-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TP8RdupPAT3dET3gk+Xsgas39OLub0OYhcD2M1fAowvSC6PJPBoMxg1zdqy0SGF5 coEddZNxNC+gdVrUeZMQDg== 0000950123-01-505550.txt : 20010815 0000950123-01-505550.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950123-01-505550 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 522187059 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15395 FILM NUMBER: 1709018 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 MAIL ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 10-Q 1 y52232e10-q.txt MARTHA STEWART LIVING OMNIMEDIA, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2001 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 (IRS Employer Identification No.) incorporation or organization) 11 West 42nd Street 10036 New York, NY (Zip Code) (Address of principal executive offices) Registrant's Telephone Number, Including Area Code: (212) 827-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding at Class August 9, 2001 Class A, $0.01 par value 14,808,419 Class B, $0.01 par value 33,888,375 ---------- Total 48,696,794 ==========
2 Martha Stewart Living Omnimedia, Inc. Index to Form 10-Q
Page ---- Part I. Financial information Item 1. Financial Statements 2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 4. Submission of matters to a vote of security 13 holders Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
1 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Balance Sheets (in thousands, except per share amounts)
June 30, December 31, 2001 2000 -------- -------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $123,346 $127,425 Accounts receivable, net 41,245 48,993 Inventories 12,145 9,433 Deferred television production costs 4,408 3,949 Other current assets 5,756 6,013 -------- -------- Total current assets 186,900 195,813 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net 41,992 37,349 -------- -------- INTANGIBLE ASSETS, net 49,374 47,207 -------- -------- OTHER ASSETS 18,681 17,045 -------- -------- Total assets $296,947 $297,414 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 35,566 $ 48,340 Accrued payroll and related costs 7,339 7,190 Income taxes payable 452 2,590 Current portion of deferred subscription income 29,827 28,782 -------- -------- Total current liabilities 73,184 86,902 -------- -------- DEFERRED SUBSCRIPTION INCOME 8,909 8,614 -------- -------- OTHER NONCURRENT LIABILITIES 4,777 5,782 -------- -------- Total liabilities 86,870 101,298 -------- -------- SHAREHOLDERS' EQUITY Class A common stock, $.01 par value, 350,000 shares authorized; 14,808 and 14,559 shares outstanding in 2001 and 2000, respectively 148 146 Class B common stock, $.01 par value, 150,000 shares authorized; 33,888 outstanding in 2001 and 2000 339 339 Capital in excess of par value 171,080 168,528 Retained earnings 38,510 27,103 -------- -------- Total shareholders' equity 210,077 196,116 -------- -------- Total liabilities and shareholders' equity $296,947 $297,414 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 4 Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Income Statements (unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ -------------------------- 2001 2000 2001 2000 ------- ------- -------- -------- Revenues Publishing $42,182 $43,132 $ 89,653 $ 88,101 Television 6,899 6,990 13,343 14,333 Merchandising 8,796 5,968 16,624 12,158 Internet/Direct Commerce 11,813 13,103 21,314 23,747 ------- ------- -------- -------- Total revenues 69,690 69,193 140,934 138,339 ------- ------- -------- -------- Operating costs and expenses Production, distribution and editorial 36,990 36,511 72,745 72,644 Selling and promotion 10,976 11,334 23,409 22,537 General and administrative 10,629 10,481 21,561 20,832 Depreciation and amortization 3,226 2,324 5,942 4,436 ------- ------- -------- -------- Total operating costs and expenses 61,821 60,650 123,657 120,449 ------- ------- -------- -------- Income from operations 7,869 8,543 17,277 17,890 Interest income, net 1,096 1,313 2,392 2,698 ------- ------- -------- -------- Income before income taxes 8,965 9,856 19,669 20,588 Income tax provision 3,766 3,904 8,262 9,055 ------- ------- -------- -------- Net income $ 5,199 $ 5,952 $ 11,407 $ 11,533 ======= ======= ======== ======== Earnings per share Basic $ 0.11 $ 0.12 $ 0.23 $ 0.24 ======= ======= ======== ======== Diluted $ 0.11 $ 0.12 $ 0.23 $ 0.23 ======= ======= ======== ======== Weighted average common shares outstanding Basic 48,608 48,277 48,562 48,946 Diluted 49,081 48,704 49,129 50,090
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 5 Martha Stewart Living Omnimedia, Inc. Consolidated Statement of Shareholders' Equity For the Six Months Ended June 30, 2001 (unaudited, in thousands)
Class A Class B common stock common stock ------------------ ------------------ Capital in excess of par Retained Shares Amount Shares Amount value earnings Total ------ ------ ------ ------ ----- -------- ----- Balance at January 1, 2001 14,559 $146 33,888 $339 $168,528 $27,103 $196,116 Net income for the period -- -- -- -- -- 11,407 11,407 Issuance of shares for stock option exercises 249 2 -- -- 2,552 -- 2,554 ------ ---- ------ ---- -------- ------- -------- Balance at June 30, 2001 14,808 $148 33,888 $339 $171,080 $38,510 $210,077 ====== ==== ====== ==== ======== ======= ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 6 Martha Stewart Living Omnimedia, Inc. Condensed Consolidated Statements of Cash Flows (unaudited, in thousands)
Six Months Ended June 30, 2001 2000 --------- --------- Cash flows from operating activities Net income $ 11,407 $ 11,533 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 5,942 4,436 Changes in operating assets and liabilities (11,492) (2,890) --------- --------- Net cash provided by operating activities 5,857 13,079 --------- --------- Cash flows from investing activities Equity investment -- (13,297) Acquisition of business (3,830) -- Capital expenditures (8,660) (6,181) --------- --------- Net cash used in investing activities (12,490) (19,478) --------- --------- Cash flows from financing activities Repurchase of common stock -- (32,488) Proceeds received from stock option exercises 2,554 -- --------- --------- Net cash provided by (used in) financing activities 2,554 (32,488) --------- --------- Net decrease in cash (4,079) (38,887) Cash and cash equivalents, beginning of period 127,425 154,749 --------- --------- Cash and cash equivalents, end of period $ 123,346 $ 115,862 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 7 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) 1. Accounting policies a. General Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as the "Company." The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to its fiscal year ended December 31, 2000. b. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company's consolidated financial statements. c. Intangible assets Intangible assets, representing the excess of purchase price over net assets acquired, are being amortized over twenty years. Management reassesses quarterly the appropriateness of both the carrying value and remaining life of intangible assets, principally based on forecasts of future undiscounted cash flows. d. Income taxes The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. e. New Accounting pronouncements In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to an annual assessment for impairment by applying a fair-value based test. The standard is effective beginning January 1, 2002. The Company has yet to determine the impact of the standard on its financial position and results of operations. 6 8 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) 2. Inventories The components of inventories are as follows:
June 30, December 31, 2001 2000 ------- ------ Paper $ 5,413 $4,151 Product merchandise 6,732 5,282 ------- ------ $12,145 $9,433 ======= ======
3. Earnings per share Earnings per share are computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding during each period. Diluted earnings per share include the determinants of basic earnings per share and, in addition, give effect to dilutive potential common shares. 4. Industry segments The Company is a leading creator of original "how to" content and related products for homemakers and other consumers. The Company's business segments are Publishing, Television, Merchandising and Internet/Direct Commerce. The Publishing segment primarily consists of the Company's magazine operations, and also those related to its book, radio, newspaper and music operations. The Television segment consists of the Company's television production operations that produce television programming that airs in syndication in the United States and on cable in the United States, Canada and certain other international markets, weekly segments on CBS's The Early Show broadcast, as well as periodic prime time specials. The Merchandising segment consists of the Company's operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Internet/Direct Commerce segment comprises the Company's operations relating to the Martha by Mail catalog, a wedding registry and gift business, and the website marthastewart.com. 7 9 Martha Stewart Living Omnimedia, Inc. Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) Revenues for each segment are presented in the condensed consolidated income statements. Income (loss) from operations for each segment were as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Publishing $ 15,238 $ 16,331 $ 32,553 $ 33,770 Television 888 1,341 1,189 2,648 Merchandising 8,468 5,923 16,027 12,052 Internet/Direct Commerce (6,898) (5,440) (12,860) (11,410) -------- -------- -------- -------- Total before corporate 17,696 18,155 36,909 37,060 charges Corporate charges (9,827) (9,612) (19,632) (19,170) -------- -------- -------- -------- Income from operations $ 7,869 $ 8,543 $ 17,277 $ 17,890 ======== ======== ======== ========
5. Acquisition of The Wedding List In March 2001, the Company acquired certain assets and liabilities of The Wedding List, a wedding registry and gift business. The purchase price was approximately $3.8 million. Goodwill of approximately $3.6 million, recognized from the transaction based upon a preliminary estimate of the purchase price, is being amortized over twenty years. 6. Supplemental Cash Flow Information
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Cash paid for interest $ 109 $ 158 $ 231 $ 363 Cash paid for income taxes $8,170 $6,546 $10,400 $6,889
8 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this report, the terms "we," "us," "our" and "MSO" refer to Martha Stewart Living Omnimedia, Inc., and its subsidiaries. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 TO THREE MONTHS ENDED JUNE 30, 2000
Three Months Ended June 30, --------------------------- 2001 2000 ------- ------- (in thousands, except per share amounts) Revenues Publishing $42,182 $43,132 Television 6,899 6,990 Merchandising 8,796 5,968 Internet/Direct Commerce 11,813 13,103 ------- ------- Total revenues 69,690 69,193 ------- ------- Operating costs and expenses Production, distribution and editorial 36,990 36,511 Selling and promotion 10,976 11,334 General and administrative 10,629 10,481 Depreciation and amortization 3,226 2,324 ------- ------- Total operating costs and expenses 61,821 60,650 ------- ------- Income from operations 7,869 8,543 ------- ------- Interest income (expense), net 1,096 1,313 ------- ------- Income before income taxes 8,965 9,856 Income tax provision 3,766 3,904 ------- ------- Net income $ 5,199 $ 5,952 ======= ======= Earnings per share - basic $ 0.11 $ 0.12 ======= ======= Earnings per share - diluted $ 0.11 $ 0.12 ======= =======
Revenues. Total revenues increased $.5 million to $69.7 million for the three months ended June 30, 2001, from $69.2 million for the three months ended June 30, 2000. Publishing revenues decreased $.9 million, or 2%, to $42.2 million for the three months ended June 30, 2001, from $43.1 million for the three months ended June 30, 2000. This decrease was primarily due to a decrease in advertising revenues as a result of a decrease in advertising pages sold in the Martha Stewart Living magazine which was partially offset by revenues from the initial issue of Martha Stewart Kids. Television revenues were comparable for both periods. Merchandising revenues increased $2.8 million, or 47%, to $8.8 million for the three months ended June 30, 2001, from $6.0 million for the three months ended June 30, 2000, primarily as a result of additional revenues from the sale of our Martha Stewart Everyday products sold at Kmart, which reflected the launch of a new housewares product line. Internet/Direct Commerce revenues decreased $1.3 million, or 10%, to $11.8 million for the three months ended June 30, 2001, from $13.1 million for the three months ended June 30, 2000, due to lower advertising of $.6 million and lower product sales of $.7 million. Production, distribution and editorial. Production, distribution and editorial expenses increased $.5 million, or 1%, to $37.0 million for the three months ended June 30, 2001, from $36.5 million for the three months ended June 30, 2000. Publishing segment costs increased $1.1 million primarily from the expenses associated with the initial publication of Martha Stewart Kids. Internet/Direct Commerce expenses decreased by $.6 million primarily due to a reduction in catalogue production and distribution costs due to lower catalog circulation and reductions in outside consulting fees, offset by costs of $.9 million associated 9 11 with the acquired Wedding List business. Selling and promotion. Selling and promotion expenses decreased $.3 million, or 3%, to $11.0 million for the three months ended June 30, 2001, from $11.3 million for the three months ended June 30, 2000. Publishing segment costs decreased $1.2 million resulting from lower circulation costs. Internet/Direct Commerce costs increased $.6 million primarily from the acquired business. General and administrative. General and administrative expenses were comparable for both periods at $10.6 million and $10.5 million for the three months ended June 30, 2001 and June 30, 2000, respectively. Depreciation and amortization. Depreciation and amortization increased $.9 million, or 39%, to $3.2 million for the three months ended June 30, 2001, from $2.3 million for the three months ended June 30, 2000. The increase is primarily due to depreciation of capital expenditures incurred for our new office facility, which we began occupying in December 2000. Interest income, net. Interest income, net was $1.1 million for the three months ended June 30, 2001, compared to $1.3 million for the three months ended June 30, 2000, due primarily to lower interest rates during the 2001 quarter. Income tax provision. Income tax provision for the three months ended June 30, 2001 was $3.8 million, representing a 42% effective income tax rate. Income tax provision for the three months ended June 30, 2000 was $3.9 million, representing a 39.6% effective income tax rate. The low rate in 2000 primarily reflected an adjustment for a shift to tax free interest income earned on invested cash. Net income. Net income was $5.2 million for the three months ended June 30, 2001, compared to net income of $6.0 million for the three months ended June 30, 2000, as a result of the above mentioned factors. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 TO SIX MONTHS ENDED JUNE 30, 2000
Six Months Ended June 30, ------------------------------- 2001 2000 -------- -------- (in thousands, except per share amounts) Revenues Publishing $ 89,653 $ 88,101 Television 13,343 14,333 Merchandising 16,624 12,158 Internet/Direct Commerce 21,314 23,747 -------- -------- Total revenues 140,934 138,339 -------- -------- Operating costs and expenses Production, distribution and editorial 72,745 72,644 Selling and promotion 23,409 22,537 General and administrative 21,561 20,832 Depreciation and amortization 5,942 4,436 -------- -------- Total operating costs and expenses 123,657 120,449 -------- -------- Income from operations 17,277 17,890 -------- -------- Interest income (expense), net 2,392 2,698 -------- -------- Income before income taxes 19,669 20,588 Income tax provision 8,262 9,055 -------- -------- Net income $ 11,407 $ 11,533 ======== ======== Earnings per share - basic $ 0.23 $ 0.24 ======== ======== Earnings per share - diluted $ 0.23 $ 0.23 ======== ========
