10-K 1 mso-12312012x10k.htm 10-K MSO-12.31.2012-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
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
Incorporation or Organization)
(I.R.S. Employer
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  þ
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  þ
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  þ    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  þ    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):
Large accelerated filer
¨
Accelerated filer
þ
 
 
 
 
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  þ
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 29, 2012, was $96,463,676.*
*
Excludes 12,057,513 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, 2012. 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 26, 2013
41,195,945 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 2013 Annual Meeting of Stockholders are Incorporated
by Reference into Part III of This Report.



TABLE OF CONTENTS
 
PART I
 
PART II
 
PART III
 
PART IV
 

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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 represent our current beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. These statements often can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “potential” or “continue” or the negative of these terms or other comparable terminology. Our actual results may differ materially from those projected in these statements, and factors that could cause such differences include those 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. Forward-looking statements herein speak only as of the date of filing of this Annual Report on Form 10-K and we caution you not to place undue reliance on such statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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.

Our strategy to generate growth and profitability includes the following imperatives:

Grow our merchandising business by leveraging our brand equity to expand the distribution of product in existing categories, 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.

The media and merchandise we create generally encompasses the following core areas:

Cooking and Entertaining
Holidays and Celebrations
Crafts
Home
Weddings
Organizing, Office Products and Accessories
Gardening and Outdoor Living
Pets (grooming, apparel, feeding and health)

As of February 8, 2013, we had approximately 497 employees. Our designed and branded products are available in thousands of retail outlets across the country including The Home Depot, Macy’s, Petsmart and Staples.

Total revenues from our three business segments were $197.6 million, $221.4 million and $230.8 million in 2012, 2011 and 2010, respectively. Our revenues from domestic sources were $187.4 million, $211.6 million and $224.3 million in 2012, 2011 and 2010, respectively. Our revenues from foreign sources were $10.2 million, $9.8 million and $6.5 million in 2012, 2011 and 2010, respectively, which was largely comprised of international sales of television 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.


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HISTORY
Martha Stewart published her first book, Entertaining, in 1982. Over the next eight years she became a well-known authority on the domestic arts, authoring eight more books on a variety of our core content areas. In 1990, Time Publishing Ventures, Inc. (“TPV”), a subsidiary of Time Inc., launched Martha Stewart Living magazine with Ms. Stewart serving as its editor-in-chief. In 1993, TPV began producing a weekly television program, Living, hosted by Ms. Stewart. In late 1996 and early 1997, a series of transactions occurred resulting in MSLO LLC acquiring substantially all Martha Stewart-related businesses. Ms. Stewart was the majority owner of MSLO LLC; TPV retained a small equity interest in the business. On October 22, 1999, MSLO LLC merged into MSO, then a wholly owned subsidiary of MSLO LLC. Immediately following the merger, we consummated an initial public offering.
BUSINESS SEGMENTS

Our three business segments are described below. Additional financial information relating to these segments may be found in Note 13, 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
In 2012, our Publishing segment accounted for 62% of our total revenues, consisting 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 63% of the segment’s revenues in 2012, while circulation revenues represented approximately 34% of the segment’s revenues.
On November 1, 2012, we announced several restructuring actions in our Publishing segment ("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, but is currently being issued as an occasional insert to Martha Stewart Living subscribers beginning in 2013. 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 Publishing Restructuring, we also are reducing the frequency of Martha Stewart Living, starting in 2013, from a monthly publication to ten times per year.
Magazines
Martha Stewart Living, our flagship magazine, is the foundation of our publishing business. We published twelve issues of Martha Stewart Living in 2012 with a rate base of 2.05 million. The magazine appeals primarily to the college-educated woman between the ages of 25 and 54 who owns her principal residence. Martha Stewart Living offers lifestyle ideas and original how-to information in a highly visual, upscale editorial environment. The magazine has won numerous prestigious industry awards and is the leading publication for the Martha Stewart brand. 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 serves as an important vehicle for introducing young women to our brands. Martha Stewart Weddings is distributed primarily through newsstands.
Everyday Food is a digest-sized magazine, which had been published ten times per year, targeted women ages 25 to 49 and featured quick, easy recipes for the everyday cook, along with seasonal menus, cooking instructions, suggestions for healthy, “smart” eating and money-saving shopping tips.
Whole Living was a publication featuring "natural living" content and had been published ten times per year. The magazine was acquired in August 2004, at which time we purchased certain assets and liabilities of Body + Soul magazine and Dr. Andrew Weil’s Self Healing newsletter. In 2010, we discontinued publication of Dr. Andrew Weil’s Self Healing newsletter and the related Dr. Weil special interest publications. Effective with the June 2010 issue, we changed the name of Body + Soul/Whole Living magazine to Whole Living. We discontinued Whole Living as part of the Publishing Restructuring.

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Magazine Summary
Certain information related to our subscription magazines is as follows:
 
Title
2010
Rate Base
 
2011
Rate Base
 
2012
Rate Base
 
2013
Rate Base
 
Martha Stewart Living
2,025,000

 
2,050,000

(1) 
2,050,000

  
2,050,000

 
Martha Stewart Weddings (2)
n/a

(3) 
n/a

(3) 
n/a

(3) 
n/a

(3) 
Everyday Food
1,000,000

  
1,025,000

(1) 
1,025,000

  
n/a

(4) 
Whole Living
650,000

 
700,000

(1) 
750,000

(1) 
n/a

(4) 
(1) Rate base increases are effective with the January issues, which typically are on sale in December of the prior fiscal year.
(2) In addition to the quarterly publication, we anticipate producing two special issues of Martha Stewart Weddings in 2013, similar to 2012, as compared to only one special issue of Martha Stewart Weddings we produced in each of 2011 and 2010.
(3) Does not have a stated rate base.
(4) As a result of the Publishing Restructuring, we are no longer publishing Everyday Food as a stand-alone magazine and are no longer publishing Whole Living.
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 2012, we published The Best of Martha Stewart Living Organizing, The Best of Martha Stewart Halloween Handbook, Martha Stewart Weddings Real Weddings and Martha Stewart Weddings Destination Weddings and Dream Honeymoons.
Magazine Production, Distribution and Fulfillment. We print most of our domestic magazines under agreements with R.R. Donnelly and currently purchase paper through an agreement with Time Inc. Our agreement with R.R. Donnelly runs through 2017. In the first half of 2012, paper prices declined slightly from 2011, then increased modestly in the second half of 2012, back to pricing levels comparable to 2011. Based on recent information from our paper supplier, we expect prices to remain stable in the first half of 2013 with an expected modest price increase in the second half of 2013. 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. Postages rates for periodicals increased by 2.1% in January 2012 from 2011 rates, and increased again by 2.5% in February 2013. 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 also expires in June 2014.
Books
We have a multi-year, multi-book agreement with The Crown Publishing Group to provide Martha Stewart branded books, under the Clarkson Potter, Potter Style or Potter Craft imprints. Under a prior version of this agreement with the same publisher, Martha's American Food was published in 2012.
In August 2008, we announced a multi-year agreement with HarperCollins Publishers to publish ten Emeril Lagasse branded books under the HarperStudio imprint, of which five had been delivered and accepted through December 31, 2012. Kicked-Up Sandwiches was published under this agreement in 2012.
Through our efforts in the books business and the rights we acquired related to Emeril’s book backlist, we now have a library of approximately 93 published books.
Digital
Websites
The 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. Since the website’s re-launch in 2007 as a content-focused, advertising-driven media website, marthastewart.com has received many industry awards. The website provides engaging experiences in several lifestyle categories: food, entertaining, holidays, home and garden, crafts and pets. The website also serves as a gateway to our other properties, including

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marthastewartweddings.com and emerils.com. In 2011, we invested in a re-platforming of our website that allows for additional functionality, which was completed in 2012. The enhancements, which include a responsive website design, allow for improved user engagement and expanded advertising inventory, including views from smartphones and tablets, which, in combination, are expected to drive growth in our audience and revenues. In 2012, we converted 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, our collective website properties saw monthly average unique visitors of 6.3 million, a 27% increase over 2011. However, similar with the industry-wide trend of lower average page views per unique visitor, we saw a 15% decline in average monthly page views to 80.9 million, down from 94.9 million in 2011.
Digital Editions and Apps
All of our magazines are available on multiple platforms. In addition to the digital editions of our magazines, we also produce numerous mobile and tablet applications (“apps”) to further distribution of our magazines and provide our content in creative, accessible programs to accommodate the growing popularity of smartphones and tablet devices.
We produce digital editions available through Barnes & Noble's Nook, Amazon's Kindle Fire and through the Zinio platform. In 2012, we built a custom storefront in Apple's iTunes, which allows us to sell subscriptions and single copies of our magazines, only for Apple's iPad products. We further produce iPad versions of Martha Stewart Living and Martha Stewart Weddings, the latter of which was launched in 2012. Digital editions, including iPad versions, currently account for approximately 4% of all our circulation. Revenues from digital editions, which were previously classified as "Other" revenues, are classified as "Circulation" revenues beginning in 2012.
We also produce various apps that provide recipes, how-to, creativity and video content, which we refer to as our companion apps. In 2012, we launched the Craft Studio app available on Apple iTunes. Produced in partnership with Happy Studios, LLC and sponsored by Snapfish, Craft Studios is a richly featured card and craft making tool. In addition, we continue to sell our library of apps we launched in prior years on iTunes, including our Cocktails, Smoothies, Cookies, Egg Dying and Everyday Food Recipe apps, along with updated content bundles. We also introduced a Microsoft Windows 7 version of the Everyday Food Recipe app and a Everyday Food Video app for Windows 8 Tablets.
Video Distribution
In 2012, we entered into several agreements to expand our video distribution. We entered into agreements with Hulu to distribute our long-form content and with AOL to distribute short-form archive and premium video content. We also entered into an agreement with Fullscreen to expand our presence on YouTube through branded channels and network distribution. With these deals, we will either create or expand our branded channels, including Martha Stewart, Emeril, Everyday Food and Mad Hungry, on these websites, and increase the distribution of our video archive.
Competition
Publishing is a highly competitive business. Our magazines, books, websites and digital apps compete not only with other magazines, books and digital apps, 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. 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. Everyday Food competes for readers and advertising dollars with women’s service and cooking 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. marthastewart.com competes with other how-to, food and lifestyle websites. Our challenge is to attract and retain users through an easy-to-use and content-relevant website. 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.
Seasonality
Our Publishing segment can experience fluctuations in quarterly performance due to variations in the publication schedule from year to year, timing of direct mail expenses, 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. Not all of our magazines are published on a regularly scheduled basis throughout the year. Additionally, the publication schedule for our special interest publications can vary and lead to quarterly fluctuations in the Publishing segment’s results. Advertising revenue in our magazines and on marthastewart.com is typically highest in the fourth quarter of the year due to higher consumer

