide for accelerated vesting upon retirement, death, or disability unless specifically included in the applicable award agreement.
Restricted stock and RSU expense for 2013, 2012 and 2011 was $1.1 million, $2.3 million and $2.1 million, respectively.
Service period-based restricted stock
The fair value of service period-based nonvested restricted stock under the Prior Plans was determined based on the most recent prior date for which a closing price was available, without regard to after-hours trading. Vesting of these awards was completed as of December 31, 2011. The total fair value of shares vested during 2011 was $0.4 million.
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The fair value of service period-based nonvested restricted stock under the Stock Plan was determined based on the closing price of the Company’s Class A Common Stock on the grant dates. The total fair value of shares vested in each of 2013 and 2012 was $0.1 million; in 2011 this amount was $0.9 million. A summary of the shares of service period-based restricted stock is as follows:
Weighted Average Grant Shares Date Value Outstanding and nonvested at December 31, 2010 320,922 $ 8.24 Granted 33,037 4.08 Vested (128,097) 7.45 Forfeitures (217,510) 8.53 Outstanding and nonvested at December 31, 2011 8,352 $ 4.49 Granted 25,202 3.26 Vested (33,554) 3.65 Outstanding and nonvested at December 31, 2012 — $ — Granted 26,966 2.71 Vested (26,966) 2.71 Outstanding and nonvested at December 31, 2013 — $ —
Service period-based RSUs
The fair value of service period-based nonvested RSUs under the Stock Plan was determined based on the closing price of the Company’s Class A Common Stock on the grant dates. The total fair value of shares vested during 2013 and 2012 was $1.4 million and $0.4 million, respectively. The fair value of shares vested during 2011 was insignificant. As of December 31, 2013, there was $1.4 million of total unrecognized compensation cost related to service period-based nonvested RSUs to be recognized over a weighted-average period of 2.8 years. A summary of the shares of service period-based RSUs is as follows:
Weighted Average Grant Shares Date Value Outstanding and nonvested at December 31, 2010 — $ — Granted 639,698 4.24 Vested (12,500) 3.95 Forfeitures (87,500) 3.95 Outstanding and nonvested at December 31, 2011 539,698 $ 4.29 Granted 302,163 3.19 Vested (119,635) 4.14 Forfeitures (2,500) 3.95 Outstanding and nonvested at December 31, 2012 719,726 $ 3.93 Granted 814,500 2.53 Vested (438,353) 3.64 Forfeitures (353,790) 3.89 Outstanding and nonvested at December 31, 2013 742,083 $ 2.69
Performance-based RSUs
During 2010 and 2009, the Company granted 550,000 and 351,625 RSUs, respectively, which contain vesting triggers based upon the Company’s achievement of certain adjusted EBITDA targets over a performance period.
During 2010, in recognition of changing economic conditions and to ensure the continued retention and motivation of key employees, the Company’s Compensation Committee approved modifications to the performance conditions associated with the RSUs issued during 2010 and 2009. The modifications effectively replaced performance condition vesting triggers with service-period vesting triggers. Consistent with requirements of ASC Topic 718, Compensation—Stock Compensation, the awards were amortized over the requisite service period on a prospective basis from the date the Compensation Committee approved the removal of the performance conditions (December 3, 2010), which is deemed to be the grant date for accounting F-19 Table of Contents purposes. As of December 31, 2013, all such awards had vested. The total fair value of these shares vested during 2013, 2012 and 2011 was $0.6 million, $0.2 million and $0.8 million, respectively. A summary of the performance-based RSUs is as follows:
Weighted Average Grant Shares Date Value (1) Outstanding and nonvested at December 31, 2010 720,000 $ 4.62 Vested (170,000) 4.62 Forfeitures (341,500) 4.62 Outstanding and nonvested at December 31, 2011 208,500 $ 4.62 Vested (50,500) 4.62 Forfeitures (17,500) 4.62 Outstanding and nonvested at December 31, 2012 140,500 $ 4.62 Vested (135,500) 4.62 Forfeitures (5,000) 4.62 Outstanding and nonvested at December 31, 2013 — $ —
(1) The weighted average grant date value included in the table above was adjusted to reflect the impact of the modifications approved on December 3, 2010 to the 2010 and 2009 awards.
Price-based RSUs
The fair value of nonvested price-based RSUs under the Stock Plan was determined based on the closing price of the Company’s Class A Common Stock on the grant dates using the Monte Carlo Simulation method which takes into account assumptions such as volatility of the Company’s Class A Common Stock, the risk-free interest rate based on the contractual term of the award, the expected dividend yield, the vesting schedule, and the probability that the market conditions of the award will be achieved. As of December 31, 2013, 2012 and 2011 no price-based RSUs had vested. As of December 31, 2013, there was $0.5 million of total unrecognized compensation cost related to nonvested price-based RSUs to be recognized over a weighted-average period of approximately 1.8 years.