10 12 Revenues. Total revenues increased $2.6 million, or 2%, to $140.9 million for the six months ended June 30, 2001, from $138.3 million for the six months ended June 30, 2000. Publishing revenues increased $1.6 million, or 2%, to $89.7 million for the six months ended June 30, 2001, from $88.1 million for the six months ended June 30, 2000. This increase was primarily due to revenues from the publication of a custom published magazine, Martha Stewart Everyday Garden, and the initial publication of Martha Stewart Kids, partially offset by lower advertising revenues in Martha Stewart Living magazine due to lower advertising pages sold. Television revenues decreased $1.0 million, or 7%, to $13.3 million for the six months ended June 30, 2001 from $14.3 million for the six months ended June 30, 2000. The decrease is due primarily to lower syndication advertising revenues on the Martha Stewart Living program due to lower ratings and lower cable television advertising revenues due primarily to advertising market conditions and lower ratings. Merchandising revenues increased $4.4 million, or 36%, to $16.6 million for the six months ended June 30, 2001, from $12.2 million for the six months ended June 30, 2000, primarily as a result of additional revenues received from our Martha Stewart Everyday products sold at Kmart, which included the launch of a new housewares product line. Internet/Direct Commerce revenues decreased $2.4 million, or 10%, to $21.3 million for the six months ended June 30, 2001, from $23.7 million for the six months ended June 30, 2000, due to lower advertising of $1.3 million and lower product sales of $1.1 million. Production, distribution and editorial. Production, distribution and editorial expenses were comparable at $72.7 million for the six months ended June 30, 2001 and $72.6 million for the six months ended June 30, 2000. Publishing segment costs increased $2.9 million primarily from the publication of Martha Stewart Everyday Garden and Martha Stewart Kids. Internet/Direct Commerce costs decreased $2.8 million due primarily to lower catalog production and distribution costs due to lower catalog circulation, reductions in outside consulting fees and a decrease in cost of goods sold and fulfillment costs, each as a result of lower product sales. These costs were partially offset by $1.3 million of costs associated with the acquired Wedding List business. Selling and promotion. Selling and promotion expenses increased $.9 million, or 4% to $23.4 million for the six months ended June 30, 2001 from $22.5 million for the six months ended June 30, 2000 primarily attributable to Internet/Direct Commerce cost increases of $1.1 million. Internet/Direct Commerce costs increased primarily due to increased promotional spending of $.4 million and costs of $.6 million primarily from the acquired business. General and administrative. General and administrative expenses increased $0.8 million, or 4%, to $21.6 million for the six months ended June 30, 2001, from $20.8 million for the six months ended June 30, 2000. The higher expenses have been incurred primarily as a result of higher occupancy costs related to our new office facility, which we began occupying in December 2000. Depreciation and amortization. Depreciation and amortization increased $1.5 million, or 34% to $5.9 million for the six months ended June 30, 2001, from $4.4 million for the six months ended June 30, 2000. The increase is attributable to higher levels of property and equipment associated with our new facility. Interest income, net. Interest income, net was $2.4 million for the six months ended June 30, 2001, compared to $2.7 million for the six months ended June 30, 2000, due to lower average cash balances and lower interest rates during 2001. Income tax provision. Income tax provision for the six months ended June 30, 2001 was $8.3 million, representing a 42% effective income tax rate. Income tax provision for the six months ended June 30, 2001 was $9.1 million, representing a 44.2% effective income tax rate. The lower rate in 2001 is due to the effect of tax-free interest income earned on invested cash. Net income. Net income was $11.4 million for the six months ended June 30, 2001, compared to net income of $11.5 million for the six months ended June 30, 2000, as a result of the above mentioned factors. 11 13 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities were $5.9 and $13.1 million during the six months ended June 30, 2001, and 2000, respectively, resulting primarily from net earnings in the period offset by payments for accounts payable and accrued liabilities. Payments for accounts payable and accrued liabilities in the six months ended June 30, 2001 exceeded the prior year primarily as a result of payments for our new office facility and our internet technology upgrade project. Cash flows used in investing activities were $12.5 million for the six months ended June 30, 2001, reflecting a $3.8 million net asset purchase of The Wedding List, and $8.7 million of capital expenditures, primarily for our internet technology upgrade project. Cash flows used in investing activities were $19.5 million during the six months ended June 30, 2000, reflecting an investment in Bluelight.com of $13.3 million and capital expenditures of $6.2 million. Subsequent to June 30, 2001, the company received cash of $13.3 million, in exchange for its stock in Bluelight.com. The amount received was equal to the company's carrying value in the investment. Cash flows provided by financing activities for the six months ended June 30, 2001 were $2.6 million, representing proceeds received from the exercise of employee stock options. Cash used in financing activities was $32.5 million during the six months ended June 30, 2000 representing repurchased Class A common stock from Time Publishing Ventures Inc. We have a line of credit with Bank of America in the amount of $10.0 million, which is available to us for seasonal working capital requirements and general corporate purposes. As of June 30, 2001, we had no outstanding borrowings under this facility. We believe that our available cash balances, together with any cash generated from operations and any funds available under existing credit facilities, will be sufficient to meet our operating and recurring cash needs for foreseeable periods. SEASONALITY AND QUARTERLY FLUCTUATIONS Several of our businesses can experience fluctuations in quarterly performance. For example, Martha Stewart Living magazine was published eleven times in 2000: three issues in each of the first, second and fourth quarters and two issues in the third quarter. In 2001, Martha Stewart Living magazine will be published twelve times. Martha Stewart Weddings is published four times annually: one issue in each of the second and third quarters and two issues in the fourth quarter. In addition, we periodically publish special interest publications, such as Martha Stewart Baby, Martha Stewart Kids, and Martha Stewart Holiday. Furthermore, the number of advertising pages per issue tends to be higher in issues published in the fourth quarter. Revenue and income from operations for the Television segment tend to be higher in the fourth quarter due to generally higher ratings and the broadcast of prime time television specials. Internet/Direct Commerce segment revenues also tend to be higher in the fourth quarter due to increased consumer spending during that period. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonal nature of certain products. 12 14 PART II: OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) We held our 2001 Annual Meeting of Stockholders on May 2, 2001. (c) The following matter was acted upon at the meeting by holders of Class A Common Stock and Class B Common Stock voting as one class with the following results: Election of directors to hold office until our next annual meeting. The vote on this matter was as follows:
BROKER FOR VOTE WITHHELD NON-VOTES -------------- --------------- -------------- Charlotte L. Beers 351,333,511 36,323 0 L. John Doerr 351,336,030 33,804 0 Arthur C. Martinez 351,336,243 33,591 0 Sharon Patrick 351,131,996 237,838 0 Naomi O. Seligman 351,331,645 38,189 0 Martha Stewart 351,136,720 233,114 0
ITEM 5: OTHER INFORMATION Cautionary Statement Pursuant to The Private Securities Litigation Reform Act of 1995 We have included in this Quarterly Report certain "forward looking statements" as that term is defined in The Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. These statements can be identified by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "potential" or "continue" or the negative of these terms or other comparable terminology. Our actual results may differ materially from those projected in these statements, and factors that could cause such differences include, but are not limited to, downturns in national and/or local economies; a softening of the domestic advertising market; changes in consumer reading, purchasing and/or television viewing patterns; unanticipated increases in paper, postage or printing costs; technological developments affecting products or methods of distribution such as the Internet or e-commerce; operational problems at any of our contractual business partners; the receptivity of consumers to our product introductions; and changes in government regulations affecting our industries. Additional information regarding some of these and other important factors that could cause actual results to differ from those in our forward-looking statements is contained in the prospectus forming part of our registration statement on Form S-1 (File No. 333-84001) under the caption "Risk Factors." 13 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report:
EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 10.1 -- Lease, dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia, Inc. 10.2 -- Termination of Leases, etc., dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia, Inc. 10.3 -- License Agreement, dated June 21, 2001, by and between MSO IP Holdings, Inc. and Kmart Corporation.
(b) Reports on Form 8-K No reports on Form 8-K have been filed by the Company during the period covered by this report. 14 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARTHA STEWART LIVING OMNIMEDIA, INC. Date: August 14, 2001 By: /s/ James Follo ------------------------------------------ Name: James Follo Title: Executive Vice President, Chief Financial Officer 15 17 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 10.1 -- Lease, dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia, Inc. 10.2 -- Termination of Leases, etc., dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha Stewart Living Omnimedia, Inc. 10.3 -- License Agreement, dated June 21, 2001, by and between MSO IP Holdings, Inc. and Kmart Corporation.
16 EX-10.1 3 y52232ex10-1.txt LEASE, DATED AS OF OCTOBER 1, 2000 1 EXHIBIT 10.1 LEASE THIS LEASE, dated as of the 1st day of October, 2000, between NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP, a Connecticut limited partnership, hereinafter referred to as the Landlord, and MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation, hereinafter referred to as the Tenant. WITNESSETH: WITNESSETH: That NOW THEREFORE, the Landlord hereby demises and leases unto the Tenant, and the Tenant hereby hires and takes from the Landlord, the demised premises described below on the following terms and conditions. 1. Demised Premises: The Landlord hereby demises and leases unto the Tenant, and the Tenant hereby hires and takes from the Landlord, a portion of the building ("building") situated on the land ("land") described in "Exhibit A" attached hereto and located at 19 Newtown Turnpike, Norwalk and Westport, Connecticut. Said portion of the building is crosshatched on "Exhibit B" attached hereto and is referred to hereinafter as "premises", "Premises", "demised premises" or "Demised Premises". Landlord and Tenant agree that it shall conclusively be deemed that there are 30,523 rentable square feet attributable to the demised premises, irrespective of the results of any calculation and/or measurement hereafter. In addition, Tenant and Tenant's employees and invitees may use any of the parking spaces of the parking lots on the land; Landlord represents to Tenant that there shall be a total of at least ninety-nine (99) parking spaces on the land for the exclusive use of Tenant and Tenant's employees and invitees. 2. Term: The initial term ("initial term") of this Lease shall a) commence July 1, 2001 ("Commencement Date") and b) end June 30, 2006. In the event, but only in the event, that a) Tenant complies with all provisions of this entire Article as and when required, and b) at the time of the expiration of the then current term, 1) Tenant, at all times prior thereto, shall have fully and faithfully complied with and performed all terms and/or provisions of this Lease, as and when required pursuant to this entire Lease, and 2) this Lease shall then be in full force and effect, Tenant shall have two (2) options to extend the term of this Lease for one additional term ("option term"), each such option term being for five (5) years and commencing at midnight on the date on which the then current term terminates. Said option as to the immediately following option term shall, at all times hereafter, automatically, conclusively, absolutely and forever be deemed not to have been exercised by Tenant, all unless Tenant shall notify Landlord by giving Landlord written notice ("Notice to Landlord") received by Landlord at least nine (9) months prior to expiration of the then current term (time being of the essence) that Tenant elects to exercise said option. Such extension shall be on the same terms, covenants and conditions as the initial term except for the amount of Base Rent and further except that there shall be absolutely no option whatsoever to extend the term of this Lease beyond the second such option term. The Base Rent due and payable for each Lease Year of each such option term shall be the greater of 1) the amount recalculated for each Lease Year of each such option term pursuant to 3.b) of this Lease or 2) the fair market rental for the demised premises determined by Landlord and Tenant at least one (1) year prior to the date on which the then current term will expire. In the event Landlord and Tenant do not agree as to said fair market rental at least one (1) year prior to the date on which the then current term will expire, said fair market rental shall be determined pursuant to the Article of this Lease entitled "Disputes". In the event that, prior to inception of such option term, said agreement is not reached and/or said determination is not made as to the amount of fair market rental for such option term, Tenant shall pay Landlord: a) on the first day of each month of such option term, until said agreement is reached or said determination is made, the amount of Base Rent due pursuant to 1) of the fourth sentence of this paragraph, same to be applied to the amount of Base Rent ultimately determined to be due for such option term, b) immediately upon the reaching of said agreement or making of said determination, the difference, if any, between said Base 2 Rent ultimately determined to be due for such option term and the amount paid pursuant to a) of this sentence, and c) at all times after the reaching of said agreement or making of said determination, on the first day of each month of such option term the amount of Base Rent ultimately determined to be due for such option term. "Lease Year" as used throughout this entire Lease shall mean each twelve (12) month period, with the first Lease Year commencing on July 1, 2001. 3. Base Rent: The Base Rent ("Base Rent" or "rent") for the initial term shall be the following which shall be paid, by Tenant to Landlord, with respect to the Demised Premises, in advance, on the Commencement Date and on the first day of each calendar month thereafter: a) With respect to the first Lease Year of the initial term (i.e., from and including July 1, 2001 through and including June 30, 2002):$1,007,259.00, payable in twelve (12) equal, monthly installments of $83,938.25 each month; and b) With respect to each Lease Year of the initial term after said first Lease Year of the initial term: the greater of (i) the Base Rent which shall have been payable with respect to the immediately prior Lease Year multiplied by 1.02, or (ii) the Base Rent which shall have been payable with respect to the immediately prior Lease Year multiplied by a fraction, the numerator of which is the CPI for April immediately preceding the inception of the Lease Year for which Base Rent is being calculated commences, and the denominator of which is the CPI for April immediately preceding the inception of the immediately prior Lease Year. For example, for the second Lease Year of the initial term, the monthly Base Rent shall be the greater of (i) the product of $83,938.25 multiplied by 1.02 or (ii) the product of $83,938.25 multiplied by a fraction, the numerator of which is the CPI for April 2002 and the denominator of which is the CPI for April 2001. The Base Rent arrived at by the foregoing calculation would then be the Base Rent used to calculate the Base Rent for the third year of the initial term. Base Rent for any Lease Year shall be paid in twelve (12), equal monthly installments. "CPI" shall mean the CPI-U Indexes ("CPI-U Indexes") of Table 2. Consumer Price Index for All Urban Consumers (CPI-U) and Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W): Selected areas, all items index ([1982-84=100], unless otherwise noted), for Selected local areas, N.Y.-Northern N.J.-Long Island, NY-NJ-CT, published by the Bureau of Labor Statistics of the United States Department of Labor (or in the event, but only in the event, that CPI-U Indexes shall cease to be so published, the CPI-W Indexes of said Table, for N.Y.-Northern N.J.-Long Island, NY-NJ-CT, published by said Bureau of said Department). In the event the CPI shall hereafter be a) converted to a different standard reference Base or otherwise revised, or b) cease to be published, the determination of the annual rent for each such Lease Year of such option term shall be made with the use of such conversion factor, formula, table or method for converting the CPI as may be published by the Bureau of Labor Statistics, or, failing such latter publication, the use of such conversion factor, formula, table or method as may be published by Prentice Hall, Inc., or, failing such latter publication, then with the use of conversion factor, formula, table or method as may be published or used by any other nationally recognized publisher selected solely by Landlord or similar statistical information selected solely by Landlord. 4. Payment of Base Rent etc.: Said Base Rent (and all other sums due pursuant to this Lease) shall be paid without abatement, setoff, deduction, demand, and/or any notice whatsoever, monthly in advance, in installments as set forth above, (and/or as otherwise set forth in this Lease) (i) at P.O. Box 707, Westport, Connecticut 06881, (ii) if paid by wire transfer, in accordance with the wiring instructions set forth in "Exhibit D"or in notice from Landlord to Tenant in accordance with Article 19. of this Lease, or (iii) as may be otherwise directed by the Landlord in writing. In the event the Landlord does not receive on or before the fifth day of any particular calendar month 2 3 (time being of the essence), in good, immediately available funds, the entire Base Rent then due, then any portion of such Base Rent not so received shall be subject to the late fee of five (5%) percent per month described in the second paragraph of Article 18 hereof. 5. Peaceful Possession: The Landlord covenants that the Tenant, on paying said Base Rent and all other sums due pursuant to this Lease and performing the covenants and conditions in this Lease contained, shall and may peaceably and quietly have, hold and enjoy the demised premises for the term aforesaid. 6. Purpose: The Tenant shall use the demised premises only for offices, kitchen and a television studio and for no other use whatsoever. 