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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 29% of our total revenues in 2012. 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 product. Our manufacturing partners source and/or produce the branded products sometimes 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. 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.
Select Retail Licensees
The Home Depot
In 2010, we launched the Martha Stewart Living program at The Home Depot, which 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 retail stores. The Martha Stewart Living program at The Home Depot encompasses a broad range of home décor, paint, storage and organization products, outdoor furniture, window treatments, kitchen cabinetry, countertops, carpet and seasonal holiday décor. In February 2012, we renewed our agreement with The Home Depot for an additional term ending March 2016.
Macy’s
In September 2007, we introduced the Martha Stewart Collection at Macy’s. It is 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 and other kitchen items, tabletop and holiday decorating items. 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. (“J.C. Penney”) and plan to launch certain home products in J.C. Penney department stores throughout the United States and through www.jcp.com in the spring of 2013. For information regarding J.C. Penney's investment in our company, see Note 7, Shareholders' Equity, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. Also see Item 3. Legal Proceedings in this Annual Report on Form 10-K for discussion of litigation related to J.C. Penney.
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 currently at Petsmart stores. The program consists of a wide range of pet accessories, including apparel, collars, leashes, bedding, grooming supplies and toys.


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Martha Stewart Home Office
In December 2011, we began shipping products for Martha Stewart Home Office with Avery and launched the line in February 2012. The Martha Stewart Home Office line is sold currently at Staples in the U.S. and U.K., on www.staples.com, and at Officeworks in Australia. The line encompasses a range of home office products, including surface organization, journals, portable filing, pantry organization and the recently launched line of bags and totes.
Martha Stewart Homes
We have had a partnership with KB Home for the development of Martha Stewart Homes since 2005. The KB Home communities created with Martha Stewart feature homes with unique exterior and interior details that are inspired by Martha Stewart’s own homes. The Martha Stewart Homes are located at multiple communities in California, Colorado, North Carolina, Georgia, Texas and Florida. We also offer a range of design options, featured exclusively at KB Home Studios nationwide.
Select Emeril Lagasse Manufacturing Licensees
We acquired certain licensing agreements in connection with our April 2008 acquisition of specific Emeril Lagasse assets and have entered into new licensing agreements following the acquisition. These 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 available at department stores and specialty retail outlets across the United States, as well as through the Home Shopping Network.
We also have a line of Emerilware products by T-FAL, launched in November 2006, which consists of small kitchen appliances available at department stores and specialty retail outlets across the United States, as well as through the Home Shopping Network.
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, as well as through the Home Shopping Network.
Emeril’s Gourmet Coffee
Launched in September 2007, Emeril’s Gourmet Coffee with Timothy’s World 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.
Other
In 2010, we introduced a variety of new partnerships, including Emerilware Cutlery with SED International Inc. (formerly Lehrhoff ABL Inc.), which is a branded cutlery collection that includes knives and cutting boards. We also introduced Emeril's Red Marble Steaks with Allen Brothers which is a line of hand-selected, aged steaks. The line, launched in the spring of 2010, is available through catalog, online and the Home Shopping Network. In 2012, we launched Emeril by Snapware, which is branded food storage, on the Home Shopping Network. In 2013, we plan to launch a line of bagged coffees with White Coffee.
Competition
The retail business is highly competitive and the principal competition for all of our merchandising lines consists of mass-market and department stores that compete with the mass-market, home improvement and department 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.


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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 9% of our total revenues in 2012. The segment consisted 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. While certain revenue derived from the provision of talent services was included in the Broadcasting segment in 2012 and prior years, we are now recording, beginning in 2012, new agreements for talent services 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 Broadcasting segment, which included the termination of our live audience television production operations. We expect that the operations of this segment in 2013 and beyond will consist of television content library licensing, satellite radio operations and limited 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.
The Martha Stewart Show, in its format with a live audience, concluded on the Hallmark Channel with the completion of season 7 in September 2012. Revenues for The Martha Stewart Show on Hallmark Channel were mostly comprised of advertising, product integration and international licensing revenues. We own the television content we produced for the Hallmark Channel and we have the right in the future to further monetize these assets. While the Hallmark Channel retains certain rights to some of our programming other than The Martha Stewart Show (“companion programming”) through September 2013, we completed the delivery of all of our companion programming to the Hallmark Channel by December 31, 2011. Revenues for the companion programs on Hallmark Channel generally consisted of licensing revenue.
In 2012, we produced two seasons of a new weekly half-hour series, Martha Stewart’s Cooking School. The show debuted on PBS in October and was produced in our studio prior to the end of our studio lease on June 30, 2012. Revenues for Martha Stewart's Cooking School, which consists of sponsorship revenue, for the first season were recognized in 2012, with additional revenue expected to be recognized in 2013 with the airing of the second season.
Emeril Lagasse also provides various television services for us. In 2012, Emeril Lagasse hosted a new show, Emeril's Florida, on the Cooking Channel, returned as a co-host on Top Chef and continued providing talent services as the recurring Food Correspondent for Good Morning America.
The Martha Stewart Living Radio channel launched on Sirius Satellite Radio, now known as Sirius XM Radio, in November 2005 providing programming 24 hours a day, seven days a week, of which 65 hours each week was original programming created by our experts. In November 2011, we renewed our agreement with Sirius XM Radio for a one-year term that ended December 31, 2012 at a reduced license fee, along with a reduction of original programming to approximately 40 hours each week. In addition, our agreement with Sirius XM provided for all radio advertising on the Martha Stewart Living Radio channel to be sold, and all revenue from such advertising retained, by Sirius XM, except for a portion of the revenue from radio advertising sold in the fourth quarter of 2012. On January 31, 2013, we announced a new agreement with Sirius XM Radio at a further reduced license fee, along with a reduction of original programming to approximately 10 hours each week. The new agreement with Sirius XM Radio replaces the Martha Stewart Living Radio channel with a new, daily radio show hosted by Martha Stewart 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. Competition for television and radio advertising dollars is based primarily on advertising rates, audience size and demographic composition, viewer response to advertisers’ products and services and the effectiveness of the advertising sales staffs. Our television programs competed 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 has experienced fluctuations in quarterly performance due to, among other things, seasonal advertising patterns, seasonal influences on people’s viewing habits and audience increases for our programming during

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holiday seasons. Because television seasons run 12 months beginning and ending in the middle of September, the 2012 results include nine months of season 7 of The Martha Stewart Show on the Hallmark Channel. While repeat episodes air over the summer, original episodes usually run September to May and typically generate higher ratings and revenues.
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 Crafts, Martha Stewart Weddings, Everyday Food, Mad Hungry 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 documents, 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 the SEC by accessing www.sec.gov, or 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.
Item 1A. Risk Factors
A wide range of factors could materially affect our performance. Like other companies, we are susceptible to macroeconomic changes that may affect the general economic climate and our performance, the performance of those with whom we do business, and the appetite of consumers for products and publications. Similarly, the price of our stock is impacted by general equity market conditions, the relative attractiveness of our market sector, differences in results of operations from estimates and projections, and other factors beyond our control. In addition to the factors affecting specific business operations identified in connection with the description of those operations and the financial results of those operations elsewhere in this report, the factors listed below could adversely affect our operations. Although the risk factors listed below are the risk factors that Company management considers significant, material risk factors that are not presently known to Company management may also adversely affect our operations.
Our success depends in part on the popularity 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.
While we believe there has been significant consumer acceptance for our products as stand-alone brands, the image, reputation, popularity and talent of Martha Stewart and Emeril Lagasse remain important factors.
Ms. Stewart’s efforts, personality and leadership, including her services as an officer and director of MSLO, have been, and continue to be, critical to our success. While we have managed our business without her daily participation at times in the past, the repeated diminution or loss of her services due to disability, death or some other cause, or any repeated or sustained shifts in public or industry perceptions of her, could have a material adverse effect on our business. In a July 2012 letter, we and Ms. Stewart agreed to extend the term of Ms. Stewart's current employment agreement until June 30, 2017. Under this letter, the parties have agreed to negotiate mutually acceptable adjustments to the terms of the employment agreement to take effect at