A summary of the shares of price-based RSUs is as follows:
Weighted Average Grant Shares Date Value Outstanding and nonvested at December 31, 2010 — $ — Granted 440,000 3.07 Outstanding and nonvested at December 31, 2011 440,000 $ 3.07 No activity during 2012 — — Outstanding and nonvested at December 31, 2012 440,000 $ 3.07 Granted 930,000 0.65 Forfeitures (400,000) 3.19 Outstanding and nonvested at December 31, 2013 970,000 $ 0.77
RSU awards to Chief Executive Officer in 2013
During the fourth quarter of 2013 the Company issued RSU awards under the Stock Plan to its newly appointed Chief Executive Officer, as provided for in his employment agreement. The first RSU award provides that the Chief Executive Officer receive 400,000 RSUs, with service-period based vesting triggers, of which approximately 133,333 RSUs vest on each December 31, 2014, 2015 and 2016. Non-cash equity compensation expense of approximately $0.1 million was recorded during the year ended December 31, 2013 related to this award. As of December 31, 2013, there was $0.9 million of total unrecognized compensation cost related to this service-period based RSU to be recognized over a period of 3 years.
The Company also made an RSU award to this executive which includes price-based vesting triggers. The price-based RSUs consist of the contingent right to receive an aggregate of 800,000 shares of Class A Common Stock, of which 200,000 RSUs will vest at such time as the trailing average closing price during any thirty (30) consecutive days during the period
F-20 Table of Contents beginning on October 28, 2013 and ending on December 31, 2016 (the “Performance Period”) has been at least $6, an additional 200,000 RSUs will vest at such time as such trailing average closing price during any thirty (30) consecutive days during the Performance Period has been at least $8, an additional 200,000 RSUs will vest at such time as such trailing average closing price during any thirty (30) consecutive days during the Performance Period has been at least $10, and the final 200,000 RSUs will vest at such time as such trailing average closing price during any thirty (30) consecutive days during the Performance Period has been at least $12. Non-cash equity compensation expense of approximately $0.1 million was recorded during the year ended December 31, 2013 related to this price-based award. As of December 31, 2013, there was $0.4 million of total unrecognized compensation cost related to this price-based RSU award to be recognized over varying derived service periods. The following table summarizes the assumptions used in applying the Monte Carlo Simulation method to value this price-based award:
Risk-free interest rate 0.65% Dividend Zero Expected volatility 48.31% Derived service periods 1.84 - 2.44 years Estimated value of price-based RSUs $0.29 - $0.94
10. INCOME TAXES
The Company follows ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in the Company’s judgment about the future realization of deferred tax assets. ASC 740 places greater emphasis on historical information, such as the Company’s cumulative operating results than it places on estimates of future taxable income. Therefore, the Company has reduced the valuation allowance by $(5.6) million in the twelve months ended December 31, 2013 resulting in a cumulative balance of $82.5 million on deferred tax assets and tax credit carryforwards. The Company has a cumulative net deferred tax liability of $7.1 million as of December 31, 2013 related to indefinite lived intangibles with book basis and no tax basis. The Company considered all income sources, including other comprehensive income, in determining the amount of deferred taxes recorded. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax asset will be realized. The Company has recorded $0.1 million of tax expense during the twelve months ended December 31, 2013, which was net of a non-recurring tax benefit of $1.3 million, which was attributable to the prior year impairment of goodwill, for which all tax basis had been previously amortized. The Company concluded that this adjustment was immaterial.
The provision for income taxes consist of the following for 2013, 2012, and 2011:
(in thousands) 2013 2012 2011 Current Income Tax (Expense) Benefit Federal $ — $ — $ — State and local 53 (107) 29 Foreign (160) (252) (262) Total current income tax expense (107) (359) (233) Deferred Income Tax Benefit / (Expense) Federal 20 (1,061) (1,149) State and local 3 (182) (198) Total deferred income tax benefit / (expense) 23 (1,243) (1,347) Income tax provision $ (84) $ (1,602) $ (1,580)
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A reconciliation of the federal income tax provision at the statutory rate to the effective rate for 2013, 2012, and 2011 is as follows:
(in thousands) 2013 2012 2011 Computed tax benefit at the federal statutory rate of 35% $ 591 $ 19,069 $ 4,879 State income taxes, net of federal benefit (19) (57) (50) Non-deductible compensation (91) (537) (30) Non-deductible expense (113) (131) (132) Non-deductible goodwill impairment 1,257 (15,490) — Tax on foreign income (104) (252) (262) Valuation allowance (1,686) (4,186) (6,090) Other 81 (18) 105 Income tax provision $ (84) $ (1,602) $ (1,580) Effective tax rate 5.0% 2.9% 11.3%
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2013 and 2012 were as follows:
(in thousands) 2013 2012 Deferred Tax Assets Provision for doubtful accounts $ 614 $ 1,020 Accrued rent 1,572 1,748 Reserve for newsstand returns 100 139 Accrued compensation 4,854 10,464 Deferred revenue 1,582 1,165 NOL/credit carryforwards 62,766 59,868 Depreciation 5,374 6,071 Amortization of intangible assets 6,054 7,756 Other 208 242 Total deferred tax assets 83,124 88,473 Deferred Tax Liabilities Prepaid expenses (585) (293) Amortization of intangible assets (7,094) (7,117) Total deferred tax liabilities (7,679) (7,410) Valuation allowance (82,539) (88,180) Net Deferred Tax Liability $ (7,094) $ (7,117)
At December 31, 2013, the Company had aggregate federal net operating loss carryforwards of $130.6 million (before- tax), which will be available to reduce future taxable income through 2033, with the majority expiring in years 2024 and 2025. The Company had federal and state tax credit and capital loss carryforwards of $3.9 million (tax effected) which begin to expire in 2014. To the extent the Company achieves positive net income in the future, the net operating loss and credits carryforwards may be utilized and the Company’s valuation allowance will be adjusted accordingly.