7. Re-entry, etc.: The Tenant shall, without any previous demand therefor, pay to the Landlord, or its agent, said Base Rent and all other sums due pursuant to this Lease, and perform all terms of this Lease, at the times and in the manner provided. In the event of the a) non-payment of said Base Rent, and/or any installment thereof, and/or any other sums due pursuant to this Lease within five (5) business days after Tenant receives notice that such payments were not made when due, b) failure to perform all other terms of this Lease, at the times and in the manner provided, and if said failure shall not have been cured within fifteen (15) days after notice to Tenant (said b) collectively referred to hereafter as "failure regarding other terms") and/or c) deserting and/or vacating of the demised premises, the Landlord or its agents shall have the right to and may enter said demised premises as the agent of the Tenant, without being liable therefor, and may relet the demised premises, and receive said Base Rent therefor, and all other sums due pursuant to this Lease, upon such terms as shall be satisfactory to the Landlord, and all rights of the Tenant to repossess the demised premises under this Lease shall be forfeited. Such re-entry by the Landlord shall not operate to release the Tenant from any of said Base Rent and all other sums due pursuant to this Lease and/or from any covenants to be performed hereunder during the full term of this Lease. For the purpose of reletting, the Landlord shall be authorized to make such repairs or alterations in or to the demised premises as may be necessary to place the same in good order and condition. The Tenant shall be liable to the Landlord for the cost of such repairs or alterations, provided such repairs or alterations are reasonable, and all expenses of such reletting. If the sum realized or to be realized from the reletting is insufficient to satisfy said Base Rent and all other sums due pursuant to this Lease, the Tenant shall forthwith pay such entire deficiency. The Tenant shall not be entitled to any surplus accruing as a result of the reletting. Each party to this Lease shall pay, all reasonable attorney's fees and other expenses incurred by the other party in enforcing any of the obligations under this Lease provided said other party shall prevail in said enforcement (and any such fees and expenses so payable by Tenant shall be deemed additional rent hereunder). All fees and expenses referred to in the immediately preceding sentence shall be due and payable a) if from the Tenant, within thirty (30) days after Landlord prevails in the enforcement referred to in the immediately preceding sentence, or b) if from Landlord, within thirty (30) days after Tenant prevails in the enforcement referred to in the immediately preceding sentence. Notwithstanding the provisions of the second sentence of this paragraph, in the event, but only in the event, that any such "failure regarding other terms" 1) can not be cured within fifteen (15) days after notice to Tenant and 2) does not or will not result in any a) harm, damage and/or liability to the land, building, demised premises, Landlord and/or Tenant and/or any other party and/or property, b) default and/or breach of any other lease, c) default and/or acceleration of any note, mortgage, assignment of leases or other loan document relating to the land and/or building, c) violation, cancellation and/or termination of, and/or increase in premiums relative to, any insurance policy existing presently and/or hereafter and/or d) violation of, non-compliance with and/or action pursuant to any governmental law, ordinance, and/or regulation, then in the event of 1) and 2), but only in the event of 1) and 2), Landlord shall not have any of the rights set forth in the second sentence of this paragraph provided Tenant commences to cure said "failure regarding other terms" within fifteen (15) days after notice to Tenant and Tenant diligently pursues said cure at all times thereafter until said failure regarding other terms has been fully cured. 3 4 8. Sub-letting and Assignment: a) The Tenant shall not sub-let the demised premises or any portion thereof, nor assign or encumber this Lease or any portion thereof, without the prior express written consent of the Landlord (which consent shall not be unreasonably withheld and the decision relative to any such consent shall not be delayed more than thirty (30) days from the date Landlord receives all items to which Landlord is entitled pursuant to this entire paragraph). Subject to the terms of Article 8 b) below, said consent may be withheld, in the sole reasonable discretion of the Landlord and/or any present and/or future holder of any present and/or future mortgage on the land and/or building, for reasons which shall include, but not be limited to, the determination as to any proposed sublessee, assignee and/or encumbrance holder (collectively, "transferee") whether alone and/or in comparison with Tenant, relative to any business, financial, personal and/or other issue and/or consideration, including, but not limited to, (i) previous business experience, (ii) proposed business, (iii) previous, present and/or projected income, assets, liabilities and net worth, (iv) financial history, (v) character and/or (vi) other matters. In order to assist the determination of any request for such consent, Tenant shall deliver to Landlord the following: a) simultaneously with said request, written (i) description by transferee of the previous business experience of, and business proposed by, transferee, (ii) references from two other parties ("other parties") describing transferee's character, previous business experience, financial history and present financial status, (iii) consent of, and authorization from, transferee to a) Landlord for Landlord to contact said other parties and/or any other company and/or agency which is hereafter in the business of providing and/or reporting credit, financial and/or other business documents and/or information (collectively, "credit companies") and to obtain from said other parties and/or credit companies such further documents and/or other information as to transferee as Landlord may thereafter request from said other parties and/or credit companies, and b) said other parties and/or credit companies for said other parties and/or credit companies to provide Landlord with all of said further documents and/or other information, and (iv) financial statements (including balance sheets and income statements) and all tax returns of transferee and Tenant for the two immediately preceding years, b) thereafter, any further documents and/or information Landlord may reasonably request, and c) each time Tenant delivers any of foregoing to Landlord, the consent of, and authorization from, Tenant, transferee, said other parties and said credit companies to Landlord to provide all of foregoing to all of said present and/or future holders of said present and/or future mortgages. b) Notwithstanding any contrary provision of Article 8, Landlord shall consent to any subtenant proposed by Tenant, provided that (i) the proposed subtenant does not pose a material risk to the physical condition or commercial reputation of the Demised Premises and (ii) at the time Tenant proposes such subtenant, Tenant meets the required Financial Ratios (as defined below), or, if such Financial Ratios are not met, Tenant delivers to Landlord, as an additional security deposit hereunder, a letter of credit in the amount of three (3) months Base Rent reasonably estimated by Landlord to be due for the final three (3) months of the term of this Lease, as such term may have been then extended by Tenant pursuant to Article 2 of this Lease; provided, however, that if Tenant subsequently elects an option term pursuant to Article 2 of this Lease, then such letter of credit amount shall be increased to three (3) months Base Rent reasonably estimated by Landlord to be due for the final three (3) months of such subsequently elected option term. Provided the Landlord is obligated to consent to the proposed subtenant as provided in the first sentence of this paragraph, in the event that Tenant proposes to sublet the Demised Premises to a subtenant that would require all or any portion of the space currently used as a television studio (the "studio space") to be modified for use as office space, then Landlord shall have the option, in its sole discretion, to either: (i) consent to such sublease, provided Tenant meets said Financial Ratios or delivers to Landlord said letter of credit as an additional security deposit hereunder; or (ii) terminate all of Landlord's and Tenant's respective rights and obligations under this Lease for the remainder of the term, which termination shall be effective a) as of the date four (4) months after Landlord provides notice 4 5 of its election of this option and b) without any further consent, signature and/or any other act of Landlord and/or Tenant. Landlord shall elect option (i) or (ii) referred to in the immediately preceding sentence and provide Tenant notice of such election within one (1) month after Landlord receives written notice from Tenant of such a proposal by Tenant. If Landlord elects said option (i), Tenant shall have the right, without obtaining any further consent of the Landlord, to make such alterations, additions or improvements to the studio space to the extent necessary to convert all or any portion of the studio space into office space of a quality consistent with the portion of the Demised Premises currently used as office space. Tenant shall have so met said "Financial Ratios" if, according to Tenant's financial statements filed with the Securities and Exchange Commission immediately prior to the date of determination, Tenant's stockholders' equity is at least one hundred million dollars ($100,000,000). c) In addition to any and all other amounts due from Tenant to Landlord, rights and/or remedies of Landlord and/or obligations and/or liabilities of Tenant, all whether or not same accrue and/or are due prior to, upon and/or after any such consent, sub-letting, assignment or encumbering, Tenant shall pay Landlord the following within seven (7) days of Landlord's demand for same (said seven (7) day period being on a time is of the essence basis wherever said seven (7) day period is referred to in this entire Article): a) whether or not said consent is given, all reasonable expenses incurred by Landlord relative to and/or resulting from said request, determination, consent, subletting, assignment, encumbering and/or any modification of this Lease, and/or review of any of foregoing, including, but not limited to, attorneys' fees, accountants' fees, consultants' fees, credit and/or financial report and/or search fees and/or the like, but in no event more than Five Thousand and 00/100 ($5,000.00) Dollars, and b) if said consent is given, the further sum of the difference, if any, between Five Thousand and 00/100 ($5,000.00) Dollars and the amount paid by Tenant to Landlord pursuant to a) of this sentence. d) Notwithstanding any provision of this entire Lease, including, but not limited to, this entire Article 8., in the event said consent is given, the Tenant shall be and remain jointly and severally liable with transferee for any and all obligations and liabilities pursuant to this entire Lease, all whether or not same accrue and/or are due prior to, upon and/or after, and notwithstanding, any such consent, subletting, assignment and/or encumbering; none of said obligations and liabilities shall be merged in any such consent, subletting, assignment or encumbering but shall survive same. Within five (5) business days of Landlord's demand for same (said five (5) business day period being on a time is of the essence basis wherever said five (5) business day period is referred to in this entire Article), Tenant shall deliver to Landlord Tenant's written confirmation ("confirmation") of all contents of the immediately preceding sentence. e) Any such consent, subletting, assignment and/or encumbering shall be deemed to be expressly a) conditioned upon Landlord's receipt of (i) all amounts referred to in the first paragraph of this Article 8.c) within the seven (7) day period referred to in said first paragraph and (ii) the confirmation referred to in the second paragraph of this Article 8.c) within the five (5) business day period referred to in said second paragraph, and b) null, void and of no effect whatsoever if Landlord does not receive all of said amounts and confirmation within said seven (7) day period and five (5) business day period, respectively. 9. Condition of Premises, Repairs/Alterations and Improvements/ Sanitation, Inflammable Materials/Sidewalks: The Tenant shall quit and surrender the demised premises at the end of the demised term in as good condition as the reasonable use thereof will permit. Tenant's obligations pursuant to the immediately preceding sentence shall include, but not be limited to, Tenant's providing, and paying all costs of, reasonable cleaning of, and waste removal from, demised premises. The Tenant shall not make any alterations, additions, or improvements to the demised premises without the Landlord's 1) prior express written initial consent of same and 2) final express written approval of all of same as-built, which consent and approval, inter alia, need not violate any mortgage now or hereafter affecting demised premises and shall require that Tenant 5 6 complies with all governmental regulations relative to all of foregoing, which consent and approval shall not be unreasonably withheld or delayed. Tenant shall pay, as and when due, all costs of all such alterations, additions and improvements. The Tenant shall pay all costs of all repairs, replacements, renovations, alterations, additions, improvements and/or maintenance required to or for demised premises, building and/or land reasonably determined by Landlord to be required due to the use of the demised premises, building and/or land by Tenant and/or its agents, servants and/or invitees (except repairs which are so required to a) structural elements and/or b) systems, of the demised premises and/or building; however, Tenant shall pay all costs of all repairs which are so required to a) structural elements and/or b) systems, of the demised premises and/or building, if said repairs result from the act and/or failure to act (provided such failure to act is in violation of Tenant's obligations under this Lease and/or at law and/or in equity) of Tenant and/or its agents, servants and/or invitees). Notwithstanding anything contained in this Lease and/or at law and/or in equity, Landlord shall not be obligated to provide and/or pay for any repairs, replacements and/or maintenance of any replacements, renovations, alterations, additions and/or improvements made by Tenant and/or its agents, servants and/or invitees unless under this Lease and/or at law and/or in equity, Landlord was obligated to make such replacements, renovations, alterations, additions and/or improvements in the first instance. The Tenant shall wash the inside and the outside of all windows of demised premises at least once every three (3) months. All erections, alterations, additions and improvements, whether temporary or permanent in character, which may be made upon the demised premises either by the Landlord or the Tenant, except furniture, studio equipment, or moveable trade fixtures installed at the expense of and belonging to the Tenant and which are removed by Tenant at its cost and without damage to the land, building or premises, shall be the property of the Landlord and shall remain upon and be surrendered with the demised premises as a part thereof at the termination of this Lease, without compensation to the Tenant. Nothing in this Lease shall impair Tenant's right to remove its furniture, equipment, personal property and/or any moveable trade fixtures (including, without limitation, its broadcast systems and media production infrastructure) installed at the expense of or belonging to, Tenant, provided that Tenant repairs any damage to the demised premises caused by such removal. The Tenant has reviewed the demised premises and accepts same in the "as is" condition. At the option of Landlord, the following aspects of the current build-out shall be modified by Tenant upon termination of the Lease so as to provide an empty, clean space: (i) The acoustical treatments applied to the surfaces of the walls and ceilings in the studios shall be removed. (ii) The studio lighting systems, including lighting grids, and all related power and dimmer systems shall be removed. The dimmer room electrical systems shall be removed, and the electrical service thereto shall be cut back to the main electrical closet. (iii) The prep kitchen fixtures and equipment shall be removed, and all utilities shall be cut and capped at the walls and floor. The roof penetration for the kitchen exhaust fan shall be capped and roofed so as to maintain the warrantee on the roof. (iv) The control room raised floor and ceiling soffit systems shall be removed. (v) The blocked windows of the spaces currently used as studios shall be unblocked and replaced with windows that match the currently existing windows elsewhere in the building. At the option of Landlord, Tenant shall convey to Landlord the Commissary Kitchen equipment and fixtures which would otherwise be required to be removed under this Article 9. The cost to Landlord of these assets shall be agreed upon by the parties at the time of such transaction. 10. Liens: 6 7 In the event that any lien is filed against the demised premises, building and/or land as a result of any act and/or omission by and/or on behalf of Tenant and/or Tenant's agents, servants, employees, contractors and/or invitees, after thirty (30) days' notice to the Tenant (unless any present or future mortgagee of the demised premises shall require a shorter notice period or no notice period, in which event said shorter notice period or no notice period shall apply) the Tenant shall have said lien released and discharged at Tenant's sole cost, and if said lien is not so released and discharged within said period, the Landlord, at its option, may terminate this Lease and/or pay said lien, without inquiring into the validity thereof, and the Tenant shall forthwith reimburse the Landlord the total expense incurred by the Landlord in releasing and/or discharging said lien, as additional rent hereunder. 11. Liability of Landlord: The Landlord shall not be responsible for the loss of or damage to property or injury to persons occurring at the demised premises, building and/or land, by reason of any existing or future condition, defect, matter or thing at the demised premises, building and/or land or the property of which the demised premises are a part, or for the acts, omissions or negligence of other persons or entities at the demised premises, building and/or land. The Tenant agrees to, shall, and does hereby, indemnify and save the Landlord harmless from all claims and liability for losses of or damage to property, or injuries to persons occurring at the demised premises(and/or at the building and/or land if such loss, damage or injury shall directly result from Tenant's and/or Tenant's agents', servants', employees', contractors' and/or invitees' intentional and/or negligent act and/or failure to act (provided such failure to act is in violation of Tenant's obligations pursuant to this Lease and/or otherwise at law and/or in equity)). Excepted from the provisions of the immediately two (2) preceding sentences shall be such loss, damage or injury as shall directly result from Landlord's intentional and/or negligent act and/or failure to act (provided such failure to act is in violation of Landlord's obligations pursuant to this Lease and/or otherwise at law and/or in equity). 12. Services, Utilities and Other Expenses: Utilities furnished to the demised premises for the benefit of the Tenant shall be provided by Landlord. In addition to all Base Rent and all other sums due pursuant to this Lease, utilities, services and other costs shall be paid for as set forth in "Schedule 1" attached hereto. The Landlord shall not be liable for any interruption or delay in any of the above services for any reason whatsoever. 