11


July 1, 2013 (or such earlier date as the parties may agree). Under the letter, if the parties do not reach an agreement regarding mutually acceptable adjustments, we can choose to have the employment agreement continue in effect through June 30, 2017 or to allow it to lapse at June 30, 2013.
In addition, in 2008 we acquired the assets relating to Emeril Lagasse’s businesses other than his restaurants and foundation. The value of these 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 these assets could be materially adversely affected if Mr. Lagasse were to lose popularity with the public or be unable to participate in our business, forcing us potentially to write-down a significant amount of the value we paid for these assets.
Our management turnover creates uncertainty.
Our continued success depends to a large degree upon our ability to attract and retain key management executives, as well as upon a number of members of creative, technology, and sales and marketing staffs. In the last several years, we have had members of the senior management team leave the Company and we have recruited new members who are part of our current management team. We are currently in a search for a new Chief Executive Officer. The loss of key members of our management team could have a negative impact on our ability to manage and grow our business effectively. As a result, we may face challenges in effectively managing our operations during this period of transition. If members of senior management leave the Company, we cannot assure you that we would be able to replace them in a timely manner, or at all, on acceptable terms. In addition, our search for replacements for departed executives may cause uncertainty regarding the future of our business, impact employee hiring and retention, increase the volatility in our stock price and adversely impact our revenue, operating results and financial condition.
Failure of the economy to sustain a recovery or difficulties in the financial markets could significantly impact our business, financial condition, results of operations and cash flows, and could adversely affect the value of our assets or hamper our ability to raise additional funds.
The economy experienced considerable disruption during the three years in the period ended December 31, 2012, including volatility in securities prices and a general reduction in credit availability. These events led to increased unemployment, a downturn in the housing market, declines in consumer confidence and declines in personal income and consumer spending, particularly discretionary spending. These adverse consumer trends led to reduced spending on general merchandise, homes and home improvement projects—categories in which we license our brands—resulting in weaker revenues from our licensed products in our Merchandising business.
We depend on advertising revenue in our Publishing business. We cannot control how much or where companies choose to advertise. Since 2009, we have seen a significant downturn in advertising dollars generally in the marketplace, and more competition for the reduced dollars. During the course of the advertising recession, we experienced a decline in advertising revenues, and a permanent reversal of that trend is not assured. If advertisers continue to spend less money, or if they advertise elsewhere in lieu of our magazines or websites, our business and revenues will be materially adversely affected. Furthermore, if our licensees experience financial hardship, they may be unwilling or unable to pay us royalties or continue selling our products, regardless of their contractual obligations. 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.
Although economic conditions have recently stabilized and shown some indications of improvement, it is difficult to judge the scope and sustainability of any general economic recovery. This makes it difficult for us to forecast consumer and product demand trends and companies’ willingness to spend money to advertise in our media properties. While consumer spending and confidence have improved, consumer spending remains constrained. Unemployment remains and is expected to remain at high levels and the housing market remains weak and may in fact further deteriorate. If consumer confidence, consumer spending and the housing market do not rebound and/or if the companies with which we do business experience ongoing problems, our revenues may not grow as planned. An extended period of reduced cash flows could increase our need for credit at a time when such credit may not be available. Because of residual uncertainties regarding the economy, our operating results will be difficult to predict, and prior results will not necessarily be indicative of results to be expected in future periods.
In addition, we have a significant intangible asset recorded on our balance sheet, as well as goodwill and other assets. We evaluate the recoverability of the carrying amount of our goodwill, intangible and other assets on an ongoing basis, and we may in the future incur substantial impairment charges, which would adversely affect our financial results. Impairment assessment inherently involves the exercise of judgment in determining assumptions about expected future cash flows and the impact of market conditions on those assumptions. Although we believe the assumptions we have used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. Future events and changing market conditions may prove our assumptions to be wrong with respect to prices, costs, holding periods or other

12


factors. Differing results may amplify impairment charges in the future. As reported in our Quarterly Report on Form 10-Q for the period ended September 30, 2012, we performed an interim review of goodwill for impairment and determined that the goodwill associated with the Publishing segment was impaired as of September 30, 2012. The non-cash goodwill impairment charge of $44.3 million was the result of the Publishing segment experiencing slower than anticipated growth in advertising. For further details on our goodwill impairment charge, see the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 2, Summary of Significant Accounting Policies under the heading "Goodwill and intangible assets."
We may not be able to successfully implement our anticipated growth strategies.
As part of our growth strategy, we seek to extend our brands and merchandise categories and expand our geographic coverage. If we were to create a new brand, or expand an existing brand, we may be required to increase expenditures to accelerate the development process with the goal of achieving longer-term cost savings and improved profitability. Brand developments may increase expenses if we hire additional personnel to manage our growth. These investments also would require significant time commitments from our senior management and place a strain on their ability to manage our existing businesses.
Achievement of our growth strategies require investment in new capabilities, distribution channels and technologies worldwide. These investments may result in short-term costs without accompanying current revenues and therefore, may be dilutive to our earnings in the short term. Although we believe that our strategy will lead to profitability, the anticipated benefits may not be fully realized.
As an example, we have been accelerating our shift in focus from print magazines to digital distribution of our content. We want to ensure that our brands are platform agnostic and that consumers can access our content in a variety of different formats, following consumer trends of greater digital consumption and less demand for printed publications. While we expect to see significant savings in editorial, production and distribution costs as a result of the Publishing Restructuring, we will have offsetting increased costs due to the increased production of digital content. Ultimately the success of this strategy will depend on our ability to monetize this digital content effectively.
We are expanding our merchandising and licensing programs into new areas and products, the failure of any 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 retail merchandising programs. We have entered into several new merchandising and licensing agreements in the past few years. Some of these agreements include exclusivity provisions and have a duration of many years. While we require that our licensees maintain the quality of our respective brands through specific contractual provisions, we cannot be certain that our licensees, or their manufacturers and distributors, will honor their contractual obligations or that they will not take other actions that will diminish the value of our brands.
There is also a risk that our extension into new business areas will meet with disapproval from consumers. We cannot guarantee that these programs will be fully implemented, or, if implemented, that they will be successful. If the licensing or merchandising programs do not succeed, we may be prohibited from seeking different channels for our products due to the exclusivity provisions and multi-year terms of these agreements. Disputes with new or existing licensees may arise that could hinder our ability to grow or expand our product lines. Disputes also could 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.
An example of such risks is a dispute with a current licensee is a lawsuit that was filed on January 23, 2012, 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 this lawsuit, Macy's Inc. and Macy's Merchandising Group, Inc. (together, the “Macy's plaintiffs”) claim that our planned activities under the agreement governing our strategic alliance with J.C. Penney materially breach the agreement between us and Macy's Merchandising Group, Inc. dated April 3, 2006 (the “Macy's Agreement”). The Macy's plaintiffs seek 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, the Macy's plaintiffs amended their complaint to assert a second claim which alleges additional breaches of the Macy's 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 is currently ongoing. See Item 3. Legal Proceedings in this Annual Report on Form 10-K for details regarding this lawsuit. Depending on the outcome of the trial or any settlement discussions, some of the future benefits we anticipate receiving from our relationship with either Macy's or J. C. Penney could be reduced.

13


If we are unable to predict, respond to and influence trends in what the public finds appealing, our business will be adversely affected.
Our continued success depends on our ability to provide creative, useful and attractive ideas, information, concepts, programming, content and products that strongly appeal to a large number of consumers, as well as distributing the content through the latest technology and traditional channels. In order to accomplish this, we must be able to respond quickly and effectively to changes in consumer tastes for ideas, information, concepts, programming, technology, content and products. The strength of our brands and our business units depends in part on our ability to influence tastes through print publication, television and digital distribution and merchandising. We cannot be sure that our new ideas and content will have the appeal and garner the acceptance that they have in the past, or that we will be able to respond quickly to changes in the tastes of homemakers and other consumers and their appetite for new technology.
Absence of new product launches may reduce our earnings or generate losses.
Our future success will depend in part on our ability to continue offering new products and services that successfully gain market acceptance by addressing the needs of our current and future customers. Our efforts to introduce new products or integrate acquired products may not be successful or profitable. The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new product, or assimilating and marketing an acquired product, is both risky and costly. New products generally incur initial operating losses. Costs related to the development of new products and services are generally expensed as incurred and, accordingly, our profitability from year to year may be adversely affected by the number and timing of new product launches. Other businesses and brands that we may develop may also prove not to be successful.
We have an advertising-revenue-based website which is dependent on a large consumer audience and resulting page views. Failure to achieve growth could adversely affect our brand and business prospects.
Our growth depends to a significant degree upon the continued development and growth of our digital properties and our ability to monetize them. We continue to enhance and upgrade the marthastewart.com site. We cannot be certain that the ongoing changes we make will enable us to sustain growth for our website in the long term. In addition, the competition for advertising dollars has intensified and we have experienced continuous pressure on digital advertising revenue pricing from various sources, including advertising networks, real time bidding and competitive websites. In order for our digital properties to succeed, we must, among other things maintain and continue to:
significantly increase our online audience;
monetize the growth from website traffic to increase advertising revenue;
attract and retain a base of frequent visitors to our website;
expand the content, products and interactive experiences we offer on our website;
respond to competitive developments while maintaining a distinct brand identity;
develop and upgrade our technologies so that they can support more efficient and effective migration of content from the print platform and provide a more robust user experience; and
bring innovative product features to market in a timely manner.
We cannot be certain that we will be successful in achieving these and other necessary objectives. If we are not successful in achieving these objectives, our business, financial condition and prospects could be materially adversely affected.
Our principal print business vendors are consolidating and this may adversely affect our business and operations.
We rely on certain principal vendors in the print portion of our Publishing segment and their ability or willingness to sell goods and services to us at favorable prices and other terms. Many factors outside our control may harm these relationships and the ability and willingness of these vendors to sell these goods and services to us on favorable terms. Our principal vendors include paper suppliers, printers, subscription fulfillment houses, subscription agents and national newsstand wholesalers, distributors and retailers. Each of these industries in recent years has experienced consolidation among its principal participants. Further consolidation may result in decreased competition, which may lead to greater dependence on certain vendors and increased prices; as well as interruptions and delays in services provided by such vendors, all of which could adversely affect our results of operations.


14


We may be adversely affected by fluctuations in paper, postage and distribution costs.
In our Publishing segment, our principal raw material is paper for the print portion of that business. Paper prices have fluctuated over the past several years. We generally purchase paper from major paper suppliers who adjust the price periodically. We have not entered, and do not currently plan to enter, into long-term forward price or option contracts for paper. Accordingly, significant increases in paper prices would adversely affect our future 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 a significant further increase in postage prices could adversely affect our future results of operations. Postage rates for periodicals increased by 2.1% in January 2012 from 2011 rates, and have increased again by 2.5% in February 2013. We may not be able to recover, in whole or in part, paper or postage cost increases.
Distribution of magazines to newsstands and bookstores is conducted primarily through companies known as wholesalers. Wholesalers have in the past advised us that they intended to increase the price of their services. We have not experienced any material increase to date; however, some wholesalers have experienced credit and going concern risks. It is possible that other wholesalers likewise may seek to increase the price of their services or discontinue operations. An increase in the price of our wholesalers’ services could have a material adverse effect on our results of operations. The need to change wholesalers could cause a disruption or delay in deliveries, which could adversely impact our results of operations.
We may be adversely affected by a continued weakening of newsstand sales.
The magazine industry has seen a weakening of newsstand sales during the past few years. A continuation of this decline would 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.
Our websites and internal networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our operations and result in the theft of our proprietary information.
Our website activities involve the storage and transmission of proprietary information, which we endeavor to protect from third party access. However, it is possible that unauthorized persons may be able to circumvent our protections and misappropriate proprietary information or cause interruptions or malfunctions in our digital operations. We may be required to spend significant capital and other resources to protect against or remedy any such security breaches. Accordingly, security breaches could expose us to a risk of loss due to business interruption, or litigation. Our security measures and contractual provisions attempting to limit our liability in these areas may not be successful or enforceable.
Martha Stewart controls our Company through her stock ownership, enabling her to elect most of our board of directors, and potentially to block matters requiring stockholder approval, including any potential changes of control.
Ms. Stewart controls all of our outstanding shares of Class B Common Stock, which provides Ms. Stewart with approximately 87% of our voting power. The Class B Common Stock has ten votes per share, while Class A Common Stock, which is the stock available to the public, has one vote per share. Because of this dual-class structure, Ms. Stewart has a disproportionately influential vote. As a result, Ms. Stewart has the ability to control unilaterally the outcome of all matters requiring stockholder approval, including the election and removal of all directors, other than the two directors whose election is controlled by J.C. Penney, and generally any merger, consolidation or sale of all or substantially all of our assets, and indirectly the ability to control our management and affairs. 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 business and result in costly litigation.
Our business is highly dependent upon our creativity and resulting intellectual property. We are susceptible to others imitating our products and infringing our intellectual property rights. We may not be able to successfully protect our intellectual property rights, upon which we depend. In addition, the laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Imitation of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenues. If we are alleged to have infringed the intellectual property rights of another party, any resulting litigation could be costly, affecting our finances and 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