ASC 740 further establishes guidance on the accounting for uncertain tax positions. As of December 31, 2013, the Company had an ASC 740 liability balance of $0.06 million. Of this amount, $0.04 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate, and $0.02 million is interest. The Company treats interest and penalties due to a taxing authority on unrecognized tax positions as interest and penalty expense. Accrued interest and penalties of $0.02 million is included in the accounts payable and accrued liabilities line item on the December 31, 2013 and 2012 consolidated balance sheets. Following is a reconciliation of the Company’s total gross unrecognized tax benefits for 2013 and 2012.
F-22 Table of Contents
(in thousands) 2013 2012 Gross balance at January 1 $ 50 $ 50 Additions based on tax positions related to the current year — — Additions for tax positions of prior years — — Reductions for tax positions of prior years — — Settlements (9) — Reductions due to lapse of applicable statute of limitations — — Gross balance at December 31 41 50 Interest and penalties 22 22 Balance including interest and penalties at December 31 $ 63 $ 72
The Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2005 and state examinations for the years before 2003. The Company does not anticipate that the liability will change significantly over the next 12 months.
11. RELATED PARTY TRANSACTIONS
In July 2013, pursuant to a Letter Agreement, the Board and Martha Stewart agreed to certain modifications to the employment agreement between Ms. Stewart and the Company, dated April 1, 2009 (the “Employment Agreement”) and the Intangible Asset License Agreement, dated as of June 13, 2008, by and between Lifestyle Research Center, LLC. ("LRC"), the successor in interest to MS Real Estate Management Company, and the Company (the “IAL”). As amended, the Employment Agreement will continue in effect until June 30, 2017 and the IAL will continue in effect until September 15, 2017.
The Company and Ms. Stewart agreed that effective as of July 1, 2013 her annual base salary under the Employment Agreement will be reduced by $0.2 million to $1.8 million, and payment or reimbursement of business and certain other expenses will be made in accordance with a new expense policy adopted by the Board.
The parties to the IAL also agreed that the annual licensing fee under the IAL will be reduced by $0.3 million to $1.7 million, effective September 15, 2013.
LRC is responsible, at its expense, to maintain and landscape the properties in a manner consistent with past practices; provided, however, that the Company is responsible for approved business expenses associated with security and telecommunications systems and security personnel related to Ms. Stewart at the properties, and must reimburse LRC for up to $0.1 million of approved and documented household expenses. In 2013 and 2012, the Company reimbursed LRC $0.03 million for approved and documented household expenses. In the year ended December 31, 2011, the Company reimbursed LRC $0.1 million for these expenses.
The Company also reimbursed LRC for certain costs borne by LRC associated with various Company business activities which were conducted at properties covered by the IAL. In 2013, the Company reimbursed LRC $0.02 million and $0.03 million in each of 2012 and 2011, for these expenses.
On February 28, 2001, the Company entered into a Split-Dollar Agreement with Ms. Stewart and The Martha Stewart Family Limited Partnership (the “MS Partnership”). Because the intent of the agreement was frustrated by the enactment of Sarbanes-Oxley and so that the parties could realize the existing cash surrender value of the policies rather than risking depleting the future surrender value, the Company, Ms. Stewart and the MS Partnership terminated the Split-Dollar Agreement, as amended, effective November 9, 2009. As part of the arrangement, the Company reimbursed the MS Partnership approximately $0.3 million for the premiums paid towards the policies. This amount, if determined to be taxable, would be subject to an estimated $0.3 million tax gross-up payable by the Company to the MS Partnership. Accordingly, the Company's the estimated tax gross-up payable of $0.3 million is included in accounts payable and accrued liabilities on the consolidated balance sheets as of December 31, 2013 and 2012.
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Related party compensation expense includes salary, bonus and non-cash equity compensation as determined under ASC Topic 718. Alexis Stewart, the daughter of Ms. Stewart, is a beneficial owner of more than 10% of the Company’s stock. During the second quarter of 2013, the Company granted Alexis Stewart stock appreciation rights ("SARs") in exchange for options pursuant to which she would receive shares of Class A Common Stock equal to the difference between the fair market value of Class A Common Stock on July 1, 2013 and the exercise price of her options. The SARs became fully vested on July 1, 2013. During 2012 and 2011, she was employed by the Company and served in various capacities from which she earned aggregate compensation of $0.03 million and $0.3 million in 2012 and 2011, respectively. The Company has also employed certain other members of Ms. Stewart’s family. Aggregate compensation for these employees was $0.4 million in each of 2013 and 2012, and $0.3 million in 2011.
In 2013 and 2011, the Company made charitable contributions of approximately $0.02 million and $0.03 million, respectively, to a foundation with which Ms. Stewart is affiliated. In 2012, no such contributions were made.
For the period December 6, 2011 through October 20, 2013, J.C. Penney held an approximate 16.4% investment in the Company's total Class A and Class B Common Stock outstanding and accordingly was considered a related party. The Company derives revenues from J.C. Penney, inclusive of design fees, advertising, television sponsorship and creative services. The Company recorded revenues earned from J.C. Penney of $11.6 million during the period January 1, 2013 through October 20, 2013 and $8.1 million for year ended December 31, 2012. See Note 8, Shareholders' Equity, for further discussion of J.C. Penney.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
During 2013 the Company leased office facilities, filming locations, and equipment under operating lease agreements. Leases for the Company’s offices and facilities expire between 2015 and 2018, and some of these leases are subject to the Company’s renewal. Total rent expense charged to operations for all such leases, was approximately $9.7 million, $12.3 million and $13.5 million for 2013, 2012, and 2011, respectively, net of sublease income of $0.7 million and $1.3 million in 2012 and 2011, respectively. There was no sublease income recognized in 2013. The Company’s 2012 and 2011 operating leases included its television production facilities and television administrative offices, which were terminated during 2012. Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.