13. Right to Inspect and Exhibit: The Landlord, or its agents shall have the right to enter the demised premises at reasonable hours provided reasonable advance notice is given to the Tenant, to examine the same, or to run telephone or other wires, or to make such repairs, additions or alterations as it shall reasonably deem necessary for the safety, preservation or restoration of the building and improvements, or for the safety or convenience of the occupants or users thereof, or to exhibit the same to prospective purchasers, lenders and/or agents, and put upon the premises a suitable sign. In the event Tenant shall not have validly exercised all of the options herein provided, for six (6) months prior to the expiration of the initial term and all option terms immediately preceding any option terms not so validly exercised, the Landlord, or its agents, may similarly exhibit the premises to prospective tenants and/or agents, and may place the usual "To Let" signs thereon. 14. Damage by Fire, Explosion, The Elements or Otherwise: In the event of the 1) total destruction of the demised premises or the building by fire, explosion, the elements or otherwise during the term hereby created, or previous thereto, or 2) such partial destruction thereof as to render the demised premises a) wholly untenantable and unfit for occupancy, or b) not repairable within one hundred eighty (180) days from the happening of such injury, then and in such case, all sums due relative to any period thereafter shall equitably abate, and, at the option of Tenant or Landlord, the term hereby created shall cease and become null and void from the date of such damage or destruction and the Tenant shall 7 8 immediately surrender said demised premises and all the Tenant's interest therein to the Landlord, and shall pay Base Rent and all other sums due pursuant to this Lease as may have been so equitably abated, only to the time of such surrender, in which event the Landlord may re-enter and re-possess the demised premises thus discharged from the Lease and may remove all parties therefrom. Should the demised premises be partially destroyed and rendered partially untenantable and unfit for occupancy, but yet be repairable within one hundred eighty (180) days from the happening of said injury, the Landlord shall and may enter and repair the same, shall commence repairs as soon as practical and proceed diligently to complete said repairs, and the Base Rent and all other sums due pursuant to this Lease shall be equitably abated from the date of said injury until said repairs are completed, and shall recommence in full immediately after said repairs shall be completed. Should the demised premises not be rendered untenantable and unfit for occupancy, then the Landlord shall and may enter demised premises and repair the same with reasonable promptness and in that case the Base Rent and all other sums due pursuant to this Lease accrued and accruing shall not cease or be reduced. The Tenant shall immediately notify the Landlord in case of fire or other damage in the demised premises of which Tenant has notice. 15. Observation of Laws, Ordinances, Rules and Regulations: Subject to the provisions expressly appearing in parenthesis in the fifth sentence of Article 9. of this Lease, the Tenant shall observe and comply with all laws, ordinances, rules and regulations of the Federal, State, County and Municipal authorities applicable to the business to be conducted by the Tenant in the demised premises. The Tenant shall not do or permit anything to be done in the demised premises, or keep anything therein, which is in violation of Article 6 hereof and will increase the rate of the Landlord's all risk property insurance premiums on the building, land, other buildings and/or improvements on the land and/or property kept therein or conflict with the regulations of the Fire Department or the Landlord's all risk property insurance policy upon the building, land, other buildings and/or improvements on the land and/or property kept therein or obstruct or interfere with the rights of other tenants of the building, land and/or said other buildings and/or improvements. In the event of any increase in the Landlord's all risk property insurance premiums on (and if a blanket policy, attributable and allocable to) the building, land, other buildings and/or improvements on the land and/or property kept therein resulting from the Tenant's specific manner of use and occupancy of the demised premises other than Tenant's current specific manner of use and occupancy of the demised premises, or from any act or omission on the part of the Tenant in violation of the terms of this Lease, the Tenant shall pay said increase in the Landlord's all risk property insurance premiums on (and if a blanket policy, attributable and allocable to) the building, land, other buildings and/or improvements on the land and/or property kept therein as additional rent. 16. Signs: No sign, advertisement, or notice (collectively, "sign") shall be affixed to or placed upon any part of the demised premises by the Tenant, except in such manner, and of such size, design and color as shall be expressly approved in advance in writing by the Landlord (said approval not to be unreasonably withheld). Landlord shall attend to the obtaining and placing of all signs approved by Landlord, and Tenant shall forthwith pay Landlord for all of same. Landlord acknowledges that all signs affixed to or placed upon the demised premises by Tenant on or before the effective date hereof are hereby expressly approved. 17. Subordination to Mortgages and Deeds of Trust, etc.: This Lease is subject and subordinate, and is hereby subjected and subordinated, to all present and/or future mortgages, deeds of trust and other encumbrances affecting the demised premises, land or building. The Tenant, forthwith upon demand of Landlord, shall execute and deliver to Landlord, at no expense to Landlord, all instruments which may reasonably be deemed necessary or desirable by the Landlord to further effect, and/or to confirm, the subjection and subordination of this Lease to any such present and/or future mortgage, deed of trust or encumbrance. The Tenant further, forthwith upon demand of Landlord, shall execute and deliver to Landlord, at no expense to Landlord, all estoppel certificates and ratification and attornment agreements as requested by Landlord relative to any proposed refinancing and/or sale of the land 8 9 and/or building. Within fifteen (15) days after Tenant's execution and delivery to Landlord of this Lease and the security deposit required hereunder, Landlord shall deliver to Tenant a Subordination, Non-Disturbance and Attornment Agreement in substantially the same form and content as "Exhibit C" attached hereto executed by the present mortgagee of the land. Landlord shall use its best efforts to deliver to Tenant an agreement in substantially the same form and content as said "Exhibit C" executed by all future mortgagees of the land. Landlord acknowledges that Tenant has executed and delivered the documents required by the second and third sentences of this paragraph to the extent Landlord has requested said execution and delivery to date. 18. Non-Payment and/or Failure to Comply with Covenants, Forfeiture of Lease, Non-Waiver of Breach, Attorneys' Fees etc.: In case Tenant a) does not pay any sum due pursuant to this Lease as and when due, including, but not limited to, Base Rent and/or net costs, within five (5) business days after the dates when due, and/or b) fails to fully comply with any of the other covenants, agreements and conditions of this Lease as and when due, and, as to b) fails to discontinue such failure to comply referred to in b) within 15 business days after notice thereof given to the Tenant (said b) collectively referred to hereafter as "failure regarding other terms"), this Lease shall thenceforth, at the option of the Landlord, become null and void. In such case, all Base Rent and all other sums due pursuant to this Lease theretofore, and/or which would have become due thereafter (discounted to the then present value, using a discount rate of 8% per annum), shall forthwith become due and payable, and the Tenant shall be liable for all loss or damage resulting from such violation as aforesaid. No waiver by the Landlord of any violation or breach of condition by the Tenant shall constitute or be construed as a waiver of any other violation or breach of condition, nor shall lapse of time after breach of condition by the Tenant before the Landlord shall exercise its option under this paragraph operate to defeat the right of the Landlord to declare this Lease null and void and to re-enter upon the demised premises after the said breach or violation. In any of said events Tenant shall pay Landlord all costs reasonably incurred by Landlord as a result of said non-payment and/or failure to comply, including, but not limited to, all reasonable attorneys' fees, experts' fees and court costs. Notwithstanding the provisions of the first sentence of this paragraph, in the event, but only in the event, that any such "failure regarding other terms" 1) can not be cured within fifteen (15) days after notice to Tenant and 2) does not or will not result in any a) harm, damage and/or liability to the land, building, demised premises, Landlord and/or Tenant and/or any other party and/or property, b) default and/or breach of any other lease, c) default and/or acceleration of any note, mortgage, assignment of leases or other loan document relating to the land and/or building, c) violation, cancellation and/or termination of, and/or increase in premiums relative to, any insurance policy existing presently and/or hereafter and/or d) violation of, non-compliance with and/or action pursuant to any governmental law, ordinance, and/or regulation, then in the event of 1) and 2), but only in the event of 1) and 2), Landlord shall not have any of the rights set forth in the first sentence of this paragraph provided Tenant commences to cure said "failure regarding other terms" within fifteen (15) days after notice to Tenant and Tenant diligently pursues said cure at all times thereafter until said failure regarding other terms has been fully cured. In addition to all of, and not in lieu of any of, Landlord's other rights and/or remedies and/or Tenants' other obligations, forthwith upon any failure of Tenant to fully and faithfully comply with all provisions of this entire Lease, including, but not limited to, paying all Base Rent, additional rent, rent, net costs, and all other sums due pursuant to this entire Lease, Tenant shall pay Landlord five (5%) percent of all amounts Tenant fails to pay as and when required by this Lease, for each month said failure of Tenant to so fully and faithfully comply with all provisions of this entire Lease continues. Said five (5%) percent shall conclusively a) represent the estimate of the Landlord and Tenant of one (1) of Landlord's costs relative to said failure of Tenant, and b) not be deemed to constitute a penalty. Landlord shall have the obligation to use reasonable efforts to mitigate its damages. 19. Notices: 9 10 All notices and demands, legal or otherwise, incidental to this Lease, or the occupation of the demised premises, shall be in writing. If either party or its agent desires to give or serve upon the other party any notice or demand, it shall be sufficient to send a copy thereof by Certified Mail, Return Receipt Requested, addressed to said other party at the address set forth in the immediately following sentence with a copy to a) Martha Stewart Living Omnimedia, Inc., 11 West 42nd Street, New York, New York 10036, Attention: President, with a copy to General Counsel, if to Tenant, and b) Peter van Witt, P.O. Box 707, Westport, Connecticut 06881 and Henry A. Perles, Esq., at c/o Kleban & Samor, P.C., 2425 Post Road, Southport, Connecticut 06490, if to Landlord. Notices from the Landlord to the Tenant shall be to the demised premises and from the Tenant to the Landlord shall be to the place hereinbefore designated for the payment of rent. Landlord or Tenant may from time to time designate in writing a change of the place to which notice shall be given to said designating party. 20. Bankruptcy, Insolvency, Assignment for Benefit of Creditors: It is further agreed that if at any time during the term of this Lease the Tenant shall make any assignment for the benefit of creditors, or be decreed insolvent or bankrupt according to law, or if a receiver shall be appointed for the Tenant, then the Landlord may, at its option, terminate this Lease, exercise of such option to be evidenced by notice to that effect served upon the assignee, receiver, trustee or other person in charge of the liquidation of the property of the Tenant or the Tenant's estate, but such termination shall not release or discharge any payment of Base Rent and/or any other sums due theretofore and/or thereafter pursuant to this Lease, or any liability by reason of any agreement or covenant herein contained on the part of the Tenant. 21. Holding Over by Tenant: In the event that the Tenant shall remain in the demised premises after the expiration of the term of this Lease without Landlord's and Tenant's having executed a new written lease, such holding over shall not constitute a renewal or extension of this Lease. The Landlord may, at its option, elect to treat the Tenant as one who has not removed at the end of his term, and thereupon be entitled to all the remedies against the Tenant provided by law in that situation, or the Landlord may elect, at its option, to construe such holding over as a tenancy from month to month, subject to all the terms and conditions of this Lease, except as to duration thereof, and in that event the Tenant shall pay monthly rent in advance at the rate of 200% of the Base Rent due for the last month of the demised term plus all other sums due pursuant to this Lease. 22. Eminent Domain, Condemnation: If the property or any part thereof wherein the demised premises are located shall be taken by public or quasi-public authority under any power of eminent domain or condemnation, this Lease at the option of the Landlord shall forthwith terminate and the Tenant shall have no claim or interest in or to any award of damages for such taking. Notwithstanding the foregoing, Tenant shall have the right separately to pursue against the condemning authority an award in respect of the loss, if any, to leasehold improvements paid for by Tenant without any credit or allowance from Landlord and in respect to the loss of Tenant's leasehold interest. 23. Disputes: Any dispute arising under this Lease shall be settled by arbitration. The Landlord and Tenant shall each choose an arbitrator, and the two arbitrators thus chosen shall select a third arbitrator. The findings and award of the three arbitrators thus chosen shall be final and binding on the parties hereto. For disputes hereunder that are not resolved by the parties within ten (10) days after either party gives notice to the other of its desire to arbitrate the dispute, the dispute shall be settled by binding arbitration by the American Arbitration Association in accordance with its then-prevailing rules at the office of the American Arbitration Association nearest the demised premises. Judgment upon the arbitration award may be entered in any court having jurisdiction. 10 11 The arbitrators shall have no power to change the lease provisions. The arbitration panel shall consist of three arbitrators, each of whom must be a commercial real estate broker then actively engaged in the practice of commercial real estate brokerage in Fairfield County for at least the immediately preceding five (5) years. Both parties shall continue performing their lease obligations pending the award in the arbitration proceeding. 24. Delivery of Lease: No rights shall be conferred upon the Landlord and/or Tenant until this Lease has been signed by the Landlord and Tenant, and an executed copy of this Lease has been delivered to the Landlord and Tenant. 25. Lease Provisions Not Exclusive: The foregoing rights and remedies are not intended to be exclusive but as additional to all rights and remedies the Landlord would otherwise have by law. 26. Lease Binding on Heirs, Successors, Etc.: All of the terms, covenants and conditions of this Lease shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. This Lease and all obligations of Tenant to pay Base Rent and all other sums due pursuant to this Lease and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall not be modified, reduced, altered and/or affected in any manner and/or to any extent whatsoever, if Landlord is unable to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make or is delayed in making any repairs, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Landlord is prevented or delayed from so doing by reason of governmental preemption in connection with the National Emergency declared by the President of the United States or in connection with any rule, order or regulation of any department or subdivision thereof of any governmental agency, or by reason of the conditions of supply and demand, or by reason of strike, or by reason of any other cause beyond Landlord's control. 27. Security: The Tenant deposited with Landlord a) $50,000.00 on March 14, 1996, b) $17,000.00 on March 3, 1997, and c) $30,000.00 on September 3, 1997 (which sums total $97,000.00) as security for the full and faithful performance by the Tenant of all the terms, covenants and conditions of this Lease upon the Tenant's part to be performed, which sums shall be returned to the Tenant, with interest from said dates of deposit to the date of return to Tenant at the passbook rate paid from time to time by banks reasonably chosen by Landlord (although Landlord shall have no obligation to deposit any or all of said security) after the time fixed as the expiration of the term herein, provided Tenant has vacated demised premises, removed all personalty required to be removed therefrom and has fully and faithfully carried out all of said terms, covenants and conditions on Tenant's part to be performed. In the event of a bona fide sale, the Landlord shall have the right to transfer such security and interest to the vendee for the benefit of the Tenant and the Landlord shall be considered released by the Tenant from all liability for the return of such security and interest; and the Tenant agrees to look to the vendee solely for the return of the said security and interest, and it is agreed that this shall apply to every transfer or assignment made of the security and interest to a vendee. The security deposited under this lease and the interest earned or deemed earned thereon shall not be mortgaged, assigned or encumbered by the Tenant without the written consent of the Landlord. In the event any or all of said security is utilized by Landlord, the entire amount so utilized shall be replenished by Tenant's depositing with Landlord a further sum in the amount so utilized forthwith upon Landlord's notification to Tenant of said utilization. 