15


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 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 businesses.
Our magazines, books, digital products and other publishing products compete not only with other magazines, books, digital products and other publishing products, but also with other mass media, websites, and many other types of leisure-time activities. We face significant competition from a number of print and website publishers, some of which have greater financial and other resources than we have, which may enhance their ability to compete in the markets we serve. As advertising budgets have diminished and the number of media offerings have grown, the competition for advertising dollars has intensified. Competition for advertising revenue in publications is primarily based on advertising rates, the nature and scope of readership, reader response to the promotions for advertisers’ products and services, the desirability of the magazine’s demographic and the effectiveness of advertising sales teams. Other competitive factors in publishing include product positioning, editorial quality, circulation, price, customer service, circulation revenues and, ultimately, advertising revenues. Our websites compete with other how-to, food and lifestyle websites. Our challenge is to attract and retain users through an easy-to-use and content-relevant website. Competition for digital adverting 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. Because some forms of media have relatively low barriers to entry, we anticipate that additional competitors, some of which have greater resources than we do, may enter these markets and intensify competition.
Our Merchandising segment competitors consist of mass-market and department stores that compete with the mass-market, home improvement and department 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. We also compete with the internet businesses of these stores and other websites that sell similar retail goods.
Our failure to meet the competitive pressures in any of these segments could negatively impact our results of operations and financial condition.
Item 1B. Unresolved Staff Comments.
None.


16


Item 2. Properties.
Information concerning the location, use and approximate square footage of our principal facilities as of December 31, 2012, all of which are leased, is set forth below: 
Location
Use
Approximate Area
in Square Feet
601 West 26th Street
New York, NY
Publishing segment editorial and production offices (includes magazines, digital and books), advertising sales offices, product design facilities, photography studio, test kitchens, property storage, principal executive and administrative offices and corporate offices
225,042

 
 
 
Satellite Sales Offices in Michigan, Illinois and California
Advertising sales offices
6,302

We vacated our television production facilities at 221 West 26th Street and our executive and administrative office for television production at 226 West 26th Street at the end of the second quarter of 2012. The other leases for our offices and facilities expire between 2015 and 2018, and some of these leases are subject to our renewal.
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 10, 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. 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, the Macy's plaintiffs claim that our planned activities under our commercial agreement with J.C. Penney materially breach the agreement between us and Macy's Merchandising Group, Inc. dated April 3, 2006. The Macy's plaintiffs seek 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, the Macy's plaintiffs amended their complaint to assert a second claim which alleges 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 is currently ongoing. We believe that we have meritorious defenses to the claims made by the Macy's plaintiffs, and we are vigorously defending such claims. Litigation costs in this matter are significant.
We are party to legal proceedings in the ordinary course of business, including product liability claims for which we are indemnified by our licensees. Other than Macy's, none of these proceedings is deemed material.
Item 4. Mine Safety Disclosures.
Not applicable.

17


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
2011
 
Q2
2011
 
Q3
2011
 
Q4
2011
 
Q1
2012
 
Q2
2012
 
Q3
2012
 
Q4
2012
High Sales Price
$
4.54

 
$
5.49

 
$
4.75

 
$
5.19

 
$
4.89

 
$
3.94

 
$
3.81

 
$
3.24

Low Sales Price
$
3.40

 
$
3.45

 
$
2.97

 
$
2.77

 
$
3.70

 
$
2.95

 
$
2.87

 
$
2.28

As of February 20, 2013, there were 7,508 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. However, in December 2011, our Board of Directors declared and paid a special one-time dividend of $0.25 per share of common stock for a total dividend payment of $16.7 million.
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.

18


PERFORMANCE GRAPH
The following graph compares the performance of our Class A Common Stock during the period commencing on January 1, 2008 and ending on December 31, 2012, with that of the Standard & Poor’s 500 Stock Index (“S&P 500 Composite Index”) and the stocks included in the Media General Financial Services database under the Standard Industry Code 2721 (Publishing-Periodicals) (the “SIC Code Index”). In 2012, we revised the performance graph to include a comparison with 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 ("Peer Group").
The addition of the S&P SmallCap 600 Index and the Peer Group in 2012 was the result of updating the comparison of the performance of our Class A Common Stock with indices that are more closely aligned with our businesses and size. 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 Peer Group selected by us, which is also 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.
For comparative purposes, we have included the SIC Code Index and the S&P 500 Composite Index, but we do not plan to include these indices in the future. The SIC Code Index consists of companies that are primarily publishers of periodicals, although many also conduct other businesses, including owning and operating television stations and cable networks. The hypothetical investment assumes investment in a portfolio of equity securities that mirror the composition of the SIC Code Index and is weighted according to market capitalization of the companies in the index.
The graph assumes that $100 was invested in each of our Class A Common Stock, the S&P SmallCap 600 Index, the Peer Group, the S&P 500 Composite Index and the SIC Code Index at the closing prices on December 31, 2007 and assumes reinvestment of dividends. The performance shown in the graph represents past performance and should not be considered an indication of future performance. 



19


Item 6. Selected Financial Data.
The information set forth below for the five years ended December 31, 2012 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). 
 
2012
 
2011
 
2010
 
2009
 
2008
INCOME STATEMENT DATA REVENUES
 
 
 
 
 
 
 
 
 
Publishing
$
122,540

 
$
140,857

 
$
145,573

 
$
146,100

 
$
179,116

Merchandising
57,574

 
48,614

 
42,806

 
52,566

 
57,866

Broadcasting
17,513

 
31,962

 
42,434

 
46,111

 
47,328

Total revenues
197,627

 
221,433

 
230,813

 
244,777

 
284,310

Operating loss
(56,396
)
 
(18,594
)
 
(8,663
)
 
(11,968
)
 
(10,857
)
Net loss
$
(56,085
)
 
$
(15,519
)
 
$
(9,596
)
 
$
(14,578
)
 
$
(15,665
)
PER SHARE DATA
 
 
 
 
 
 
 
 
 
Loss per share:
 
 
 
 
 
 
 
 
 
Basic and diluted—Net loss
$
(0.83
)
 
$
(0.28
)
 
$
(0.18
)
 
$
(0.27
)
 
$
(0.29
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic and diluted
67,231,463

 
55,880,896

 
54,440,490

 
53,879,785

 
53,359,538

Dividends per common share
$

 
$
0.25

 
$

 
$

 
$

FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,925

 
$
38,453

 
$
23,204

 
$
25,384

 
$
50,204

Short-term investments
29,182

 
11,051

 
10,091

 
13,085

 
9,915

Total assets
154,260

 
216,120

 
222,314

 
229,791

 
261,285

Long-term obligations

 

 
7,500

 
13,500

 
19,500

Shareholders’ equity
95,516

 
147,947

 
139,033

 
143,820

 
150,995

OTHER FINANCIAL DATA
 
 
 
 
 
 
 
 
 
Cash flow provided by / (used in) operating activities
$
239

 
$
(2,220
)
 
$
1,872

 
$
(9,273
)
 
$
39,699

Cash flow (used in) / provided by investing activities
(18,918
)
 
6,886

 
153

 
(9,617
)
 
(38,856
)
Cash flow provided by / (used in) financing activities
151

 
10,583

 
(4,205
)
 
(5,930
)
 
18,825

NOTES TO SELECTED FINANCIAL DATA
Loss from continuing operations
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.
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 (“Kmart”) royalties of $10.0 million as non-cash revenue, an incremental $3.9 million from the conclusion of our relationship with TurboChef Technologies, Inc.

20


(“TurboChef”), 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.
2008 results include revenues from Kmart of $23.8 million, as well as a $9.3 million non-cash goodwill impairment charge recorded in the Publishing segment.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and high-quality, licensed products that we design. We are organized into three business segments: Publishing, Merchandising and Broadcasting. Summarized below are our operating results for 2012, 2011 and 2010. 
 