The following is a schedule of future minimum payments under operating leases at December 31, 2013. The table includes total minimum lease payment commitments which include rent and other charges:
Operating Sublease Net Operating (in thousands) Lease Payments Receipts * Lease Payments 2014 $ 8,673 $ 429 $ 8,244 2015 8,580 433 8,147 2016 8,581 439 8,142 2017 7,621 — 7,621 2018 555 — 555 Total $ 34,010 $ 1,301 $ 32,709
* The Company subleased certain properties at a loss. These losses were recognized at the time the sublease was executed and accordingly, the Company does not recognize any rent expense or offsetting sublease receipts for the remainder of the sublease agreements. The table above provides the total minimum cash lease payments and cash receipts for future periods.
During February 2014, in an effort to reduce overhead expenses and more efficiently utilize our office space, we vacated 47,592 square feet at our principal office facility. Future reductions in minimum lease payment commitments of $6.3 million associated with the vacating of this space are not included in the table above as the related lease termination was not effective until mid- February 2014.
Legal Matters
On January 23, 2012, Macy's Inc. and Macy's Merchandising Group, Inc. (collectively, “Macy’s”) filed a lawsuit against the Company in the Supreme Court of the State of New York, County of New York titled Macy's, Inc. and Macy's Merchandising Group, Inc. v. Martha Stewart Living Omnimedia, Inc. In such lawsuit, Macy's claimed that the Company's planned activities under the Company's commercial agreement with J.C. Penney materially breached the agreement between F-24 Table of Contents the Company and Macy's Merchandising Group, Inc. dated April 3, 2006 (the “Agreement”). Macy's sought a declaratory judgment, preliminary and permanent injunctive relief, and incidental and other damages. The Court entered a preliminary injunction on July 31, 2012 which limited the Company's activities with J.C. Penney in certain respects. In November 2012, Macy's amended its complaint to assert a second claim which alleged additional breaches of the Agreement. In January 2013, the lawsuit was consolidated with an action titled Macy's Inc. and Macy's Merchandising Group, Inc. v. J.C. Penney Corporation, Inc. The trial of the consolidated cases began on February 20, 2013 and concluded on August 1, 2013.
On October 21, 2013, the Company and J.C. Penney entered into an amendment to their commercial agreement, narrowing the range of product categories covered by the commercial agreement and shortening the term of the commercial agreement. On December 31, 2013, the Company and Macy’s entered into a settlement agreement and release; the terms of which are not material to the Company's financial statements. As part of the settlement agreement and release, the parties jointly sought an order from the Court, which was entered on January 13, 2014, ordering a stipulation of discontinuance with prejudice, dismissing all claims made by Macy’s against the Company in the lawsuit.
The Company is party to legal proceedings in the ordinary course of business, including product liability claims for which the Company is indemnified by its licensees. None of these proceedings is deemed material.
Unclaimed property
In August 2013, the Company entered into an agreement with agents of the State of Delaware (“the State”) who will assist in administrating the State’s abandoned property reporting outreach program (“VDA Program”) in which the Company is enrolled and under which the Company will disclose information regarding its compliance with certain abandoned property procedures. As the VDA Program is in its early stages, the Company cannot quantify the State’s findings, if any, on its consolidated results of operations, financial condition, or liquidity. In the normal course of conduct, the Company records amounts due for abandoned property.
Other
See Note 7, Credit Facilities, for discussion of the Company’s line of credit with Bank of America.
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13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except share and per share data)
First Second Third Fourth Year ended Year ended December 31, 2013 Quarter Quarter Quarter Quarter Total Revenues $ 37,224 $ 42,198 $ 33,848 $ 47,405 $ 160,675 Operating (loss)/income $ (3,045) $ (636) $ (4,076) $ 5,860 $ (1,897) Net (loss)/income $ (3,273) $ (1,180) $ (4,295) $ 6,976 $ (1,772) (Loss)/earnings per share—basic and diluted $ (0.05) $ (0.02) $ (0.06) $ 0.12 $ (0.03) Weighted average common shares outstanding Basic 67,241,626 67,371,869 67,490,820 57,630,635 64,912,368 Diluted 67,241,626 67,371,869 67,490,820 58,011,641 64,912,368
First Second Third Fourth Year ended Year ended December 31, 2012 Quarter Quarter Quarter Quarter Total Revenues $ 49,831 $ 47,884 $ 43,549 $ 56,363 $ 197,627 Operating (loss)/income $ (4,182) $ (2,885) $ (50,689) $ 1,360 $ (56,396) Net (loss)/income $ (3,613) $ (2,704) $ (50,878) $ 1,110 $ (56,085) (Loss)/earnings per share—basic and diluted $ (0.05) $ (0.04) $ (0.76) $ 0.02 $ (0.83) Weighted average common shares outstanding Basic 67,065,741 67,224,593 67,271,211 67,330,288 67,231,463 Diluted 67,065,741 67,224,593 67,271,211 67,621,961 67,231,463
Note: Basic and diluted earnings per share are computed independently for each quarter and full year presented. Accordingly, the sum of the quarterly earnings per share data may not agree with the calculated full year earnings per share. For the year ended December 31, 2012, the non-cash goodwill impairment charge amounted to $0.66 per share.