28. Confidentiality: 11 12 All terms of this entire Lease ("terms") shall be held by Landlord and Tenant in strict and absolute confidence and not revealed to any other party whatsoever except for the sole purpose of enabling 1) Landlord or Tenant to obtain financing and/or appropriately communicate with its attorneys and/or accountants and/or with companies owning and/or owned by Landlord or Tenant and/or 2) Landlord to sell the land and/or building. Notwithstanding any contrary provision of this Article 28, Landlord and/or Tenant may disclose, without any liability hereunder, any information required to be disclosed by applicable law or regulation (including, without limitation, the applicable rules of any national securities exchange or similar self-regulatory organization) or any Federal, State, County or Municipal governmental authority. Notwithstanding anything contained in this entire Lease, and in addition to all of its other rights and remedies, Landlord and Tenant shall be entitled to injunctive relief for the reason that a monetary award would not constitute an adequate remedy for any such failure to so fully and faithfully comply. All provisions of this entire paragraph shall survive the termination of this Lease, and shall not be merged in same. 29. Brokerage: Tenant and Landlord warrant and represent they have not dealt with any realtor, broker and/or agent, in connection with this Lease, including, but not limited to, the negotiation, entering into, execution and/or delivery of this Lease. Tenant and Landlord shall pay, and shall, and do hereby, hold harmless and indemnify the other from and against, any and all costs, expenses, damages and/or liabilities (including, but not limited to, all compensation, commissions, fees, costs of suit, witnesses' fees, experts' fees and/or attorneys' fees) with respect to the indemnitor's dealing with any broker in connection with this Lease, including, but not limited to, the negotiation, entering into, execution and/or delivery of this Lease. 30. Sale or Assignment by Landlord, Etc.: Without any further act, agreement, consent and/or the like whatsoever of the Landlord, Tenant, any other person, entity and/or party and/or their respective heirs, successors and/or assigns: a) The Landlord shall have the right to sell, assign and/or transfer all or any part of the land, building, other buildings, Demised Premises, this Lease and/or any benefits pursuant to this Lease, and b) forthwith upon any such sale, assignment, and/or transfer, absolutely and forever, the seller, assignor and/or transferor pursuant to such sale, assignment and/or transfer shall be entirely relieved of all of Landlord's obligations under this Lease which are required to be performed and/or complied with after such sale, assignment and/or transfer, provided a) the purchaser, assignee and/or transferee pursuant to such sale, assignment and/or transfer shall have assumed and agreed to be obligated and responsible for all of said obligations and/or b) any such sale, assignment and/or transfer shall be subject to all provisions of this Lease. The term "Landlord" as used in this Lease shall mean the Landlord and/or the owner for the time being of the Demised Premises. 31. Landlord's Rights to Perform Tenant's Covenants: If Tenant shall at any time fail to perform, and/or cause to be performed, any obligation of Tenant pursuant to the provisions of this Lease, then, after the expiration of any notice and cure period expressly provided in this Lease, Landlord shall have the right, but not the obligation, after ten (10) days' notice to Tenant (but without notice in the event of an emergency) and without waiving, and/or releasing Tenant from, any obligation of Tenant in this Lease contained, to perform same, in such manner and to such extent as Landlord shall, in its sole reasonable discretion decide, and in exercising any such rights, pay and incur necessary and incidental costs and expenses, including, but not limited to, reasonable attorneys' fees. Forthwith upon Landlord's demand therefor, Tenant shall reimburse Landlord for all sums paid by Landlord pursuant to this entire Lease, including, but not limited to, this Article, with interest at the rate of 8% per annum, and Landlord shall have the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case of default by Tenant in the payment of the rent. 32. No Representations by Landlord: 12 13 Neither Landlord nor anyone on behalf of Landlord has made any representations, promises and/or the like with respect to the Demised Premises, building, land and/or other buildings (including, but not limited to, any representations, promises and/or the like relative to condition, square footage and/or permitted zoning uses of Demised Premises, building, land and/or other buildings) on which Tenant has relied, except as expressly herein set forth. Landlord hereby represents the following to Tenant: 1. During the spring of 1995, Landlord removed the following from the land: (a) Two (2) underground fuel storage tanks and the contents thereof (which contents were believed by Landlord to be fuel); (b) Two (2) underground waste storage tanks and the contents thereof (which contents were believed by Landlord to include cleaning solvents); and (c) Approximately two hundred (200) tons of soil; 2. During January of 1996, Landlord removed from the land the contents of one (1) tank referred to in 32.2. of the Lease dated as of March 6, 1996 between Landlord and Tenant and which tank previously was believed by Landlord to be a septic tank and which contents were believed by Landlord to include cleaning solvents. During December of 1996, Landlord removed from the land said tank. The septic tank servicing the building is, to the best of Landlord's knowledge, sufficient to service the building; 3. All removal to date referred to in 1. and 2., above, has been, to the best of Landlord's knowledge, as requested by the Department of Environmental Protection of the State of Connecticut; 4. To the best of Landlord's knowledge, there presently exist none of the following on the land and/or in the building: a) hazardous materials in violation of environmental laws or b) other violations of environmental laws; and 5. Landlord shall, and does hereby, indemnify and hold harmless Tenant of and from all costs resulting from Landlord's acts and/or failures to act relative to violations of environmental laws, unless said violations were caused by the act, failure to act and/or use of the land and/or building by and/or on behalf of Tenant and/or its agents, servants and/or invitees. 33. Right of Mortgagee To Cure Defaults of Landlord: Tenant shall give to Landlord's mortgagee whose name and address have been supplied to Tenant a copy of any notice of default served upon and/or sent to Landlord. If Landlord shall have failed to cure such default within the time provided for in this Lease then Landlord's mortgagee shall have a) an additional period, of the greater of the cure period provided in any applicable mortgage or thirty (30) days, within which to cure such default, or b) if such default cannot be cured within said period, then such additional time as may be necessary if within said period the Landlord's mortgagee has commenced and is diligently pursuing the curing of such default. This Lease shall not be terminated if said default is cured within said period, or if such cure is being so diligently pursued, as the case may be. Tenant shall accept performance by any such Landlord's mortgagee. 34. Entire Agreement, Etc.: As of July 1, 2001, it is expressly understood and agreed by and between the parties hereto that this Lease sets forth all the covenants, promises, agreements, conditions and/or understandings, either oral and/or written, between them with respect to the land, building and/or demised premises and/or this Lease, and there are no others as of the date hereof except as are 13 14 expressly set forth in a) an Agreement between Landlord and Tenant's predecessor in interest dated March 10, 1997, as amended by a Termination of Leases, Etc. between Landlord and Tenant dated of even date herewith and/or b) a written agreement between Landlord and Tenant and/or Tenant's predecessor in interest regarding the issuance to Tenant of a credit against rent in exchange for improvements and/or repairs (including the paving and/or re-paving of all or a portion of the parking lot) of the land by Tenant . It is further understood and agreed that no subsequent alteration, amendment, change and/or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. The article and/or paragraph headings contained in this Lease are for convenience only and shall not be considered in the construction and/or interpretation of any provision of this Lease. 35. Invalidity of Particular Provisions: If any term or provision of this Lease or the application thereof to any person or circumstance shall to any extent be invalid, non-binding and/or unenforceable, the remainder of this Lease, or the application of such term and/or provision to persons and/or circumstances other than those as to which it is invalid, non-binding and/or unenforceable, shall not be affected thereby, and each term of this Lease shall be valid, binding and enforceable and be enforced to the fullest extent permitted by law. 36. Social Security Numbers, etc.: Tenant represents that the following is the tax identification number of Tenant: 52-2187059. 37. No Smoking in Building: None of Tenant's employees, customers, contractors, agents, servants, or invitees shall smoke in any portion of the building, including, but not limited to, any portion of the demised premises. 38. Insurance: a) Tenant shall obtain and maintain, at Tenant's cost, at all times during the term of this Lease, (i) all risk property insurance on Tenant's alterations, additions and improvements to the demised premises, in the amount of $6,000,000.00, and (ii) public liability insurance (in a minimum amount of $5,000,000.00) with respect to the demised premises, and all of (i) and (ii) of this sentence naming (1) Tenant as an insured and (2) if and to the extent of their insurable interests, Landlord and any holders of mortgages on the land and/or building designated by Landlord in a notice to Tenant, as additional insureds. All of said insurance (1) shall be written by one or more insurance companies licensed to do business in Connecticut, (2) may be carried under a blanket policy covering the demised premises and (3) shall contain an agreement by the insurer to endeavor not to cancel said policies with respect to said Landlord or holders of mortgages except upon at least ten (10) days prior written notice to Landlord. All renewal policies (or certificates evidencing the same) shall be delivered to Landlord not less than ten (10) days prior to the expiration of such policies to be renewed. b) Landlord shall obtain and maintain, at Landlord's cost, at all times during the term of this Lease, all risk property insurance on the building and the land which (1) without limitation, shall cover and allow the uses permitted by Article 6 of this Lease and Tenant's current specific manner of use and occupancy of the demised premises, (2) shall be written by one or more insurance companies licensed to do business in Connecticut, and (3) may be carried under a blanket policy covering the building and land. 14 15 IN WITNESS WHEREOF, the said Parties have hereunto set their hands and seals the day and year first above written. Witness: NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP By NGP, LLP, Its General Partner, Hereunto Duly Authorized By /s/ Peter van Witt ________________________________ ________________________________ Peter Van Witt, Its President, ________________________________ Hereunto Duly Authorized MARTHA STEWART LIVING OMNIMEDIA, INC. By /s/ Sharon Patrick ________________________________ ________________________________ Name: Sharon Patrick Title: President ________________________________ Hereunto Duly Authorized 15 16 STATE OF CONNECTICUT ) ) ss: ________ ___, 2001 COUNTY OF FAIRFIELD ) Personally appeared Peter Van Witt, President hereunto duly authorized of NGP, LLP, general partner hereunto duly authorized of NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP, signer and sealer of the foregoing instrument, who acknowledged the same to be his free act and deed as such President hereunto duly authorized, the free act and deed of said Saugatuck Group Property Management, Inc. as such general partner hereunto duly authorized, and the free act and deed of said NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP, before me. ________________________________ Commissioner of the Superior Court Notary Public My Commission Expires: STATE OF NEW YORK ) ) ss: New York City _________ ___, 2001 COUNTY OF NEW YORK ) Personally appeared ______________________, ____________ hereunto duly authorized of MARTHA STEWART LIVING OMNIMEDIA, INC., signer and sealer of the foregoing instrument, who acknowledged the same to be his/her free act and deed as such _____________ hereunto duly authorized, and the free act and deed of said MARTHA STEWART LIVING OMNIMEDIA, INC., before me. ________________________________ Notary Public My Commission Expires: 16 17 Attachments to Lease "Exhibit A" - Description of "land". "Exhibit B" - Cross-hatched outline of "demised premises". "Exhibit C" - Subordination, Non-Disturbance and Attornment Agreement. "Exhibit D" - Current Wiring Instructions for Payments to Landlord "Schedule 1"- Net Costs. 17 18 "Schedule 1" 1. Tenant shall further pay all of the following ("net costs") to the extent same relate to any period occurring during the term and commencing on or after Commencement Date: a) all charges for all utilities and heating oil used and/or consumed at demised premises, b) all charges for removal from land of waste and/or other items relating to demised premises which are in excess of standard office waste, c) all real estate and/or personal property taxes and/or other governmental assessments resulting from any alterations, additions, improvements, erections, repairs, replacements, renovations and/or maintenance made, and/or labor, services, materials and/or other items provided, to the demised premises by Tenant on or after the Commencement Date, d) all charges for all utilities, heating oil and sewer relative to the land and/or building (excluding therefrom all those payable by Tenant and/or other tenants of the building), plus e) increases in Landlord's all risk property insurance described in Article 38 of this Lease to the extent provided for in Article 15 of this Lease. All expenses related to grounds maintenance, landscaping, snow and waste removal shall be borne directly by the Tenant as the tenant for the building. All of foregoing shall be paid by Tenant to Landlord without any abatement, deduction and/or set-off for any reason whatsoever. Tenant shall pay to Landlord, in advance, on Commencement Date, and on the same day of each month thereafter as Base Rent shall be due pursuant to Article 3. of this Lease, one-twelfth (1/12), of the product of the annual amount estimated by Landlord, in all reasonable probability, as the amounts which shall be net costs payable by Tenant and attributable to the 12 months immediately following Commencement Date and each 12 months thereafter (said 12 month period, collectively, "applicable period"), or for the applicable period if said estimate is received by Tenant after the applicable period has commenced, which estimated annual amount shall be shown on a notice hereinafter called "Current Notice". All payments made by Tenant to Landlord pursuant to said Current Notice shall be credited to the payments ultimately determined to be due for the applicable period. In the event said applicable period has commenced prior to delivery of any such Current Notice, Tenant shall pay to Landlord, in addition, within thirty (30) days of delivery of such Current Notice, for each month in said applicable period that commenced prior to Tenant's receipt of such Current Notice, an amount equal to one-twelfth(1/12) of the annual amount shown on such Current Notice multiplied by the number of months of said applicable period that have theretofore commenced. As soon as practical after the end of each applicable period, Landlord shall prepare and deliver to Tenant a Notice of net costs for the immediately preceding applicable period, which Notice is hereinafter called "Past Notice", advising Tenant of a) the amounts, due from Tenant to Landlord as net costs for the immediately preceding applicable period, less b) the amounts paid pursuant to the immediately preceding paragraph. Within thirty (30) days of the delivery of such Past Notice, Tenant shall pay Landlord the amount shown thereon, if any, as due, or Landlord shall credit Tenant the amount shown thereon, if any, as an over payment, all as the case may be. The amount of charges for utilities shall be the amount (i) indicated by any separate meter for such periods as there is any such separate meter and/or (ii) reasonably estimated by Landlord for all other periods. 2. In no event shall any of the provisions of this entire Schedule 1 result in a negative calculation. 3. All sums due and payable by Tenant pursuant to this Schedule 1 shall be due and payable to Landlord and/or any provider, as Landlord shall direct, within ten (10) days of Landlord's demand therefor. 4. Tenant shall have the right to reasonably audit all of said net costs, but said right and audit shall not entitle Tenant to delay making the payments referred to above to the extent referred to above. 18 19 [ FIRST UNION LOGO] "Exhibit C" SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT dated ________, ______ (the "AGREEMENT"), between FIRST UNION NATIONAL BANK ("BANK"), a national banking association, having an office at ____________________________________________________ ("Bank") and _______________________________________________________________________, a ________________________, having an office at ____________________________________________ ("TENANT"). BACKGROUND A. As security for a loan made by Bank to _______________________________________ ("LANDLORD") Landlord, Landlord is about to give and/or has given to Bank a [SELECT APPROPRIATE AGREEMENT] [Mortgage and Security Agreement] [Deed of Trust and Security Agreement] [Deed to Secure Debt and Security Agreement], which is about to be recorded and/or has been recorded in the public records for the County of ___________________________, ________________ (the "SECURITY INSTRUMENT"), constituting a first lien against the Property described on SCHEDULE "A" attached hereto (the "PROPERTY"). B. Tenant has entered into the Lease dated ______________, as amended _____________ (as so amended, the "LEASE") covering all or a portion of the Property (the "LEASED PREMISES"). C. As a condition of making the loan, Bank has required that the Lease be subordinated to the Security Instrument and that Tenant agree to attorn to the purchaser of the Property at foreclosure of the Security Instrument in the event of such foreclosure, or to Bank prior to foreclosure in the event Bank elects to collect the rents and other sums due and becoming due under the Lease, and Tenant is willing to so attorn, if Bank will recognize Tenant's rights under the Lease, on the terms and conditions hereinafter provided. AGREEMENT NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants herein contained, and intending to be legally bound, hereby agree as follows: 1. SUBORDINATION OF LEASE. The Lease is and shall be subject and subordinate to the provisions and lien of the Security Instrument and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of the principal amount and other sums secured thereby and interest thereon, as if the Lease had been executed and delivered after the execution, delivery and recording of the Security Instrument. 