2012
 
2011
 
2010
Total Revenues
$
197,627

 
$
221,433

 
$
230,813

Total Operating Costs and Expenses
(254,023
)
*
(240,027
)
 
(239,476
)
Total Operating Loss
$
(56,396
)
 
$
(18,594
)
 
$
(8,663
)
* Publishing segment operating costs and expenses included a non-cash goodwill impairment charge of $44.3 million.
We generate revenue from various sources such as advertising customers and licensing partners. Publishing is our largest business segment, accounting for 62% of our total revenues in 2012. The primary source of Publishing segment revenue is advertising from our magazines which, in 2012, included Martha Stewart Living, Martha Stewart Weddings, Everyday Food and Whole Living. As part of the Publishing Restructuring, 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. Magazine subscriptions, newsstand sales and royalties from our book business account for most of the balance of the print portion of Publishing segment revenue. 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 Martha Stewart Living program at The Home Depot and our Martha Stewart Collection at Macy’s. Pursuant to our commercial agreement with J.C. Penney, we began to provide product design services in January 2012 for which we earn a fee. Our manufacturing partnerships include Avery for our Martha Stewart Home Office line (currently sold at Staples), Wilton Properties Inc. 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 manufacturing partnerships to produce products under the Emeril brand. In 2012, Broadcasting segment revenue was derived primarily from television advertising and license fees from our agreement with Hallmark Channel, as well as satellite radio advertising, license fees and sponsorship revenues. Our agreement with the Hallmark Channel to televise The Martha Stewart Show concluded with the completion of season 7 in September 2012. While the Hallmark Channel retains certain rights to some of our programming other than The Martha Stewart Show (“companion programming”) through September 2013, we completed the delivery of all of our companion programming to the Hallmark Channel by December 31, 2011 and therefore will not recognize any additional revenues from this source. Effective January 1, 2012, our agreement with Sirius XM provided for all radio advertising on the Martha Stewart Living Radio channel to be sold, and all revenue from such advertising retained, by Sirius XM, except for a portion of the revenue from radio advertising sold in the fourth quarter of 2012. On January 31, 2013, we announced a new agreement with Sirius XM Radio at a reduced license fee, along with a reduction of original programming to approximately 10 hours each week. The new agreement with Sirius XM Radio replaces the Martha Stewart Living Radio channel with a new, daily radio show hosted by Martha Stewart on SiriusXM Stars, channel 107. During 2012, we significantly restructured the Broadcasting segment, which included the termination of our live audience television production operations. We expect that the operations of this segment in 2013 and beyond will consist of television content library licensing, satellite radio operations and limited television production 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 (including related direct mail and other marketing expenses), the editorial costs associated with creating content across our media platforms, the technology costs associated with our digital properties and the costs associated with producing our television and video programming. We also incur general overhead costs, including facilities and related expenses. In 2012, we incurred restructuring charges associated with significant changes in our Broadcasting business and more recently of our Publishing business, as described above. The restructuring charges primarily consisted of employee severance and other employee-related termination costs. In addition, we also incurred restructuring charges in 2012 related to the departure of our President and Chief Executive Officer. In 2011, we

21


incurred restructuring charges associated with the installation of a new executive management team and the implementation of their strategic vision.
Our results for 2012 include a non-cash goodwill impairment charge of $44.3 million as a result of the Publishing segment experiencing slower than anticipated growth in advertising.
Detailed segment operating results for 2012, 2011 and 2010 are summarized below. 
 
2012
 
2011
 
2010
Segment Revenues:
 
 
 
 
 
Publishing
$
122,540

 
$
140,857

 
$
145,573

Merchandising
57,574

 
48,614

 
42,806

Broadcasting
17,513

 
31,962

 
42,434

TOTAL REVENUES
197,627

 
221,433

 
230,813

Segment Operating Costs and Expenses:
 
 
 
 
 
Publishing
(184,569
)
*
(147,321
)
 
(142,923
)
Merchandising
(18,097
)
 
(18,642
)
 
(17,805
)
Broadcasting
(15,159
)
 
(36,702
)
 
(44,012
)
TOTAL OPERATING COSTS AND EXPENSES BEFORE CORPORATE EXPENSES
(217,825
)
 
(202,665
)
 
(204,740
)
Operating Income / (Loss):
 
 
 
 
 
Publishing
(62,029
)
 
(6,464
)
 
2,650

Merchandising
39,477

 
29,972

 
25,001

Broadcasting
2,354

 
(4,740
)
 
(1,578
)
Total Segment Operating (Loss) / Income Before Corporate Expenses
(20,198
)
 
18,768

 
26,073

Corporate Expenses **
(36,198
)
 
(37,362
)
 
(34,736
)
TOTAL OPERATING LOSS
$
(56,396
)
 
$
(18,594
)
 
$
(8,663
)
* 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, 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.

22


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, our operating costs and expenses before Corporate expenses 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 cash compensation and non-cash equity compensation costs related to executive management, partially offset by higher legal fees.
2011 Operating Results Compared to 2010 Operating Results
In 2011, total revenues decreased 4% from 2010 largely due to lower television and print advertising revenue. The 2010 revenues also included royalties related to our Kmart and 1-800-Flowers.com agreements, which ended in January 2010 and June 2010, respectively, and the $2.2 million termination payment that we received from 1-800-Flowers.com, as well as substantially all of the exclusive license fee of approximately $5.0 million from the Hallmark Channel for a significant portion of our library of programming. The 2010 revenues further included a $1.0 million one-time payment received from a manufacturing partner. The reduced television and print advertising revenues and the absence of these 2010 items were partially offset by higher 2011 television revenue from license fees related to our new programming on the Hallmark Channel, an increase in Merchandising segment revenues from increased sales by certain of our existing partners and higher digital advertising revenue.
In 2011, our operating costs and expenses before Corporate expenses decreased 1% from 2010 predominantly due to lower television production and distribution costs related to seasons 6 and 7 of The Martha Stewart Show in our Broadcasting segment, as well as lower advertising staff costs from the reorganization of our advertising sales department in the fourth quarter of 2010 in both the Publishing and Broadcasting segments. These decreases in costs were partially offset by higher paper, printing and distribution expenses, higher content creation costs and higher subscriber acquisition costs in our Publishing segment in 2011, as well as higher expenses associated with our expanded merchandising relationships. Segment operating costs and expenses before Corporate expenses included restructuring charges, which mainly consisted of employee severance and certain consulting costs.
Corporate expenses increased 8% in 2011 as compared to 2010 primarily due to restructuring charges. These Corporate restructuring charges, which consisted of employee severance and other employee-related termination costs, as well as certain consulting and recruiting costs, were partially offset by the reallocation of facilities-related expenses primarily to the Publishing segment, as described further in the segment discussion below.
Liquidity
During 2012, our overall cash, cash equivalents and short-term investments decreased $0.4 million from $49.5 million at December 31, 2011 to $49.1 million at December 31, 2012. Despite our net loss of $(56.1) million in 2012, $0.2 million of cash was provided from operating activities in 2012. The slight overall decrease in cash, cash equivalents and short-term investments was due to cash used for capital expenditures. We had no borrowings against our line of credit as of December 31, 2012 or 2011.

23


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
)
Publishing Segment Operating Costs and Expenses
 
 
 
 
 
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
)
Total Publishing Segment Operating Costs and Expenses
$
(184,569
)
 
$
(147,321
)
 
$
(37,248
)
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.

24


Restructuring charges increased $1.1 million in 2012 from 2011 as the result of the workforce reduction related to the Publishing Restructuring. As reported in our Quarterly Report on Form 10-Q for the period ended September 30, 2012, we performed an interim review of goodwill for impairment and determined that the goodwill associated with the Publishing segment was impaired as of September 30, 2012. The non-cash goodwill impairment charge of $44.3 million was the result of the Publishing segment experiencing slower than anticipated growth in advertising. For further details on our goodwill impairment charge, see the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 2, Summary of Significant Accounting Policies under the heading "Goodwill and intangible assets."

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

Merchandising Segment Operating Costs and Expenses
 
 
 
 
 
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
)
Total Merchandising Segment Operating Costs and Expenses
$
(18,097
)
 
$
(18,642
)
 
$
545

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 new 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 new 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.

25


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
)
Broadcasting Segment Operating Costs and Expenses
 
 
 
 
 
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
)
Total Broadcasting Segment Operating Costs and Expenses
$
(15,159
)
 
$
(36,702
)
 
$
21,543

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 new weekly series that debuted on PBS in October. 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. For further information, see "Schedule II—Valuation and Qualifying Accounts" at the end of this Annual Report on Form 10-K.
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.

26


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 and non-cash equity compensation related to executive management. Restructuring charges in 2012 primarily included the costs associated with the departure of our 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). Interest income was $0.8 million in 2012 compared to net interest expense in 2011 of $(0.3) million. In 2011, we completely repaid our then outstanding $9.0 million term loan balance.
GAIN ON SALE OF COST-BASED INVESTMENT. Gain on the sale of a cost-based investment was $1.2 million in 2012 compared to a gain of $7.6 million in 2011. The gain in 2012 was related to selling our cost-based investments in Ziplist and pingg common stock for cash of $0.8 million and $0.4 million, respectively. The gain in 2011 was related to selling our cost-based investment in WeddingWire in December 2011 for cash of $11.0 million.
OTHER-THAN-TEMPORARY LOSS ON COST-BASED INVESTMENTS. Other-than-temporary loss on cost-based investments was $0.1 million for 2012 compared to $2.7 million in 2011. The loss in 2012 was related to writing down the carrying value of the Company's remaining cost-based equity investment in United Craft MS Brands, LLC. The loss in 2011 was related to the write down of the carrying value of our cost-based investments in pingg and Ziplist 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.


27


RESULTS OF OPERATIONS
Comparison of 2011 to 2010.
PUBLISHING SEGMENT 
(in thousands)
2011
 
2010
 
Better / (Worse)
Publishing Segment Revenues
 
 
 
 
 
Print Advertising
$
67,740

 
$
73,797

 
$
(6,057
)
Digital Advertising
23,366

 
21,420

 
1,946

Circulation
46,109

 
46,442

 
(333
)
Books
1,814

 
2,756

 
(942
)
Other
1,828

 
1,158

 
670

Total Publishing Segment Revenues
$
140,857

 
$
145,573

 
$
(4,716
)
Publishing Segment Operating Costs and Expenses
 
 
 
 
 
Production, distribution and editorial
(86,197
)
 
(82,433
)
 
(3,764
)
Selling and promotion
(51,036
)
 
(52,872
)
 
1,836

General and administrative
(8,486
)
 
(6,491
)
 
(1,995
)
Depreciation and amortization
(774
)
 
(1,127
)
 
353

Restructuring charges
(828
)
 

 
(828
)
Total Publishing Segment Operating Costs and Expenses
$
(147,321
)
 
$
(142,923
)
 
$
(4,398
)
Publishing Segment Operating (Loss) / Income
$
(6,464
)
 