Fourth Quarter 2013 Items:
Results include restructuring charges of approximately $2.8 million. Restructuring charges include employee severance and other employee-related termination costs.
Fourth Quarter 2012 Items:
Results include restructuring charges of approximately $3.5 million. Restructuring charges include employee severance and other employee-related termination costs, as well as recruiting costs.
14. GAIN ON SALE OF SUBSCRIBER LIST, NET
On January 2, 2013 the Company sold certain intangible assets related to Whole Living magazine in exchange for consideration of approximately $1.0 million. Pursuant to the sale, the subscription contracts for the print and digital editions of the magazine, as well as the rights and benefits of the subscribers, were transferred to the buyer. The agreement also required that the Company reimburse the buyer up to $0.1 million for customer refunds resulting from the transaction and paid by the buyer through June 30, 2013. Accordingly, the Company received $0.9 million in cash on the close of the transaction, and, in early July 2013, received the remainder of the refund reserve which was not utilized by the buyer. As a result of selling the Whole Living subscriber list, and thus transferring the subscription liability fulfillment obligation to the buyer, the Company recognized its existing $2.2 million deferred subscription revenue, resulting in a gain of $2.7 million as a component of operations. This gain on sale of subscriber list, net, reflected on the Company's consolidated statement of operations for the twelve months ended December 31, 2013, was recorded within the Publishing segment and consisted of the $1.0 million list sale price, less broker fees and other costs of $0.5 million incurred in connection with the transaction, as well as the $2.2 million release of the deferred subscription revenue liability.
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15. INDUSTRY SEGMENTS
The Company is an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. The Company’s business segments are Publishing, Merchandising and Broadcasting.
The Publishing segment primarily consists of the Company’s operations related to its magazines (Martha Stewart Living and Martha Stewart Weddings) and books, as well as its digital operations, which includes the content-driven website, marthastewart.com, and the digital distribution of video content. As part of the Company's restructuring announced in November 2012, Everyday Food ceased publication as a stand-alone title with its December 2012 issue and Whole Living was discontinued after its January/February 2013 issue.
The Merchandising segment primarily consists of the Company’s operations related to the design and branding of merchandise and related collateral and packaging materials that are manufactured and distributed by its retail and wholesale partners in exchange for royalty income. The Merchandising segment also includes the licensing of talent services for television programming produced by third parties.
In 2012, the Company significantly restructured its Broadcasting segment, which included the termination of the Company's live audience television production operations. Subsequent to the restructuring, the Broadcasting segment consists of the Company's limited television production operations, television content library licensing and satellite radio operations. While future revenues and assets from these operations are not expected to be significant, the Company plans to continue reporting activities under the Broadcasting segment to provide historical context.
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The accounting policies for the Company’s business segments are the same as those described in Note 2, Summary of Significant Accounting Policies. Segment information for 2013, 2012, and 2011 is as follows:
(in thousands) Publishing Merchandising Broadcasting Corporate Consolidated 2013 Revenues $ 96,493 $ 59,992 $ 4,190 $ — $ 160,675 Non-cash equity compensation * (376) (237) (8) (1,287) (1,908) Depreciation and amortization (944) (50) (27) (2,737) (3,758) Restructuring charges * (2,004) (583) — (852) (3,439) Gain on sale of subscriber list, net 2,724 — — — 2,724 Operating (loss) / income (14,781) 40,512 2,155 (29,783) (1,897) Total assets 25,245 64,876 1,290 56,956 148,367 Capital expenditures 187 5 — 898 1,090 2012 Revenues $ 122,540 $ 57,574 $ 17,513 $ — $ 197,627 Non-cash equity compensation * (587) (455) (50) (2,715) (3,807) Depreciation and amortization (742) (52) (388) (2,825) (4,007) Restructuring charges * (1,971) (81) (816) (1,943) (4,811) Goodwill impairment (44,257) — — — (44,257) Operating (loss) / income (62,029) 39,477 2,354 (36,198) (56,396) Total assets 31,232 87,213 19,619 16,196 154,260 Capital expenditures 236 105 41 932 1,314 2011 Revenues $ 140,857 $ 48,614 $ 31,962 $ — $ 221,433 Non-cash equity compensation (682) (224) (67) (4,523) (5,496) Depreciation and amortization (774) (32) (470) (2,702) (3,978) Restructuring charges * (828) (13) (600) (3,675) (5,116) Operating income/(loss) (6,464) 29,972 (4,740) (37,362) (18,594) Total assets 83,769 81,199 28,352 22,800 216,120 Capital expenditures 1,221 7 32 1,619 2,879 * As disclosed on the Company's consolidated statements of cash flows, total non-cash equity compensation expense was $2.0 million, $3.9 million and $5.0 million in 2013, 2012 and 2011, respectively. Included in non-cash equity compensation expense were net charges to expense of approximately $0.1 million for 2013 and 2012, and reversals of expense in 2011 of approximately $0.5 million, which were generated in connection with restructuring activities. Accordingly, these amounts are reflected as restructuring charges in the Company's 2013 and 2012 consolidated statements of operations. See Note 16, Restructuring Charges for further information.