19 20 2. ATTORNMENT. Tenant agrees that it will attorn to and recognize: (i) Bank, whether as mortgagee in possession or otherwise; (ii) any purchaser at a foreclosure sale under the Security Instrument; (iii) any transferee who acquires possession of or title to the Property, whether by deed in lieu of foreclosure or other means; and (iv) the successors and assigns of such purchasers and/or transferees (each of the foregoing parties, a "SUCCESSOR"), as its landlord for the unexpired balance (and any extensions, if exercised) of the term of the Lease upon the same terms and conditions as set forth in the Lease. Such attornment shall be effective and self-operative without the execution of any further instruments by any party hereto; provided, however, that Tenant will, upon request by Bank or any Successor, execute a written agreement attorning to Bank or such Successor, affirming Tenant's obligations under the Lease, and agreeing to pay all rent and other sums due or to become due to Bank or such Successor. 3. NON-DISTURBANCE. So long as Tenant complies with Tenant's obligations under this Agreement and is not in default under any of the terms, covenants or conditions of the Lease, Bank will not disturb Tenant's use, possession and enjoyment of the Leased Premises nor will the leasehold estate of Tenant be affected or Tenant's rights under the Lease be impaired (except to the extent that Tenant's right to setoff any sums owed to Landlord or to receive any obligations to be performed by Landlord shall not be enforceable thereafter against Bank or any Successor), in any foreclosure action, sale under a power of sale, transfer in lieu of the foregoing, or the exercise of any other remedy pursuant to the Security Instrument. 4. ASSIGNMENT OF LEASES. Tenant acknowledges that it has been advised that Landlord is assigning the Lease and the rents thereunder to Bank pursuant to an Absolute Assignment of Leases and Rents from Landlord to Bank (the "ASSIGNMENT"). Tenant agrees that if Bank, pursuant to the Assignment, and whether or not it becomes a mortgagee in possession, shall give notice to Tenant that Bank has elected to require Tenant to pay to Bank the rent and other charges payable by Tenant under the Lease, Tenant shall, until Bank shall have cancelled such election, be similarly bound to Bank and shall similarly attorn to Bank and shall thereafter pay to Bank all rent and other sums payable under the Lease. Any such payment shall be made notwithstanding any right of setoff, defense or counterclaim which Tenant may have against Landlord, or any right to terminate the Lease. 5. LIMITATION OF LIABILITY. 5.1. In the event that Bank succeeds to the interest of Landlord under the Lease, or title to the Property, then Bank and any Successor shall assume and be bound by the obligations of Landlord under the Lease which accrue from and after such party's succession to Landlord's interest in the Leased Premises, but Bank and such Successor shall not be: (i) liable for any act or omission of any prior landlord (including Landlord); (ii) liable for the retention, application or return of any security deposit to the extent not paid over to Bank; (iii) subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord); (iv) bound by any rent or additional rent which Tenant might have paid for more than the current month to any prior landlord (including Landlord); (v) bound by any amendment or modification of the Lease made without Bank's or such Successor's prior written consent; or (vi) obligated to cure any defaults of any prior landlord under the Lease which occurred prior to the date on which Bank or such Successor succeeded to Landlord's interest under the Lease. Nothing in this section shall be deemed to waive any of Tenant's rights and remedies against any prior landlord. 5.2. Tenant agrees that any person or entity which at any time hereafter becomes the landlord under the Lease, including without limitation, Bank or any Successor, shall be liable only for the performance of the obligations of the landlord under the Lease which arise during the period of its or their ownership of the Leased Premises and shall not be 20 21 liable for any obligations of the landlord under the Lease which arise prior to or subsequent to such ownership. Tenant further agrees that any such liability shall be limited to the interest of Bank or such Successor in the Property, and Tenant shall not be able to enforce any such liability against any other assets of Bank or such Successor. 6. RIGHT TO CURE DEFAULTS. Tenant agrees to give notice to Bank of any default by Landlord under the Lease, specifying the nature of such default, and thereupon Bank shall have the right (but not the obligation) to cure such default, and (if Tenant is entitled to terminate the Lease or abate any rent payable thereunder by reason of such default) Tenant shall not terminate the Lease or abate the rent payable thereunder by reason of such default unless and until it has afforded Bank thirty (30) days after Bank's receipt of such notice to cure such default and a reasonable period of time in addition thereto (i) if the circumstances are such that said default cannot reasonably be cured within said thirty (30) day period and Bank has commenced and is diligently pursuing such cure, or (ii) during and after any litigation action including a foreclosure, bankruptcy, possessory action or a combination thereof. It is specifically agreed that Tenant shall not require Bank to cure any default which is not susceptible of cure by Bank. 7. TENANT'S AGREEMENTS. Tenant hereby covenants and agrees that: (i) Tenant shall not pay any rent or additional rent under the Lease more than one month in advance; (ii) Tenant shall have no right to appear in any foreclosure action under the Security Instrument; (iii) Tenant shall not amend, modify, cancel or terminate the Lease without Bank's prior written consent, and any attempted amendment, modification, cancellation or termination of the Lease without such consent shall be of no force or effect as to Bank; (iv) Tenant shall not voluntarily subordinate the Lease to any lien or encumbrance (other than the Security Instrument) without Bank's prior written consent; (v) Tenant shall not assign the Lease or sublet all or any portion of the Leased Premises (except as permitted by the terms of the Lease) without Bank's prior written consent; (vi) this Agreement satisfies any requirement in the Lease relating to the granting of a non-disturbance agreement; and (vii) Tenant shall deliver to Bank, from time to time and within ten (10) days from the date of request, a written statement in form and substance satisfactory to Bank certifying to certain matters relating to the Lease. 8. MISCELLANEOUS. 8.1. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Agreement shall in any way affect or impair the lien created by the Security Instrument, except as specifically set forth herein. 8.2. MODIFICATIONS. This Agreement may not be supplemented, amended or modified unless set forth in writing and signed by the parties hereto. 8.3. NOTICES. All notices and communications under this Agreement shall be in writing and shall be given by either (a) hand delivery, (b) first class mail (postage prepaid), or (c) reliable overnight commercial courier (charges prepaid) to the addresses listed in this Agreement. Notice shall be deemed to have been given and received: (i) if by hand delivery, upon delivery; (ii) if by mail, three (3) calendar days after the date first deposited in the United States mail; and (iii) if by overnight courier, on the date scheduled for delivery. A party may change its address by giving written notice to the other party as specified herein. 21 22 8.4. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the substantive laws of the [State/Commonwealth] of __________________. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have duly executed and delivered this Subordination, Non-Disturbance and Attornment Agreement [under seal] as of the day and year first above written. ["SEAL" MAY BE DELETED IF NOT REQUIRED UNDER STATE LAW; WITNESSES MAY BE DELETED IF NOT REQUIRED UNDER STATE LAW; TWO WITNESSES ARE REQUIRED IN CONNECTICUT, DELAWARE (INDIVIDUALS AND PARTNERSHIPS ONLY), FLORIDA (RECORDED DOCS ONLY) AND SOUTH CAROLINA; TWO WITNESSES OPTIONAL IN FLORIDA] WITNESS: TENANT: __________________________________ ______________________________________________________(SEAL) Name: Name: (Individual) WITNESS/ATTEST: _________________________________________________(SEAL) (Corporation, Partnership or LLC) _________________________________________________ By: _________________________________________________________ Name: Name: Title: Title: [Corporate Seal] BANK: ATTEST: FIRST UNION NATIONAL BANK _________________________________________________ By: _________________________________________________________ Name: Name: Title: Title: [Corporate Seal] 22 23 SCHEDULE A DESCRIPTION OF PROPERTY 23 24 [ATTACH APPROPRIATE ACKNOWLEDGEMENT(S) FROM ACKNOWLEDGEMENT DOCUMENT] 24 25 "Exhibit D" Current Wiring Instructions for Payments to Landlord Fleet Bank Routing Code: 011900571 Account No: 9401776695 Account Name: Newtown Group Properties Limited Partnership 25 EX-10.2 4 y52232ex10-2.txt TERMINATION OF LEASES, ETC. 1 EXHIBIT 10.2 TERMINATION OF LEASES, ETC. This Amendment of Leases, Etc. dated as of the 1st day of October, 2000 is entered into by and between NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP ("Newtown"), a Connecticut limited partnership, and MARTHA STEWART LIVING OMNIMEDIA, INC. ("MSLO"), a Delaware corporation. WHEREAS, Newtown and MSLO presently are the sole parties in interest, as landlord and tenant, respectively, of and pursuant to the following documents, as a result of their and/or their predecessors in interest's having previously entered into said documents: (i) the Lease dated as of March 6, 1996 between Newtown and Time Publishing Ventures Inc., as amended, as assigned to Martha Stewart Living Omnimedia LLC ("MSO LLC"), predecessor to MSLO, as of February 3, 1997 ("Lease 1"); (ii) the Lease dated as of August 1, 1996 between Newtown and MSO LLC ("Lease 2"); (iii) the Lease dated as of August 14, 1997 between Newtown and MSO LLC ("Lease 3", together with Lease 1 and Lease 2, the "Prior Leases"); (iv) the Letter Agreement dated as of September 29, 2000 between Newtown and MSLO amending the Prior Leases (the "Amendment Agreement"); and (v) the Agreement dated as of March 10, 1997 between Newtown and MSO LLC with respect to certain alterations made by MSO LLC to the premises which are the subject of the Prior Leases (the "Alterations Agreement"). WHEREAS, Newtown and MSLO wish to enter into, execute and deliver to the other a Lease dated as of October 1, 2000 ("Lease 4") but will do so only if both of them enter into, execute and deliver to the other this Amendment of Leases, Etc. 2 NOW, THEREFORE, for good, valuable, sufficient, adequate, legal and valid consideration, given and received by each and both of the undersigned to and from the other, including, but not necessarily limited to, each and both of the undersigned's entering into, executing and delivering to the other this Amendment of Leases, Etc. and Lease 4, the undersigned hereby agree that the Prior Leases, Amendment Agreement and Article 10. of the Alterations Agreement are hereby amended so that the term referred to in the Prior Leases shall be deemed to terminate, and the Prior Leases, Amendment Agreement and Article 10. of the Alterations Agreement shall be deemed to terminate and become and be null, void and of no effect whatsoever, all as of July 1, 2001, and all absolutely, forever and unconditionally. IN WITNESS WHEREOF, the said Parties have hereunto set their hands and seals the day and year first above written. Witness: NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP By Saugatuck Group Property Management, Inc., Its General Partner, Hereunto Duly Authorized By /s/ Peter van Witt - -------------------------------- -------------------------------- Peter Van Witt, Its President, - -------------------------------- Hereunto Duly Authorized MARTHA STEWART LIVING OMNIMEDIA, INC. - -------------------------------- By /s/ Sharon Patrick -------------------------------- Its President --------------------------------, -------------------------------- - -------------------------------- Hereunto Duly Authorized 2 3 STATE OF CONNECTICUT) ) ss: , 2000 COUNTY OF FAIRFIELD ) Personally appeared Peter Van Witt, President hereunto duly authorized of Saugatuck Group Property Management, Inc., general partner hereunto duly authorized of NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP, signer and sealer of the foregoing instrument, who acknowledged the same to be his free act and deed as such President hereunto duly authorized, the free act and deed of said Saugatuck Group Property Management, Inc. as such general partner hereunto duly authorized, and the free act and deed of said NEWTOWN GROUP PROPERTIES LIMITED PARTNERSHIP, before me. -------------------------------- Commissioner of the Superior Court Notary Public My Commission Expires: STATE OF NEW YORK ) ) ss: New York City , 2000 COUNTY OF NEW YORK ) Personally appeared , hereunto duly authorized of MARTHA STEWART LIVING OMNIMEDIA, INC., signer and sealer of the foregoing instrument, who acknowledged the same to be his/her free act and deed as such hereunto duly authorized, and the free act and deed of said MARTHA STEWART LIVING OMNIMEDIA, INC., before me. -------------------------------- Commissioner of the Superior Court Notary Public My Commission Expires: 3 EX-10.3 5 y52232ex10-3.txt LICENSE AGREEMENT 1 EXHIBIT 10.3 NOTE: CERTAIN MATERIAL HAS BEEN OMITTED FROM THIS AGREEMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2. THE LOCATIONS OF THESE OMISSIONS ARE INDICATED THROUGHOUT THE AGREEMENT BY THE FOLLOWING MARKINGS: [ * * * ]. LICENSE AGREEMENT THIS AGREEMENT made as of this 21st day of June, 2001, by and between MSO IP HOLDINGS, INC., a California corporation, with its principal place of business at 11100 Santa Monica Boulevard, Suite 600, Los Angeles, California 90025 ("MSO") and KMART CORPORATION, a Michigan corporation, with its principal place of business at 3100 West Big Beaver Road, Troy, Michigan 48084 ("Kmart"). WHEREAS, MSO and Kmart have previously entered into an agreement, dated January 28, 1997 (the "Bed and Bath Agreement"), pursuant to which Kmart and MSO, among other things, merchandise and develop certain home products; WHEREAS, MSO and Kmart have previously entered into an agreement, dated June 1, 1998 (the "Garden Agreement"), pursuant to which Kmart and MSO, among other things, merchandise and develop certain garden products; WHEREAS, MSO and Kmart have previously entered into an agreement, dated April 21, 1999 (the "Housewares Agreement," and together with the Bed and Bath Agreement and the Garden Agreement, the "Prior Agreements"), pursuant to which Kmart and MSO, among other things, merchandise and develop certain housewares products; WHEREAS, Kmart and MSO have determined to terminate the Prior Agreements and enter into this Agreement, which shall set forth revised terms and conditions governing the relationship between the parties and shall, as of August 1, 2001, supersede the Prior Agreements in every way (except for obligations relating to payment of royalties for periods prior to August 1, 2001); NOW, THEREFORE, for good and valuable consideration the sufficiency of which is hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows: I. Grant. Subject to the terms and conditions of this Agreement, MSO licenses to Kmart the limited right in the Territory (as defined below) to utilize the trademark MARTHA STEWART EVERYDAY(TM) and variations and stylized forms thereof designated by MSO (the "Trademark"), together with the name, likeness, voice and signature of Martha Stewart (in each case solely in connection with the Trademark) (the "Stewart Property"), and the designs and other intellectual property incorporated in the Licensed Products (as defined below) (the "Product Designs," and together with the Stewart Property and the Trademark, the "Licensed Property"), all of which shall be approved by MSO in the manner set forth herein, solely in connection with (i) the manufacture of Licensed Products, (ii) the distribution of Licensed Products to, and retail sale of Licensed Products by, Kmart's Kmart stores in the Territory, and (iii) the manufacture and exploitation of the Materials (as defined in Section VI(1)) in connection with Kmart's sales of Licensed Products through its Kmart stores. Any sale or other exploitation 2 of the Licensed Products or use of the Licensed Property in a manner not explicitly permitted hereunder shall be deemed a material breach of this Agreement. "Licensed Products" shall mean the Home Products (as defined below), the Garden Products (as defined below), the Housewares Products (as defined below), the Seasonal Products (as defined below) and the Additional Products (as defined in Section XVII). The "Home Products" shall mean those products developed and merchandised by Kmart and MSO pursuant to the terms of this Agreement and/or the Bed and Bath Agreement in the product categories set forth on Schedule I(a) hereto. The "Garden Products" shall mean those products developed and merchandised by Kmart and MSO pursuant to the terms of this Agreement and/or the Garden Agreement in the product categories set forth on Schedule I(b) hereto. The "Housewares Products" shall mean those products developed and merchandised by Kmart and MSO pursuant to the terms of this Agreement and/or the Housewares Agreement in the product categories set forth on Schedule I(c) hereto. The "Seasonal Products" shall mean those products developed and merchandised by Kmart and MSO pursuant to the terms of this Agreement in the product categories set forth on Schedule I(d) hereto. "Product Category" shall mean a broad category of Licensed Product (1) comprising narrower categories of product associated by a common theme, and (2) which Kmart and MSO consider a cohesive program (e.g. Home Products, Garden Products, etc.). "Initial Products" shall mean the Home Products, the Garden Products, the Housewares Products and the Seasonal Products. "Territory" shall mean the United States of America and its territories, including, Puerto Rico, Guam, and the U.S. Virgin Islands, and the Caribbean. Additionally, if Kmart opens Kmart stores in additional small countries it may request of MSO for such country to be added to the definition of the Territory, which request MSO shall generally approve so long as (x) MSO (or its affiliate) is not already actively marketing (either directly or through third parties) products and/or services in such country, (y) MSO (or its affiliate) does not have plans to begin to market (either directly or through third parties) products and/or services in such country in the foreseeable future, and (z) MSO has no other compelling reason why adding such country to the Territory would be detrimental to MSO's (or its affiliate's) business. II. Exclusivity. (1) MSO warrants and agrees that the license of the Licensed Property contained herein is exclusive to Kmart in Exclusive Stores (as hereafter defined) in the Territory during the Term in connection with the promotion, advertising, manufacture, distribution and sale of any products which are Licensed Products. "Exclusive Stores" shall mean (i) the retail store outlets in the discount store channel of distribution which includes only Wal-Mart, Sam's Club, Target, J.C. Penney, Montgomery Ward, Venture, Bradlees, Kohl's, Mervyn's, Meijer, Fred Meyer, Shopko, Costco and Hill's and similar national or regional discount stores which are not in business as of the date hereof but which may come into existence in the future during the Term, provided that Kmart provides MSO with written notice of its desire to include such newly-existing stores within the definition of Exclusive Stores within 60 days of the initial opening of any such store and MSO reasonably agrees that such store should be so included, and (ii) the retail store outlets of Sears, Lowe's, Home Depot, HQ, Builder's Square and Hechinger's. (2) MSO may use or permit others to use the Licensed Property on products which are of the same product type as Licensed Products and which are of a higher quality and intended by MSO to be sold at a higher price point than the Licensed Products sold by Kmart provided, however, that such products are sold by such licensee other than through Exclusive Stores. 