$
2,650

 
$
(9,114
)
Publishing segment revenues decreased 3% in 2011 from 2010. Print advertising revenue decreased $6.1 million in 2011 from 2010 due to the decrease in advertising pages in Martha Stewart Living, Everyday Food and Whole Living, partially offset by higher rates across these three publications. Martha Stewart Weddings advertising revenue increased due to an increase in advertising pages, partially offset by lower rates. Digital advertising revenue increased $1.9 million in 2011 from 2010 due to an increase in sold advertising volume, partially offset by lower rates. Circulation revenue was essentially flat in 2011 as compared to 2010 due to lower newsstand sales of Martha Stewart Living, Everyday Food and Whole Living, partially offset by the sales of the special issue of Everyday Food with no comparable special interest publication in the prior year, as well as higher newsstand sales of Martha Stewart Weddings. Also offsetting the decline in combined newsstand sales was the increase in volume of subscription copies of Martha Stewart Living at higher revenues per copy from 2010. Revenue related to our books business decreased $0.9 million primarily due to the delivery and acceptance in 2011 of lower-value manuscripts related to our multi-book agreements with The Crown Publishing Group (Clarkson Potter) for Martha Stewart books. Other revenue increased $0.7 million primarily due to increased digital distribution and sales of our content on portable devices, including iPad versions of our titles and iPad/iPhone apps.
Production, distribution and editorial expenses increased $3.8 million in 2011 from 2010 due to higher paper, printing and distribution prices and the costs associated with the additional special issue of Everyday Food. Production, distribution and editorial expenses also increased due to higher art and editorial compensation and story costs to support the digital and print magazines, books, websites and other digital initiatives, partially offset by savings from a lower volume of magazine pages produced. Selling and promotion expenses decreased $1.8 million due to lower staff costs primarily from the fourth quarter 2010 reorganization of our advertising sales department, lower advertising sales commission costs and lower print advertising marketing expenses. These decreases were partially offset by higher subscriber acquisition costs, higher newsstand marketing costs and higher digital marketing and advertising operations costs supporting the increase in digital advertising revenues. General and administrative expenses increased $2.0 million largely due to a higher allocation of facilities-related expenses to our Publishing segment to reflect the 2011 utilization of office space, as well as higher compensation expense. The increase in our Publishing segment rent allocation was offset by a decrease in the Corporate rent allocation. Depreciation and amortization expenses decreased by $0.4 million during 2011 compared to 2010 reflecting the full depreciation during the second quarter of 2010 of the costs associated with our 2007 launch of our redesigned website. Restructuring charges included employee severance and certain consulting costs.

28


MERCHANDISING SEGMENT 
(in thousands)
2011
 
2010
 
Better / (Worse)
Merchandising Segment Revenues
 
 
 
 
 
Royalty and other
$
48,614

 
$
42,806

 
$
5,808

Total Merchandising Segment Revenues
$
48,614

 
$
42,806

 
$
5,808

Merchandising Segment Operating Costs and Expenses
 
 
 
 
 
Production, distribution and editorial
(8,668
)
 
(7,891
)
 
(777
)
Selling and promotion
(4,726
)
 
(4,162
)
 
(564
)
General and administrative
(5,203
)
 
(5,709
)
 
506

Depreciation and amortization
(32
)
 
(43
)
 
11

Restructuring charges
(13
)
 

 
(13
)
Total Merchandising Segment Operating Costs and Expenses
$
(18,642
)
 
$
(17,805
)
 
$
(837
)
Merchandising Segment Operating Income
$
29,972

 
$
25,001

 
$
4,971

Merchandising segment revenues increased 14% in 2011 from 2010. Royalty and other revenues increased $5.8 million primarily due to increased sales by certain of our existing partners, partially offset by the inclusion in 2010 of royalties and a one-time $2.2 million termination payment from 1-800-Flowers.com, an agreement that ended in June 2010. In addition, 2010 results included royalties from the terminated Kmart license and other expired partnerships, as well as a one-time $1.0 million payment received from a manufacturing partner.
Production, distribution and editorial expenses increased $0.8 million primarily due to higher compensation expenses associated with an increase in headcount to support our new merchandising relationships. Selling and promotion expenses increased $0.6 million mostly as a result of services that we provided to our partners for reimbursable creative services projects. General and administrative expenses decreased $0.5 million largely due to the benefit in non-cash equity compensation expense from a large forfeiture of equity awards in connection with certain executive departures in the Merchandising segment.


29


BROADCASTING SEGMENT 
(in thousands)
2011
 
2010
 
Better / (Worse)
Broadcasting Segment Revenues
 
 
 
 
 
Advertising
$
15,201

 
$
23,499

 
$
(8,298
)
Licensing and other
16,761

 
18,935

 
(2,174
)
Total Broadcasting Segment Revenues
$
31,962

 
$
42,434

 
$
(10,472
)
Broadcasting Segment Operating Costs and Expenses
 
 
 
 
 
Production, distribution and editorial
(32,219
)
 
(37,870
)
 
5,651

Selling and promotion
(1,446
)
 
(3,254
)
 
1,808

General and administrative
(1,967
)
 
(2,010
)
 
43

Depreciation and amortization
(470
)
 
(878
)
 
408

Restructuring charges
(600
)
 

 
(600
)
Total Broadcasting Segment Operating Costs and Expenses
$
(36,702
)
 
$
(44,012
)
 
$
7,310

Broadcasting Segment Operating Loss
$
(4,740
)
 
$
(1,578
)
 
$
(3,162
)
Broadcasting segment revenues decreased 25% in 2011 from 2010. Advertising revenue decreased $8.3 million primarily due to the decline in ratings, as well as lower rates, for season 6 of The Martha Stewart Show on the Hallmark Channel as compared to season 5 of The Martha Stewart Show in syndication. Advertising revenue also declined due to fewer sales of television integrations, lower integration rates and decreased radio advertising in 2011 from 2010. Television licensing and other revenue decreased $2.2 million primarily due to the inclusion in the first quarter of 2010 of substantially all of the exclusive license fee of approximately $5.0 million from the Hallmark Channel for a significant portion of our library of programming, as well as lower talent fees for certain television programming featuring Emeril Lagasse and lower international sales of The Martha Stewart Show. The decrease in these television licensing revenues was partially offset by the delivery of television programming in 2011 to the Hallmark Channel as part of the companion programming to The Martha Stewart Show, which included Emeril's Table, Mad Hungry with Lucinda Scala Quinn, Martha Bakes, holiday and other specials and Petkeeping with Marc Morrone.
Production, distribution and editorial expenses decreased $5.7 million due to lower television production costs related to season 6 of The Martha Stewart Show on the Hallmark Channel and the absence of distribution fees, which were payable under the season 5 syndication agreement for The Martha Stewart Show. The cost savings from The Martha Stewart Show season 6 were partially offset by higher television production costs associated with the delivery of new programming to the Hallmark Channel and a non-cash impairment charge of approximately $1.3 million for a definite-lived intangible asset previously acquired by the Broadcasting segment related to a television content library. Selling and promotion expenses decreased $1.8 million primarily due to lower staff costs from the fourth quarter 2010 reorganization of our advertising sales department. Restructuring charges included employee severance as well as certain other non-recurring costs.


30


CORPORATE 
(in thousands)
2011
 
2010
 
Better / (Worse)
Corporate Operating Costs and Expenses
 
 
 
 
 
General and administrative
$
(30,985
)
 
$
(32,152
)
 
$
1,167

Depreciation and amortization
(2,702
)
 
(2,584
)
 
(118
)
Restructuring charges
(3,675
)
 

 
(3,675
)
Total Corporate Operating Costs and Expenses
$
(37,362
)
 
$
(34,736
)
 
$
(2,626
)
Corporate operating costs and expenses increased 8% in 2011 from 2010. General and administrative expenses decreased $1.2 million due to the reallocation of facilities-related expenses to our Publishing segment to reflect 2011 utilization of office space, as well as the inclusion in 2010 of severance charges related to the reorganization of our advertising sales department, lower rent expense from the consolidation of certain offices and decreased general overhead spending. These decreases were partially offset by an increase in compensation expense as a result of overlaps in our executive management team during transition periods and higher professional fees. Restructuring charges included employee severance and other employee-related termination costs, as well as certain consulting and recruiting costs. Also included in the $3.7 million restructuring charge was an approximate $0.4 million reversal of non-cash equity compensation expense related to certain employee departures.
OTHER ITEMS
LOSS ON SALE OF FIXED ASSET. Loss on the sale of a fixed asset was $0.6 million for 2010 with no comparable loss in 2011.
GAIN ON SALE OF SHORT-TERM INVESTMENTS. Gain on the sale of short-term investments from the disposition of certain marketable equity securities was $1.5 million in 2010 with no comparable gain in 2011.
GAIN / (LOSS) ON EQUITY SECURITIES. Gain on equity securities was $0.02 million for 2011 compared to a loss of $(0.02) million in 2010. Income/(loss) on equity securities in 2010 was the result of marking a warrant then held by us to fair value in accordance with accounting principles governing these financial instruments. That warrant was cancelled during the three months ended September 30, 2011 resulting in a loss that was partially offset by the gains previously recorded in 2011.
NET GAIN ON SALE OF COST-BASED INVESTMENT. Net gain on the sale of a cost-based investment was $7.6 million for 2011 with no comparable gain in 2010. The gain was related to selling our cost-based investment in WeddingWire in December 2011 for cash of $11.0 million.
OTHER-THAN-TEMPORARY LOSS ON COST-BASED INVESTMENTS. Other-than-temporary loss on cost-based investments was $2.7 million for 2011 with no comparable loss in 2010. The loss was related to the write down of the carrying value of our cost-based investments in pingg and Ziplist after concluding that these investments were substantially impaired.
NET LOSS. Net loss was $(15.5) million for 2011, compared to a net loss of $(9.6) million for 2010, as a result of the factors described above.