16. RESTRUCTURING CHARGES
The Company incurred restructuring charges of approximately $3.4 million, $4.8 million and $5.1 million in 2013, 2012 and 2011, respectively. In 2013, the Company incurred restructuring charges associated with a significant reorganization of its Publishing business. The restructuring charges primarily consisted of employee severance and other employee-related termination costs. In 2012, the Company incurred restructuring charges associated with significant changes in its Broadcasting and Publishing businesses. In addition, the Company also incurred restructuring charges in 2012 related to the departure of the Company's then-current President and Chief Executive Officer. In 2011, restructuring charges were primarily related to severance expenses associated with executive management, as well as certain consulting costs. Restructuring charges include F-28 Table of Contents net non-cash compensation expense charges of approximately $0.1 million in 2013 and 2012. For 2011, restructuring charges include non-cash equity compensation expense reversals of approximately $0.5 million. Of the amounts charged to restructuring expense, approximately $2.6 million and $3.3 million were payable as of December 31, 2013 and 2012, respectively.
17. OTHER INFORMATION
The Company’s financial instruments consist of cash and cash equivalents, short-term investments, restricted cash and investments, accounts receivable, accounts payable and accrued expenses. The carrying amount of these accounts approximates fair value.
Total revenues from the Company's three business segments were $160.7 million, $197.6 million and $221.4 million in 2013, 2012 and 2011 respectively. Revenues from domestic sources were $153.1 million, $187.4 million and $211.6 million in 2013, 2012 and 2011, respectively. Revenues from foreign sources (primarily from Canada) were $7.6 million, $10.2 million and $9.8 million in 2013, 2012 and 2011, respectively.
Advertising expense, including subscription acquisition costs, was $6.9 million, $9.5 million and $15.3 million for 2013, 2012, and 2011, respectively.
Production, distribution and editorial expenses; selling and promotion expenses; and general and administrative expenses are all presented exclusive of depreciation and amortization, impairment charges, restructuring charges and gain on sale of subscriber list, net, which are shown separately within “Operating Costs and Expenses.”
Interest paid in 2013 and 2012 was insignificant. In 2011, the Company paid interest of $0.3 million, which was predominantly related to the Company’s loan with Bank of America that it fully repaid by December 2011.
Income taxes paid in 2013, 2012 and 2011 were $0.5 million, $0.5 million and $0.6 million, respectively.
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MARTHA STEWART LIVING OMNIMEDIA, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions Additions/ (Deductions) Charged to (Deductions) Charged to Balance, Revenues, Charged to Revenues, Beginning Costs and Balance Sheet Costs and Balance, Description of Year Expenses Accounts Expenses End of Year Allowance for doubtful accounts: Year ended December 31, 2013 $ 1,617 $ 885 $ (1,230) $ (424) $ 848 2012 1,630 997 (109) (901) 1,617 2011 1,502 1,196 (334) (734) 1,630 Reserve for valuation allowance on the deferred tax asset: Year ended December 31, 2013 $ 88,180 $ 321 $ — $ (5,962) $ 82,539 2012 83,846 5,031 — (697) 88,180 2011 76,963 6,883 — — 83,846
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EXHIBIT INDEX
Exhibit Number Exhibit Title 3.1 — Martha Stewart Living Omnimedia, Inc. Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1, as amended, file number 333-84001 (the “Registration Statement”)). 3.1.1 — Certificate of Designations of the Series A Preferred Stock of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to our Current Report on Form 8-K/A (file number 001-15395) filed on December 13, 2011). 3.2 — Fourth Amended and Restated By-Laws of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013). 4.1 — Warrant to purchase shares of Class A Common Stock, dated August 11, 2006 (incorporated by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2006 (the “September 2006 10-Q”)). 4.2 — Investor Rights Agreement dated as of December 6, 2011 by and between Martha Stewart Living Omnimedia, Inc. and J.C. Penney Corporation, Inc. (incorporated by reference to Exhibit 2 to the Schedule 13D (file number 001-15395) filed by J.C. Penney Company, Inc. on December 16, 2011). 4.3 — Certificate of Elimination of the Series A Preferred Stock of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013). 10.1† — 1999 Stock Incentive Plan (incorporated by reference to the Registration Statement), as amended by Exhibits 10.1.1, 10.1.2 and 10.1.3. 10.1.1† — Amendment No. 1 to the 1999 Stock Incentive Plan, dated as of March 9, 2000 (incorporated by reference to our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 1999 (the “1999 10-K”)). 10.1.2† — Amendment No. 2 to the Amended and Restated 1999 Stock Incentive Plan, dated as of May 11, 2000 (incorporated by reference to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2000). 10.1.3† — Amendment No. 3 to the Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to our Current Report on Form 8-K (file number 001-15395) filed on May 17, 2005 (the “May 17, 2005 8-K”)). 10.2† — 1999 Non-Employee Director Stock and Option Compensation Plan (incorporated by reference to the Registration Statement) as amended by Exhibit 10.2.1. 10.2.1† — Amendment No. 1 to the Martha Stewart Living Omnimedia, Inc. Non-Employee Director Stock and Option Compensation Plan (incorporated by reference to the May 17, 2005 8-K). 10.3 — Form of Intellectual Property License and Preservation Agreement, dated as of October 22, 1999, by and between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.8 to the Registration Statement). 10.4† — Director Compensation Program (incorporated by reference to Exhibit 10.4 of our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 2011 (the “2011 10-K”)). 10.5 — Lease, dated August 20, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC (incorporated by reference to Exhibit 10.12 to the Registration Statement) as amended by Exhibits 10.6.1 and 10.6.2. Table of Contents