2 3 (3) In the event MSO wishes to develop, merchandise, and sell products in cooperation with Kmart in Product Categories other than those of the Initial Products, MSO shall provide Kmart written notice describing such category and MSO's desire to work with Kmart in connection therewith. Promptly thereafter, representatives of Kmart and MSO shall cooperate in good faith to agree upon appropriate Sales projections for such Product Category, a schedule for development and launch of the Licensed Products relating thereto, and other pertinent factors relating to the Program. Upon reaching agreement on these elements, MSO and Kmart shall enter into an addendum to this Agreement relating to such Product Category and setting forth all relevant information necessary to incorporate such Product Category into this Agreement. Royalty rates for such Product Categories shall be the same as royalty rates otherwise applicable hereunder and Minimum Royalty Amounts shall be [ * * * ] of agreed upon projections for Sales of such Licensed Products. MSO may not enter into any agreement with any Exclusive Store for the sale of Martha Stewart branded products in any of the Product Categories set forth on Schedule II(3) hereto unless agreement has not been reached with respect to projections, development and launch schedule for the Licensed Products in such Product Category within 90 days of the giving of notice by MSO hereunder, provided that if Kmart is still cooperating with MSO in good faith to come to such agreement this period will be extended for an additional 30 days. Any Licensed Products developed pursuant to this Section II(3) shall be "Additional Products." Notwithstanding the foregoing, in no event shall MSO enter into any agreements with Target, Wal-mart, Kohl's, J.C. Penny's, and Sears in connection with the manufacture, distribution or sale at such stores of products in the categories of apparel, electronics, sporting goods, automotive care, cameras or jewelry. III. Restrictions on Use. Kmart agrees that all use of the Licensed Property by Kmart shall be in the form and manner as is approved by MSO, which approval shall not be unreasonably withheld or delayed, and there will appear on all Licensed Products and their tags, labels, containers, packaging and the like, such legends, markings and notices as may be reasonably deemed necessary by MSO for protection under trademark, copyright or other applicable laws. IV. Royalties. Kmart shall pay to MSO in the manner described in Section V below royalties based on Sales (as defined below) at the royalty rates set forth on Schedule IV hereto. "Sales" for a particular period shall mean the aggregate retail sale prices charged by Kmart for Licensed Products sold during such period, net any amounts actually refunded by Kmart to customers on account of returns of Licensed Products during such period. V. Payments. (1) Kmart shall deliver royalty reports to MSO within thirty (30) days following the end of each Kmart fiscal quarter (the "Quarterly Reports"). Each Quarterly Report shall be certified as accurate by an authorized Kmart officer and shall set forth the Sales during such quarter by Product Category and SKU, as well as the amount of royalties payable with respect thereto. In addition to the Quarterly Reports, Kmart shall deliver non-binding (but based on Kmart's then current knowledge), interim reports containing the same sales information on a monthly basis, consistent with Kmart's practice under the Prior Agreements since 1998. Additionally, Kmart shall continue to work to provide MSO with electronic access to current financial information relating to Sales via the workbench system, any successor system and any supplemental systems necessary to provide MSO such access. 3 4 (2) When Kmart delivers the Quarterly Reports to MSO, Kmart shall also pay to MSO the royalties due and owing for the corresponding quarter. These payments shall be made by wire transfer to a bank account designated by MSO unless it is not practicable for Kmart to utilize such method, in which event payment shall be made by check to MSO. Additionally, Schedule V(2) hereto sets forth certain guaranteed royalty amounts as of each January 31 of the Term commencing on January 31, 2002 ("Minimum Royalty Amounts") by Product Category and in the aggregate which may give rise to increases in royalty payments otherwise payable. Specifically, the royalty payable in connection with each quarter ending January 31 shall be increased by the aggregate Category Shortfalls, if any, and by the Aggregate Shortfall, if any, for such January 31. A "Category Shortfall" shall mean, for any Product Category and any January 31, the excess, if any, of the Minimum Royalty Amount for such Product Category and such January 31 over the amount of royalties paid and/or payable to MSO on account of Sales relating to such Product Category that occurred during the twelve-month period ending on such January 31. An "Aggregate Shortfall" for any January 31 shall mean the excess, if any, of the aggregate Minimum Royalty Amount relating to such January 31, over the amount of royalties paid and/or payable to MSO on account of Sales of the Initial Products that occurred during the twelve-month period ending on such January 31. (3) Kmart shall maintain complete and accurate records of the Sales, royalty computations, royalty reports and amounts spent on advertising and shall, upon reasonable request, make such records and all other documents and materials in the possession or control of Kmart and reasonably required to confirm Kmart's satisfaction of its obligations under this Agreement and the Prior Agreements available to MSO or its duly authorized representatives, during usual business hours at Kmart International Headquarters in Troy, Michigan, for the duration of this Agreement and for one year thereafter, and to make extracts therefrom at its sole expense. All such records and documents shall be deemed Information under Section XXV hereof. In the event any audit reveals that Kmart has underpaid MSO pursuant to this Agreement and/or any of the Prior Agreements, Kmart shall promptly pay MSO the aggregate difference between what MSO should have been paid, and what MSO was paid, plus interest on such amount at an annual rate of 8%, compounded semi-annually. Moreover, in the event the amount of any such underpayment equals or exceeds two and one-half percent (2.5%) of the amounts actually paid to MSO during the period with respect to which the audit was conducted, Kmart shall bear MSO's reasonable costs of the audit, including, without limitation, any amounts payable to MSO's outside auditors in connection therewith. VI. Licensed Product Design, Consultation, Quality, Schedules, Approvals, and Expenses. (1) The parties recognize that the name Martha Stewart has valuable goodwill with the consuming public, and that Martha Stewart ("Stewart") is recognized as an authority on quality and style in the area of domestic products and related activities. It is an objective of this Agreement that MSO, Kmart, and Kmart's vendors of Licensed Products establish a broad spectrum of Licensed Products with respect to quality and design consistent with Stewart's image and Kmart's pricing philosophy. The parties agree that as an integral part of this Agreement, MSO shall direct Kmart and Kmart's vendors of Licensed Products in the establishment of the Strategic Direction (as defined below) of the initial line and subsequent evolutionary lines (and all changes therein) of merchandise comprising each Product Category. As used herein the "Strategic Direction" shall include development of all aspects of the Licensed Products and the promotion thereof including, without limitation, (A) concepts, designs, and product selection, (B) marketing support, and (C) packages, labels, hang tags, signage, other 4 5 consumer facings and advertising and promotional materials to be used in connection with the Licensed Products (materials in this sub-clause (C), whether developed under this Agreement or a Prior Agreement, the "Materials") . The Strategic Direction with respect to each Product Category shall be developed and modified as follows: (i) Approximately eighteen months prior to the scheduled store implementation of each transition of Licensed Products or at such time as may be mutually agreed upon, MSO and Kmart shall meet with respect to such products. At such meetings, Kmart shall be responsible, in consultation with MSO, for proposing a merchandise plan (including selected vendors and planned linear footage) and time and action calendars for the relevant Licensed Products as well as related packaging/display requirements. MSO shall review the foregoing and shall work with Kmart to finalize the same. (ii) MSO shall then present Kmart with product and packaging design concepts. Kmart shall review such concepts and shall work with MSO to finalize the same. After the concepts have been finalized, MSO shall deliver to Kmart and the relevant vendors Licensed Product designs, each with a specific Martha Stewart Everyday design number, according to the approved time and action calendars. Kmart and the relevant vendors shall then review the product designs for price point, delivery and other pertinent merchandise needs and Kmart quality control shall review all designs to ensure that they meet or exceed industry standards. Notwithstanding the foregoing, prior to any vendor receiving any designs or other proprietary or confidential information, such vendor must enter into an agreement (the "Vendor Agreement") in substantially the form set forth on Schedule VI(1)(ii) hereof regarding the confidentiality and proprietary nature of certain information, designs and materials to which the vendors shall have access. MSO and Kmart shall cooperate to cause all vendors to enter into the Vendor Agreement. (iii) Kmart and the relevant vendors shall determine all package, display and label requirements, both legal and otherwise, and forward the related specifications and schedules to MSO. MSO shall then direct the creative look of all packaging, display and labels for the Licensed Products. (iv) As Licensed Products are developed by vendors based on MSO's approved design concepts, MSO shall review such development and submit comments and direction to Kmart and the vendors. When samples of each Licensed Product are completed, such samples shall be reviewed by Kmart and MSO. All samples shall be reviewed by Kmart and MSO prior to comments being given to the vendors and shall be tested for quality by Kmart. Both Kmart and MSO must approve a sample before it can be manufactured for sale. Kmart shall give such approvals based upon its merchandise needs and on the results of its quality testing and MSO shall give its approvals based upon the design concepts it submitted to Kmart and MSO's brand objectives (including quality). (v) Kmart shall monitor the packaging and display development to insure schedules for all vendors are being met. MSO shall monitor the packaging and display development to coordinate the design and art direction needs of all Licensed Products being packaged and displayed. Both Kmart and MSO must approve all packaging and displays before they can be used in connection with the Licensed Products. Kmart shall 5 6 give such approvals based upon its merchandise needs and MSO shall give such approvals based upon the design concepts it submitted to Kmart and MSO's brand objectives (including quality). (vi) The activities set forth in this Section VI(1) shall be conducted in a manner generally consistent with past practice under the Prior Agreements as of the date hereof. (2) Kmart agrees that each Licensed Product sold by it pursuant to this Agreement, and the Materials utilized in connection therewith, shall conform to the specifications developed by MSO pursuant to Section VI(1) hereof (or under a Prior Agreement) and shall be of a quality equal to or exceeding the samples of such Licensed Product approved by MSO pursuant to Section VI(1) hereof (or a Prior Agreement). Promptly following execution of this Agreement, MSO and Kmart shall develop and implement a mutually agreeable program for (i) reviewing and testing the quality, safety and propriety for intended use of samples of Licensed Products prior to the time at which they are approved for mass manufacture and sale, and (ii) for monitoring quality and safety on a continuing basis to make sure that the factory runs of each Licensed Product are consistent with the initially approved samples. The costs of this program shall be the responsibility of Kmart. This program shall include vigorous testing of Licensed Products for wear and tear, maintenance, use and other appropriate elements to be determined by the parties. The program shall be primarily implemented by Kmart but shall involve MSO personnel as the parties deem appropriate. (3) Upon receipt of a notice from MSO pursuant to this Agreement setting forth any quality deficiencies prohibited by this Agreement, or upon Kmart's discovery of any such deficiencies, Kmart and/or Kmart's vendors of the Licensed Products containing such deficiencies shall remedy such deficiencies prior to the sale of the deficient Licensed Products or, at their option, dispose of such off-quality merchandise through other outlets. Whenever such merchandise is sold as aforesaid, no use of or reference to the name Martha Stewart or any Licensed Property shall be used in connection with any advertising, publicity, labeling, wrapping or packaging with respect to any such sales. In accordance with the practice in the trade, Kmart's vendors of Licensed Products shall notify their customers to assure compliance by them with the requirements of the preceding sentence. Kmart and its vendors of Licensed Products shall be deemed to have met this obligation by the removal of all labels, tags and marks which would identify the goods as Martha Stewart merchandise and by placing the following legend on all purchaser's invoices for such goods and by enforcing the terms of such legend if, in the event of non-compliance and following consultation with MSO, MSO and Kmart deem it appropriate for brand protection: "Purchaser agrees that it will not use the name `Martha Stewart' or the legend `designed by Martha Stewart' or any other phrase or statement using the name `Martha Stewart' on any advertising, publicity, labeling, wrapping or packaging with respect to the merchandise listed hereon." In the event certain Licensed Products must be disposed of pursuant to this Section VI(3) and such products have the Trademark or some derivation thereof embedded in the product (e.g. a stamp or mold), Kmart and MSO agree to cooperate in good faith to determine a manner in which such Licensed Products can be disposed of that is mutually beneficial and minimizes any potential impact to the Sales and brand image of the Licensed Products. 