31


LIQUIDITY AND CAPITAL RESOURCES
Overview
During 2012, our overall cash, cash equivalents and short-term investments decreased $0.4 million from $49.5 million at December 31, 2011 to $49.1 million at December 31, 2012. Despite our net loss of $(56.1) million in 2012, $0.2 million of cash was provided from operating activities in 2012. The slight overall decrease in cash, cash equivalents and short-term investments was due to cash used for capital expenditures.
During February 2012, we increased our line of credit with Bank of America to $25.0 million, incorporating a previous $5.0 million line. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. On January 11, 2013, we amended our line of credit agreement with Bank of America, which served to reduce the existing commitment from $25.0 million to $10.0 million. See the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 6, Credit Facilities, for further discussion of the our line of credit with Bank of America. 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 twelve 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, the physical costs associated with producing magazines, the editorial costs associated with creating content across our media platforms, the technology costs associated with our digital properties and the costs of facilities. In 2012, we also used cash for the production costs incurred for our television programming that are expected to be significantly reduced as the result of our restructuring activities in the Broadcasting segment.
Cash provided by and (used in) operating activities was $0.2 million, $(2.2) million and $1.9 million in 2012, 2011 and 2010, respectively. In 2012, cash from operating activities increased slightly, despite our operating loss, as discussed earlier, 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 in our Broadcasting and Publishing businesses, specifically the termination of our live audience television production operations and discontinuation of Whole Living after its January/February 2013 issue and Everyday Food as a stand-alone title after its December 2012 issue.
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.
In 2010, cash provided by operations was $1.9 million despite our 2010 operating loss. Cash provided by operations in 2010 benefited from the satisfaction of the 2009 year-end receivable due from Kmart and other advertising receivables, partially offset by the addition of a receivable related to the recognition of substantially all of the exclusive license fee from Hallmark Channel for a significant portion of our library of programming. Additionally, in the fourth quarter of 2010, there were significant expenses incurred for several television productions, which were paid in 2011.
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 (used in) and provided by investing activities was $(18.9) million, $6.9 million and $0.2 million in 2012, 2011 and 2010, respectively. 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

32


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.
In 2010, cash flow provided by investing activities was $0.2 million predominantly the result of cash received from the sale of a fixed asset and net sales of short-term investments largely offset by cash used for capital improvements, including expenditures to upgrade office technology and to relocate and consolidate certain offices.
Financing Activities
Our cash inflows from financing activities generally include proceeds from the exercise of stock options for our Class A Common Stock issued under our equity incentive plans. Cash outflows from financing activities generally include principal repayments on outstanding debt.
Cash flows provided by and (used in) financing activities were $0.2 million, $10.6 million and $(4.2) million in 2012, 2011 and 2010, respectively. In 2012, cash flows 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. 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.
In 2010, we made $4.5 million in principal pre-payments on our term loan with Bank of America.
Debt
During February 2012, we increased our line of credit with Bank of America to $25.0 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%. The terms of the line of credit require us to be in compliance with certain financial and other covenants, with which we were compliant as of December 31, 2012.
The loan agreement, which was to expire on February 14, 2013, was amended on January 11, 2013, at which time the line was reduced to $10.0 million. The January 11, 2013 agreement also amended the expiration date to be June 12, 2013, at which time any outstanding amounts borrowed under the agreement are then due and payable. We had no outstanding borrowings under our line of credit as of December 31, 2012 or 2011, but had outstanding letters of credit as of such dates of $1.6 million and $2.6 million, respectively.
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 11, Commitments and Contingencies, for further discussion. 
 
Total
Contractual Obligations
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More
than
5 years
 
Other
Operating Lease Obligations (1)
$
40,240

 
$
8,698

 
$
15,225

 
$
15,597

 
$
720

 
$

Unrecognized Tax Benefits (2)
72

 

 

 

 

 
72

Total
$
40,312

 
$
8,698

 
$
15,225

 
$
15,597

 
$
720

 
$
72

(1)
Operating lease obligations are shown net of sublease income in this table. See the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 11, Commitments and Contingencies, for further discussion of operating leases.

33


(2)
This amount represents expected payments with interest for uncertain tax positions as of December 31, 2012. 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 9, Income Taxes, for further discussion of income taxes.
In addition to our contractual obligations, we expect to use approximately $4.0 million in cash in 2013 for capital expenditures primarily for leasehold improvements to our office space and continued upgrades to our corporate information technology.
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 product discontinuation, new product launches and the seasonality and performance of certain product lines. Advertising revenue from our Broadcasting segment was highly dependent on ratings which fluctuated throughout the television season following general viewer trends. Ratings tended to be highest during the fourth quarter and lowest in the summer months. Certain revenues and costs in our television business also fluctuate based on production and delivery schedules.
Magazine Publication Schedule
Year ended December 31,
2012
 
2011
Martha Stewart Living
12 Issues
 
12 Issues
Martha Stewart Weddings
4 Issues
 
4 Issues
Everyday Food
10 Issues
 
10 Issues
Whole Living
9 Issues
 
10 Issues
Special Interest Publications (a)
4 Issues
 
4 Issues
(a)
 In 2012, we published two special issues of Martha Stewart Weddings as compared to 2011 during which we published one special issue of Martha Stewart Weddings. These Martha Stewart Weddings specials contributed both advertising and newsstand revenues. In 2012, we also published two other special issues — The Best of Martha Stewart Living Organizing and The Best of Martha Stewart Halloween Handbook — as compared to 2011 during which we published three other special issues — Martha Stewart Living Halloween Flights of Fancy, Martha Stewart Holiday Handbook and a full-sized Everyday Food special. These other special issues contributed primarily newsstand revenues.
OFF-BALANCE SHEET ARRANGEMENTS
Our bylaws may require us to indemnify our directors and officers against liabilities that may arise by reason of their status as such and to advance their expenses incurred as a result of any legal proceedings against them as to which they could be indemnified. We also have contractual indemnification obligations with our directors.
RELATED PARTY TRANSACTIONS
In December 2011, J.C. Penney purchased 11,000,000 newly-issued shares of the Class A Common Stock and one share of our Series A Preferred Stock in exchange for cash of $38.5 million. As of December 31, 2012, J.C. Penney holds an approximate 16.4% investment in our total Class A and Class B Common Stock outstanding.
In December 2011, we entered into a Commercial Agreement with J.C. Penney. The Commercial Agreement provides for an initial term that will 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. The Commercial Agreement was subsequently amended in July 2012 to add certain additional categories of Products. 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 requires

34


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.
For the year ended December 31, 2012, we recorded revenues earned from J.C. Penney of $8.1 million. These revenues represent the total amount earned from design fees, advertising, television sponsorships and creative services. As of December 31, 2012, the total accounts receivable from J.C. Penney was $0.7 million.  

For further information regarding J.C. Penney's investment in our company, see Note 7, Shareholders' Equity, in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. Also see Item 3. Legal Proceedings in this Annual Report on Form 10-K for discussion of litigation related to J.C. Penney.
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 realized or realizable and earned. 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 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

35


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 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, at the time television integrations are aired 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 advertisements, which are recorded in the period in which the advertisements are served.
Licensing-based revenues, most of which are in our Merchandising segment, are accrued on a monthly basis based on the specific mechanisms of each contract. Payments are typically made by our partners on a quarterly basis. Generally, revenues are accrued based on actual net sales, while any minimum guarantees are earned evenly over the fiscal year.
Television advertising revenues for season 5 of The Martha Stewart Show in syndication were recognized when the related commercials were aired and were recorded net of agency commission and estimated reserves for television audience underdelivery. Television spot advertising for seasons 6 and 7 of The Martha Stewart Show was sold by the Hallmark Channel, with net receipts payable to us quarterly. Since advertisers contracted with the Hallmark Channel directly, balance sheet reserves for television audience underdelivery were not required; however, revenues were recognized when commercials were aired and were recorded net of agency commission and the impact of television audience underdelivery as determined by the Hallmark Channel. Television integration revenues were recognized when the segment featuring the related product/brand immersion was initially aired. Television revenues related to talent services provided by Emeril Lagasse are generally recognized when services are performed, regardless of when the episodes air. Licensing revenues are recorded as earned in accordance with the specific terms of each agreement and are generally recognized upon delivery of the episodes to the licensee, provided that the license period has begun. Throughout 2010, we executed several agreements with the Hallmark Channel, certain of which were combined as one arrangement. The agreements with the Hallmark Channel were accounted for under the guidance set forth in ASC 926, Entertainment—Films. Radio advertising revenues were generally recorded when the related commercials were aired and were recorded net of agency commissions. 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. To the extent that estimated future results are losses, capitalized television production costs are written down to zero.
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

36


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.
Based on our quantitative assessment performed during the fourth quarter of 2012, the fair value of the goodwill within the Merchandising reporting unit exceeded its carrying value by more than 25%. With respect to our goodwill that was previously recorded within the Publishing reporting unit, as reported on our Quarterly Report on Form 10-Q for the period ended September 30, 2012, we performed an interim review of goodwill for impairment and determined that the goodwill associated with the Publishing segment was impaired as of September 30, 2012. The goodwill impairment charge of $44.3 million was the result of the Publishing segment experiencing slower than anticipated growth in advertising. For further details on our goodwill impairment charge, see the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, specifically Note 2, Summary of Significant Accounting Policies under the heading "Goodwill and intangible assets." For 2011 and 2010, no impairment charges related to goodwill were deemed necessary.
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 2012, the fair value of our trademarks within the Merchandising reporting unit exceeded its carrying value by more than 25%. For 2012, 2011, and 2010, no impairment charges for intangible assets with indefinite useful lives were deemed necessary.
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.
During the three month period ended December 31, 2011, we recorded a non-cash impairment charge of approximately $1.3 million for a definite-lived intangible asset previously acquired by the Broadcasting segment related to a television content library. Because the future undiscounted cash flows for this asset were determined to be significantly lower than the carrying

37


value, we wrote the asset down to zero. For the years ended December 31, 2012 and 2010, no impairment charges for long-lived tangible and intangible assets with definite useful lives were deemed necessary.
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 9, 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 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, 2012, net unrealized gains and losses on these investments were not material. In 2012, we recorded approximately $0.9 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-32 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 principal executive officer and our principal 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 the end of the period covered by this report. Based upon that evaluation, our principal

38


executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of that date 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 the principal executive officer and principal 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 principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our principal executive officer and principal financial officer concluded that our internal control over financial reporting was effective 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.
Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on our internal control over financial reporting. Their attestation report 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 2012, 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.


39


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, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (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, 2012, 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, 2012 and 2011, 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, 2012 of Martha Stewart Living Omnimedia, Inc. and our report dated March 1, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, New York
March 1, 2013


40


Item 9B. Other Information.
None.