Exhibit Number Exhibit Title 10.5.1 — First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.12.1 to our 1999 10-K). 10.5.2 — Sixth Lease Modification Agreement, dated as of June 14, 2007, between 601 West Associates LLC and Martha Stewart Living Omnimedia, Inc (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended March 31, 2008 (“March 2008 10-Q”)). 10.5.3* — Tenth Lease Modification Agreement, dated as of February 6, 2014, between RXR SL Owner LLC and Martha Stewart Living Omnimedia, Inc. 10.6* — Second Amendment, dated February 6, 2014, to the written agreement of lease dated as of February 2004, between RXR SL Owner LLC and Martha Stewart Living Omnimedia, Inc. 10.7† — Amended and Restated Employment Agreement, dated as of April 1, 2009, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (file number 001-15395) for the Quarter ended March 31, 2009 (“March 2009 10-Q”)). 10.7.1† — Letter Agreement, dated as of March 30, 2012, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended March 31, 2012 (“March 2012 10-Q”)). 10.7.2† — Letter Agreement, dated as of July 9, 2012, between Martha Stewart Living Omnimedia, Inc., Martha Stewart and MS Real Estate Management Company (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2012 (“September 2012 10-Q”)). 10.7.3† — Letter Agreement, dated as of July 2, 2013, between Martha Stewart Living Omnimedia, Inc., Martha Stewart and Lifestyle Research Center LLC (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (file number 001-15395) filed on July 3, 2013. 10.8 — Intangible Asset License Agreement, dated as of June 13, 2008, between Martha Stewart Living Omnimedia, Inc. and MS Real Estate Management Company (incorporated by reference to Exhibit 10.9 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2008), as amended by Exhibits 10.10.1 and 10.10.2. 10.8.1 — First Amendment, dated as of December, 2008, to the Intangible Asset License Agreement between MS Real Estate Management Company and Martha Stewart Living Omnimedia, Inc. dated as of June 13, 2008 (incorporated by reference to Exhibit 10.11.1 to our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 2009 (the “2009 10-K”)). 10.8.2 — Second Amendment, dated as of February 8, 2010, to the Intangible Asset License Agreement between MS Real Estate Management Company and Martha Stewart Living Omnimedia, Inc. dated as of June 13, 2008, as amended (incorporated by reference to Exhibit 10.11.2 to the 2009 10-K). 10.8.3 — Letter Agreement, dated as of July 9, 2012, between Martha Stewart Living Omnimedia, Inc. and MS Real Estate Management Company (incorporated by reference to Exhibit 10.1 to our September 2012 10-Q). 10.8.4 — Letter Agreement, dated as of July 2, 2013, between Martha Stewart Living Omnimedia, Inc., Martha Stewart and Lifestyle Research Center LLC (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (file number 001-15395) filed on July 3, 2013. 10.9† — Form of Restricted Stock Award Agreement for use under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file number 001-15395) filed on January 14, 2005). 10.10 — Publicity Rights Agreement, dated as of April 2, 2008, by and among Martha Stewart Living Omnimedia, Inc., MSLO Shared IP Sub LLC and Emeril J. Lagasse, III (incorporated by reference to Exhibit 10.4 to our March 2008 10-Q). 10.11 — Amended and Restated Loan Agreement, dated as of February 14, 2012, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.1 to our March 2012 10-Q). Table of Contents
Exhibit Number Exhibit Title 10.11.1 — Amendment, dated January 11, 2013 to the Amended and Restated Loan Agreement, dated as of February 14, 2012, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. 10.11.2 — Amendment, dated May 9, 2013 to the Amended and Restated Loan Agreement, dated as of February 14, 2012, as amended, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2013). 10.11.3 — Pledge Agreement, dated May 9, 2013, between Bank of America, N.A. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2013). 10.12 — Security Agreement, dated as of July 31, 2008, among Martha Stewart Living Omnimedia, Inc., MSLO Emeril Acquisition Sub LLC, and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to our September 2008 10-Q), as amended by Exhibits 10.18.1, 10.18.2, and 10.17.1. 10.12.1 — Waiver and Omnibus Amendment No. 1, dated as of June 18, 2009, to Loan Agreement dated as of April 4, 2008 by and among Bank of America, N.A., MSLO Emeril Acquisition Sub LLC and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended June 30, 2009). 10.12.2 — Amendment No. 2, dated as of August 7, 2009, to Security Agreement dated as of July 31, 2008 among Martha Stewart Living Omnimedia, Inc., Emeril Acquisition Sub LLC and Bank of America, (incorporated by reference to Exhibit 10.2 to our September 2009 10-Q). 10.13 — Continuing and Unconditional Guaranty dated as of April 4, 2008 executed by Martha Stewart Living Omnimedia, Inc., MSO IP Holdings, Inc., Martha Stewart, Inc., Body and Soul Omnimedia, Inc., MSLO Productions, Inc., MSLO Productions-Home, Inc., MSLO Productions-EDF, Inc. and Flour Productions, Inc. (incorporated by reference to Exhibit 10.8 to our March 2008 10-Q), as reaffirmed by Exhibit 10.22.1. 