41


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 2013 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 2012,” “EXECUTIVE COMPENSATION AGREEMENTS,” “OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2012,” “OPTION EXERCISES AND STOCK VESTED DURING 2012,” 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, 2012.
EQUITY COMPENSATION PLAN INFORMATION 
Plan Category
Number of Securities to be Issued
upon Exercise of Outstanding
Options, Warrants and Rights
(a)
 
 
 
Weighted-Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
 
Number of Securities Remaining
Available for Future Issuance Under
Equity Compensation Plans (Excluding
Securities Reflected in Column (a)
(c)
 
 
Equity Compensation plans approved by security holders:
8,326,910

 
(1)
 
$
7.31

 
5,941,120

 
(2)
Equity Compensation plans not approved by security holders:

 
 
 
$

 
N/A

 
  
Total
8,326,910

 
  
 
N/A

 
N/A

 
  
(1)
 Includes 719,726 shares subject to awards the vesting of which are tied to service periods; 140,500 shares subject to awards the vesting of which were originally tied to satisfaction of performance goals, but has been subsequently modified to replace those vesting conditions with vesting conditions tied to service periods; and 440,000 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.





42


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.
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.

43


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
Third Amended and Restated By-Laws of Martha Stewart Living Omnimedia, Inc. (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K (file number 001-15395) filed on March 16, 2012).
 
 
 
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).
 
 
 
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†
Amended and Restated Employment Agreement, dated as of July 26, 2011, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman (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, 2011 (“September 2011 10-Q”)), as amended by Exhibit 10.5.1.
 
 
 
10.5.1†
Amendment dated as of September 15, 2011 to the Amended and Restated Employment Agreement, dated as of July 26, 2011, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman (incorporated by reference to Exhibit 10.2 to our September 2011
10-Q).

44


Exhibit
Number
  
Exhibit Title
10.6
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.
 
 
 
10.6.1
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).
 
 
 
10.6.2
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”)).
 
 
 
10.9†
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”)).
 
 
 
10.10
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.
 
 
 
10.10.1
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”)).
 
 
 
10.10.2
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).
 
 
 
10.10.3
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 Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended September 30, 2012 (“September 2012 10-Q”)).
 
 
 
10.12†
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).
 
 
 
10.13†
Registration Rights Agreement between Charles A. Koppelman and Martha Stewart Living Omnimedia, Inc. dated January 24, 2005 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K (file number 001-15395) filed on October 21, 2005).
 
 
 
10.14
Warrant Registration Rights Agreement, dated as of August 11, 2006, between Martha Stewart Living Omnimedia, Inc. and Mark Burnett (incorporated by reference to Exhibit 10.3 to our September 2006 10-Q).
 
 
 
10.15†
Amended and Restated Services Agreement, dated as of April 2, 2012, between Martha Stewart Living Omnimedia, Inc. and Charles A. Koppelman (incorporated by reference to Exhibit 10.2 to our March 2012 10-Q).
 
 
 
10.16
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).
 
 
 
10.17.1
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 Quarterly Report on Form 10-Q (file number 001-15395) for the quarter ended March 31, 2012 (“March 2012 10-Q”)).



45


Exhibit
Number
  
Exhibit Title
10.17.2*
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.
 
 
 
10.18
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.
 
 
 
10.18.1
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).
 
 
 
10.18.2
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).
 
 
 
10.19
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.
 
 
 
10.19.1
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).
 
 
 
10.20
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).
 
 
 
10.21†
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”)).
 
 
 
10.22†
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”)).
 
 
 
10.23†
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).
 
 
 
10.24†
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).
 
 
 
10.25†
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).
 
 
 
10.26†
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).
 
 
 
10.27†
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).
 
 
 
10.28†
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).



46


Exhibit
Number
  
Exhibit Title
10.29†
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).
 
 
 
10.30†
Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Restricted Stock Grant Agreement dated October 1, 2008 between Martha Stewart Living Omnimedia, Inc. and Charles Koppelman (incorporated by reference to Exhibit 10.5 to our September 2008 10-Q).
 
 
 
10.31†
Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan Stock Option Grant Agreement and form of related Notice dated October 1, 2008 between Martha Stewart Living Omnimedia, Inc. and Charles Koppelman (incorporated by reference to Exhibit 10.6 to our September 2008 10-Q).
 
 
 
10.32†
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).
 
 
 
10.33†
Form of Martha Stewart Living Omnimedia, Inc. Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.1 to our June 2011 10-Q).
 
 
 
10.34†
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).
 
 
 
10.35†
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).
 
 
 
10.36†
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).
 
 
 
10.37
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).
 
 
 
10.38†
Separation Agreement and General Release, dated as of September 13, 2011, between Martha Stewart Living Omnimedia, Inc. and Peter Hurwitz (incorporated by reference to Exhibit 10.5 to our September 2011 10-Q).
 
 
 
10.39+
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.
 
 
 
10.39.1
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).
 
 
 
10.39.2
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).
 
 
 
10.40
Letter Agreement, dated as of March 30, 2012, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to Exhibit 10.3 of our March 2012 10-Q).
 
 
 
10.41
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).

47


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.
** In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

48


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: March 1, 2013
 
 
MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 
 
 
By:
/s/     DANIEL TAITZ        
 
 
Daniel Taitz
 
 
Interim Principal 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 TAITZ
 
Interim Principal Executive Officer
Daniel Taitz
 
 
 
 
 
/s/    KENNETH P. WEST        

 
Chief Financial Officer (Principal Financial Officer)
Kenneth P. West
 
 
 
 
 
/s/    ALLISON JACQUES        

 
Controller (Principal Accounting Officer)
Allison Jacques
 
 
 
 
 
/s/    CHARLOTTE BEERS        

 
Director
Charlotte Beers
 
 
 
 
 
/s/    FREDERIC FEKKAI        

 
Director
Frederic Fekkai
 
 
 
 
 
/s/    ARLEN KANTARIAN        

 
Director
Arlen Kantarian
 
 
 
 
 
/s/    MICHAEL W. KRAMER        

 
Director
Michael W. Kramer
 
 
 
 
 
/s/    WILLIAM A. ROSKIN        

 
Director
William A. Roskin
 
 
 
 
 
/s/    MARGARET M. SMYTH        

 
Director
Margaret M. Smyth
 
 
 
 
 
/s/    MARTHA STEWART        

 
Director
Martha Stewart
 
 
 
 
 
/s/    DANIEL E. WALKER        

 
Director
Daniel E. Walker
 
 
Each of the above signatures is affixed as of March 1, 2013


49


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND OTHER
FINANCIAL INFORMATION
 
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


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, 2012 and 2011, 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, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and 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, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2013 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

New York, New York
March 1, 2013



F-2


MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2012, 2011 and 2010
(in thousands except share and per share data)
 
 
2012
 
2011
 
2010
REVENUES
 
 
 
 
 
Publishing
$
122,540

 
$
140,857

 
$
145,573

Merchandising
57,574

 
48,614

 
42,806

Broadcasting
17,513

 
31,962

 
42,434

Total revenues
197,627

 
221,433

 
230,813

OPERATING COSTS AND EXPENSES
 
 
 
 
 
Production, distribution and editorial
103,347

 
127,084

 
128,194

Selling and promotion
52,453

 
57,208

 
60,288

General and administrative
45,148

 
46,641

 
46,362

Depreciation and amortization
4,007

 
3,978

 
4,632

Restructuring charges
4,811

 
5,116

 

Goodwill impairment
44,257

 

 

Total operating costs and expenses
254,023

 
240,027

 
239,476

OPERATING LOSS
(56,396
)
 
(18,594
)
 
(8,663
)
OTHER INCOME / (EXPENSE)
 
 
 
 
 
Interest income / (expense), net
836

 
(283
)
 
(66
)
Loss on sale of fixed asset

 

 
(647
)
Gain on sale of short-term investments

 

 
1,512

Income / (loss) on equity securities

 
15

 
(15
)
Gain on sales of cost-based investments
1,165

 
7,647

 

Other-than-temporary loss on cost-based investments
(88
)
 
(2,724
)
 

Total other income
1,913

 
4,655

 
784

LOSS BEFORE INCOME TAXES
(54,483
)
 
(13,939
)
 
(7,879
)
Income tax provision
(1,602
)
 
(1,580
)
 
(1,717
)
NET LOSS
$
(56,085
)
 
$
(15,519
)
 
$
(9,596
)
LOSS PER SHARE—BASIC AND DILUTED
 
 
 
 
 
Net loss
$
(0.83
)
 
$
(0.28
)
 
$
(0.18
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
Basic and diluted
67,231,463

 
55,880,896

 
54,440,490















The accompanying notes are an integral part of these consolidated financial statements.

F-3


MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2012, 2011 and 2010
(in thousands)


 
2012
 
2011
 
2010
Net loss
$
(56,085
)
 
$
(15,519
)
 
$
(9,596
)
Other comprehensive loss:
 
 
 
 
 
     Unrealized (loss) / gain on securities, net
(272
)
 
(48
)
 
1,131

     Realized gain on investment

 

 
(1,512
)
Other comprehensive loss
(272
)
 
(48
)
 
(381
)
Total comprehensive loss
$
(56,357
)
 
$
(15,567
)
 
$
(9,977
)









































The accompanying notes are an integral part of these consolidated financial statements.

F-4


MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
(in thousands except share and per share data)
 
 
2012
 
2011
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
19,925

 
$
38,453

Short-term investments
29,182

 
11,051

Accounts receivable, net
38,073

 
48,237

Paper inventory
4,580

 
7,225

Deferred television production costs
434

 

Other current assets
3,335

 
4,858

Total current assets
95,529

 
109,824

PROPERTY AND EQUIPMENT, net
10,738

 
13,396

GOODWILL, net
850

 
45,107

OTHER INTANGIBLE ASSETS, net
45,203

 
45,215

OTHER NONCURRENT ASSETS, net
1,940

 
2,578

Total assets
$
154,260

 
$
216,120

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
12,770

 
$
23,728

Accrued payroll and related costs
9,316

 
7,008

Current portion of deferred subscription revenue
13,168

 
16,018

Current portion of other deferred revenue
5,605

 
5,147

Total current liabilities
40,859

 
51,901

DEFERRED SUBSCRIPTION REVENUE
4,478

 
3,975

OTHER DEFERRED REVENUE
1,113

 
2,333

DEFERRED INCOME TAX LIABILITY
7,117

 
5,874