10.13.1 — Reaffirmation of Guaranty, dated as of August 7, 2009, executed by Martha Stewart Living Omnimedia, Inc., MSO IP Holdings, Inc., Martha Stewart, Inc., Body and Soul Omnimedia, Inc., MSLO Productions, Inc. MSLO Productions Home, Inc. MSLO Productions-EDF, Inc and Flour Productions, Inc. (incorporated by reference to Exhibit 10.3 to our September 2009 10-Q). 10.14 — Registration Rights Agreement, dated as of April 2, 2008, by and among Martha Stewart Living Omnimedia, Inc., Emeril's Food of Love Productions, L.L.C., emerils.com, LLC and Emeril J. Lagasse, III (incorporated by reference to Exhibit 10.9 to our March 2008 10-Q). 10.15† — Martha Stewart Living Omnimedia, Inc. Director Deferral Plan (incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K (file number 001-15395) for the year ended December 31, 2008 (the “2008 10-K”)). 10.16† — Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K (file number 001-15395) filed on May 20, 2008 (“May 20, 2008 8-K”)). 10.17† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Option Agreement and forms of related Notices (incorporated by reference to Exhibit 99.2 to our May 20, 2008 8-K). 10.18† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to our March 2011 10- Q). 10.19† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Unit Agreement for Directors (incorporated by reference to Exhibit 10.2 to our March 2011 10-Q). 10.20† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Grant Agreement (incorporated by reference to Exhibit 99.4 to our May 20, 2008 8-K). 10.21† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Appreciation Right Agreement and form of related Notice (incorporated by reference to Exhibit 99.5 to our May 20, 2008 8-K). Table of Contents
Exhibit Number Exhibit Title 10.22† — Form of Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Grant Agreement and form of related Acknowledgement (incorporated by reference to Exhibit 99.6 to our May 20, 2008 8-K). 10.23† — Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file number 001-15395) filed on February 12, 2009). 10.24† — Martha Stewart Living Omnimedia, Inc. Annual Incentive Plan (incorporated by reference to the Company's proxy statement filed in respect of its 2005 annual meeting of stockholders, dated as of April 7, 2005). 10.25† — Form of Martha Stewart Living Omnimedia, Inc. Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.1 to our June 2011 10-Q). 10.26† — Employment Agreement, dated as of May 24, 2011, between Martha Stewart Living Omnimedia, Inc. and Lisa Gersh (incorporated by reference to Exhibit 10.3 to our June 2011 10-Q). 10.26.1† — Letter Agreement dated December 19, 2012 between the Company and Lisa Gersh (incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K (file number 001-15395) filed on December 19, 2012). 10.27† — Employment Agreement, dated as of September 6, 2011, between Martha Stewart Living Omnimedia, Inc. and Kenneth P. West (incorporated by reference to Exhibit 10.4 to our September 2011 10-Q). 10.28† — Employment Agreement, dated as of August 22, 2011, between Martha Stewart Living Omnimedia, Inc. and Daniel Taitz (incorporated by reference to Exhibit 10.36 of our 2011 10-K). 10.28.1† — Letter Agreement between Martha Stewart Living Omnimedia, Inc. and Daniel Taitz, dated December 13, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (file number 001-15395) filed on December 17, 2013. 10.29† — Employment Agreement, dated as of October 25, 2013, between Martha Stewart Living Omnimedia, Inc. and Daniel W. Dienst (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2013). 10.30 — Securities Purchase Agreement, dated as of December 6, 2011, by and between Martha Stewart Living Omnimedia, Inc. and J.C. Penney Corporation, Inc. (incorporated by reference to Exhibit 1 to the Schedule 13D (file number 001-15395) filed by J.C. Penney Company, Inc. on December 16, 2011). 10.31†* — Separation Agreement and General Release, dated as of February 19, 2014, between Martha Stewart Living Omnimedia, Inc. and Joseph Lagani. 10.32+ — JCP/MSLO Agreement, dated as of December 6, 2011, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.39 to our 2011 10-K), as amended by Exhibits 10.39.1 and 10.39.2. 10.32.1 — First Amendment, dated as of January 4, 2012, to the JCP/MSLO Agreement, dated as of December 6, 2011, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.39.1 of our 2011 10-K). 10.32.2 — Second Amendment, dated as of July 11, 2012, to the JCP/MSLO Agreement, dated as of December 6, 2011, by and between J. C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 10.2 to our September 2012 10-Q). 10.32.3+ — Third Amendment, dated as of October 21, 2013, to the JCP/MSLO Agreement, dated as of December 6, 2011, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013. 10.32.4 — Mutual Release of Claims, dated as of October 21, 2013, by and between J.C. Penney Corporation, Inc. and Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2013. Table of Contents
Exhibit Number Exhibit Title 21* — List of Subsidiaries. 23.1* — Consent of Independent Registered Public Accounting Firm. 31.1* — Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* — Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* — Certification of Principal Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS — XBRL Instance Document 101.SCH — XBRL Taxonomy Extension Schema Document 101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF — XBRL Taxonomy Extension Definition Linkbase Document 101.LAB — XBRL Taxonomy Extension Label Linkbase Document 101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document
† Indicates management contracts and compensatory plans.
+ Indicates that confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
* Indicates filed herewith.