6 7 (4) Kmart shall select its vendors of Licensed Products pursuant to the Kmart Quality Standards, Policies and Procedures set forth on Schedule VI(4) hereto. (5) MSO and Kmart each agree to exercise their respective rights of approval hereunder in a reasonable and timely manner, consistent with any agreed upon time schedules and the established Strategic Direction. Notwithstanding the foregoing, no decision by Kmart to refuse to offer for sale a particular product that MSO desires to have manufactured for sale shall be considered unreasonable, unless such refusal is made for purposes of frustrating the purposes of this Agreement. Kmart shall designate one individual authorized to exercise its approval rights hereunder and to be the liaison between Kmart and MSO. (6) Except as set forth in Section VIII(2) or as otherwise explicitly stated herein or agreed upon by Kmart, MSO shall be responsible for the costs of its personnel in connection with its services and activities hereunder (including, without limitation, its services and activities under Section VI (1)) (the "MSO Costs"). Kmart shall bear all its own expenses incurred in connection with this Agreement, as well as all other costs incurred in connection with the sourcing, design, manufacturing, distribution, marketing, advertising and sale of the Licensed Products and the Materials, including, without limitation, all photography and production costs relating to the Materials. In connection with all still photography shoots, MSO shall continue to conduct such shoots, to invoice Kmart therefor and to pay all relevant third party costs (including photography costs) from such invoiced amounts, provided that budgets for such shoots will be determined in advance by MSO and Kmart. (7) In furtherance of the valuable goodwill that Martha Stewart products carry with the consuming public, Kmart agrees that it shall cause Kmart store employees in every Kmart store to dedicate adequate and substantial time to (i) replenishing the shelves that display Licensed Products, (ii) monitoring store inventory levels of Licensed Products (including, without limitation, using reasonable efforts to increase inventory levels in anticipation of sale events, and generally maintaining inventory levels sufficient to meet demand), (iii) ensuring that the areas in which the Licensed Products are sold are clean, and (v) forwarding any Licensed Products which are returned to the relevant Kmart store for reasons of defect to a Kmart quality assurance representative. (8) Kmart and MSO agree that the Seasonal Products shall be introduced at all Kmart stores in time for the Christmas season in 2002, provided that each party acknowledges certain products requiring substantial developmental lead-times will not be available until 2003. The portion of the Martha Stewart Everyday program comprising Garden Products shall be conducted according to the terms set forth on Schedule VI(8) hereto as well as the rest of the terms of this Agreement. VII. Term. This Agreement shall commence on August 1, 2001 and continue in full force and effect until January 31, 2008 (the "Term"). Provided that (i) the aggregate royalties earned by, and paid to, MSO hereunder with respect to Sales of the Initial Products occurring from August 1, 2001 through January 31, 2007 equals or exceeds [ * * * ], and (ii) the royalties earned by, and paid to, MSO with respect to Sales of the Initial Products during the four quarters ending January 31, 2007 equals or exceeds [ * * * ], this Agreement shall automatically be 7 8 renewed for an additional five years (the "Renewal Term"). Notwithstanding the foregoing, the Term commences as of the date hereof solely with respect to the terms of Section XXIX hereof. VIII. Promotional and Marketing Services. (1) MSO shall cause Stewart to render her services in a professional manner consistent with the intent of this Agreement and to use her reasonable good faith efforts to participate in the promotion and imaging of the Licensed Products including, without limitation, through television, radio and print advertising, in-store videos, appearances and other media presentations or programs and shall use reasonable and appropriate opportunities, in her reasonable discretion, to promote the Licensed Products and Kmart's sale thereof including, without limitation, interviews, editorials, press conferences, press releases and television appearances. In light of the considerable demands on Stewart's schedule, Kmart and MSO shall cooperate in good faith to schedule the dates, times, places and manner in which Stewart shall fulfill her obligations under this Section as far in advance, and in the most convenient manner, possible. Subject to the final sentence of this Section VIII(1), MSO shall cause Martha Stewart to be available to render services under this Section VIII(1) consistent with past practices under the Prior Agreements, but in no event for more than 25 days annually, inclusive of travel time. Kmart shall pay all costs and expenses in connection with such services including, without limitation, costs of first class air travel (or private plane) and lodging consistent with Kmart's past practices with Stewart under the Prior Agreements as of the date hereof. Any significant expenses anticipated by MSO in excess of those generally borne by Kmart pursuant to past practice under the Prior Agreements shall be first submitted to Kmart for approval. No failure by MSO to comply with the terms of this provision by reason of the death, disability or incapacity of Martha Stewart shall be considered a breach of this Agreement. (2) Each year, Kmart and MSO shall consult regarding the advertising needs for the Licensed Products for the following year, taking into account the existence of any Additional Products and extensions of existing product lines, following which Kmart shall determine the aggregate amount to be spent on advertising for the Licensed Products ("MSE Advertising") during such year. Notwithstanding the foregoing, the aggregate amount to be spent on MSE Advertising during any twelve-month period ending on any January 31 throughout the Term (the "Annual MSE Ad Spend"), commencing with the twelve-month period ending January 31, 2002, shall represent a percentage of projected Sales for such period that is no less than the percentage that estimated MSE Advertising expenditures for 2001 as of the date hereof (such estimate, the "2001 MSE Ad Spend") represents of Sales for 2001, provided, however, that the Annual MSE Ad Spend for any year shall not represent a larger percentage of the aggregate advertising expenditures by Kmart during such year than the percentage that the 2001 MSE Ad Spend represents of Kmart's aggregate advertising expenditures during 2001. Marketing expenses relating to significant product launches shall be outside of this budget. Kmart and MSO agree that in the event of a Renewal Term the parties shall review whether the foregoing method of determining levels of MSE Ad Spend is in the mutual best interest of MSO and Kmart and shall make any changes thereto that are mutually agreed upon at the time of such renewal. Kmart and MSO shall discuss the best allocation of the year's advertising budget between production, media selection, and timing of advertising campaigns. Although MSO shall be given the opportunity to meaningfully consult with Kmart regarding such allocation, Kmart shall make the final determination as to how such money should be allocated, provided that amounts dedicated to creative development and production of advertisements on a per advertisement basis shall be mutually agreed upon each year and shall be at least consistent with past practice under the Prior Agreements. Once the allocations have been made and the advertising needs determined, MSO 8 9 shall be responsible for developing all creative elements of, and, with respect to television advertisements, producing, all advertising for the Licensed Products. In doing so, MSO may, subject to the approved budgets, retain independent advertising agencies, production companies and photographers to assist in developing, creating and producing the advertisements. All such advertisements remain subject to Kmart's approval. Kmart shall pay MSO the budgeted amounts for all creative development and production, out of which MSO shall pay any third party fees including, where appropriate and approved, any creative service fees to MSO. All media buying for advertising of the Licensed Products will continue to be done by Kmart's advertising agency of record. Kmart further agrees to continue purchasing advertising, whether or not for Licensed Products, in Martha Stewart Living media properties at 2001 expenditure levels. (3) With respect to each television commercial relating in whole or part to the Licensed Products and featuring Stewart, Kmart shall pay to MSO [ * * * ] for Stewart's appearance in each such commercial. The foregoing payment shall be an advance against all residuals owed to Stewart pursuant to any applicable union, guild, or collective bargaining agreement on account of the use and reuse of such commercials, provided that such residuals shall be credited and payable at twice scale. Kmart shall pay or cause to be paid any and all pension, health and/or welfare fund payments required by reason of Stewart's services hereunder pursuant to any applicable union, guild or collective bargaining agreement and covenants that Kmart, or any other entity for whom Stewart is rendering her services in connection with each such commercial, shall be a signatory to any applicable union, guild and collective bargaining agreement. The per commercial fee payable hereunder shall increase by 4% each calendar year. (4) Kmart shall sell Licensed Products only through the Martha Stewart Everyday "store-in-store" format, including, but not limited to, the fixturing, signage, and layouts of such "store-in-stores." Unless there are compelling business reasons dictating otherwise, Licensed Products shall be sold in dedicated, full-run shelf-space. In no event will products that compete with Licensed Products be commingled with Licensed Products in Kmart stores. The "store-in-store" format employed by Kmart shall be developed with the assistance of MSO and shall be subject to MSO's reasonable approval. IX. Property Retention. (1) All right, title and interest in the Licensed Property including, without limitation, all copyrights, trademarks and other rights therein (and all renewals and extensions thereof) shall be owned exclusively by MSO. Subject to the terms of this Agreement, MSO shall have the sole unrestricted right to exploit the Licensed Property in its sole discretion in any manner in perpetuity in any and all media throughout the world whether now known or hereafter devised with no further obligation whatsoever to Kmart or any third party. Any use which Kmart may be permitted to make of the Licensed Property pursuant to this Agreement shall be subject to MSO's prior approval as specified herein. (2) Kmart confirms the sole ownership by MSO of the Licensed Property and agrees that all use by Kmart of the Licensed Property shall inure solely to the benefit of MSO and, as such, Kmart shall not at any time acquire any rights in the Licensed Property or otherwise by virtue of any use or exploitation Kmart may make thereof. (3) All rights in the Licensed Property other than those specifically granted herein are reserved by MSO for its sole use and benefit and exploitation in its sole discretion. Upon the expiration or termination of this Agreement for any reason whatsoever, all rights in the Licensed 9 10 Property shall automatically revert to MSO for its sole use and disposition with no further obligation whatsoever to Kmart or any third party, provided, however, Kmart shall have six months from the date of termination, or three months from expiration, whichever the case may be, to sell all units of Licensed Products purchased or ordered before expiration or termination of this Agreement and to use the associated Materials approved pursuant to this Agreement prior to such expiration or termination to accomplish such sell-off. MSO shall be paid royalties on all such sales at the applicable rates under this Agreement. (4) Kmart agrees to promptly inform MSO of any use by any person or entity of a trademark, servicemark or design similar to the Licensed Property which comes to the attention of Kmart and which Kmart has reason to believe could be a use unauthorized by MSO. MSO shall have the sole right to determine whether or not any action shall be taken on account of any infringement and Kmart shall join in such action at Kmart's expense if MSO so requests. Kmart shall have no right to take any action with respect to the Licensed Property without prior written approval from MSO which approval shall not be unreasonably withheld. MSO and Kmart shall share any award of damages net of costs including, without limitation, attorneys' fees and disbursements, as a result of such actions, in proportion to their respective damages suffered by such infringement. (5) All designs, concepts, patterns, names and other intellectual property (including copyright rights) in materials relating to the subject matter of this Agreement or any Prior Agreement that are developed and/or created by MSO shall be owned solely by MSO. All designs, concepts, patterns, names and other intellectual property (including copyright rights) in materials relating to the subject matter of this Agreement or any Prior Agreement that are developed and/or created by third parties under MSO's direction, or which are incorporated into the Licensed Products and/or the Materials at MSO's request, shall, as between MSO and Kmart, be owned solely by MSO. All designs, concepts, patterns, names and other intellectual property (including copyright rights) in materials relating to the subject matter of this Agreement or any Prior Agreement that are developed and/or created by Kmart shall be owned solely by Kmart. Subject to all other provisions of this Agreement, the physical elements of all Materials will be and remain the property of Kmart, provided that, in the event MSO owns the intellectual property therein, Kmart will provide the necessary access to enable MSO to duplicate any such Materials. (6) Nothing contained herein shall be construed as an assignment or grant to Kmart of any right, title or interest in or to the Licensed Property, it being understood that all rights thereto are reserved exclusively by MSO, except for the license granted hereunder as specifically described herein. X. Representations and Warranties. (1) By MSO. MSO represents and warrants to Kmart that (i) it has the full right and authority to enter into this Agreement and to grant the licenses herein, and (ii) Kmart's authorized use of the Licensed Property shall not infringe or violate the rights of any third parties. (2) By Kmart. Kmart hereby represents and warrants to MSO that (i) it has the full right and authority to enter into this Agreement and the relationship contemplated herein, (ii) the manufacture, distribution, marketing, sale and use of the Licensed Products shall not violate or infringe upon any rights whatsoever of any third party (except as a result of a breach of MSO's 10 11 representations and warranties), (iii) the Licensed Products (including any labeling thereon) will conform in all respects to, and satisfy applicable requirements of, applicable federal, state and local laws, orders and regulations, and (iv) Kmart has sufficient systems to accurately track, and that it will accurately track, all Sales. XI. Indemnification. (1) Kmart agrees to defend, indemnify and hold harmless MSO and its officers, directors, members, shareholders, employees and representatives from, in respect of and against any and all claims, losses, liabilities, expenses (including, without limitation, reasonable attorneys' fees and disbursements), judgments, damages, demands, lawsuits or similar actions or proceedings ("Claims") arising out of the breach of any of Kmart's representations, warranties or covenants hereunder (or under any Prior Agreement) or out of the manufacture, design, purchase, promotion, advertising, distribution, use or sale of Licensed Products, including, without limitation, any claims for product liability (a "Kmart Claim"). MSO agrees to notify Kmart within a reasonable time after it receives notice of any Kmart Claim and Kmart shall promptly assume MSO's defense thereof either directly or through counsel to any relevant vendor. MSO shall have the right to participate in the defense of any Kmart Claim with counsel of its choosing and at MSO's expense. Any settlement which affects the Licensed Property or otherwise contains a remedy other than the payment of money damages by Kmart (which in any way impacts upon MSO) must be approved in writing in advance by MSO. (2) MSO agrees to defend, indemnify and hold harmless Kmart and its officers, directors, shareholders, employees and representatives from, in respect of and against any and all Claims arising out of the breach of any of MSO's representations, warranties or covenants hereunder (or under any Prior Agreement) or for copyright, trade dress, or trademark infringement or unfair trade practice arising directly out of Kmart's authorized use of the Licensed Property (an "MSO Claim"). Kmart agrees to notify MSO within a reasonable time after it receives notice of any MSO Claim and MSO shall promptly assume Kmart's defense thereof. Kmart shall have the right to participate in the defense of any MSO Claim with counsel of its choosing and at Kmart's expense. Any settlement which contains a remedy other than the payment of money damages by MSO (which in any way impacts upon Kmart) must be approved in writing in advance by Kmart. XII. Insurance. Kmart shall maintain in full force and effect comprehensive general liability insurance (the "Insurance"), including, without limitation, product liability insurance, covering all Licensed Products sold by it as well as any liability on its part or the part of MSO in the amount of at least $25,000,000 per occurrence and $100,000,000 in the aggregate. The Insurance shall be placed with an insurer or insurers of recognized worth and reputation, duly licensed to carry on the business of insurance in all parts of the Territory and shall name Martha Stewart, MSO, its officers, directors, employees, representatives or agents as additional insureds, for coverage against all forms of liability for death or injury to any individual, and for loss or damage to property. The Insurance shall provide for primary coverage and not contributory coverage, notwithstanding any other insurance which MSO may obtain or maintain. The Insurance shall provide for prior written notice to MSO of cancellation, lapse or material change in the Insurance and Kmart shall provide MSO with a certificate of insurance as evidence of the Insurance prior to, or as soon as practicable after, the execution hereof. MSO hereby acknowledges that Kmart self-insures a per claim deductible in the amount of $2,000,000. 11 12 XIII. Guaranteed Products. Kmart agrees to manufacture and market Licensed Products in the categories of merchandise set forth on Schedule XIII hereto upon request from MSO and to use reasonable commercial efforts to cause Licensed Products in each such product category to be available at each Kmart store. XIV. Projections. Schedule XIV sets forth the projections for annual Sales relating to the Initial Products through the Term and the Extension, if any, as of the date hereof (the "Initial Projections"). Promptly following the execution of this Agreement, MSO and Kmart agree to develop a strategy for materially increasing Sales in each Product Category to the maximum extent practicable. The projections set forth on Schedule XIV shall be increased as a result of the outcome of such efforts (the projections as they may be increased from time to time, the "Projections"), and MSO and Kmart agree to meet at least annually to strategize and otherwise develop programs and plans to maximize Sales and increase Projections. Kmart agrees to use its best efforts to cause Sales to equal or exceed the Projections. XV. [ * * * ]. XVI. Kmart Bridal and Gift Registry. MSO hereby grants Kmart the right to offer the Licensed Products as part of a Kmart bridal and/or gift registry program, provided that the registry is not branded with the name "Martha Stewart" or any related trademark and all aspects of the sale, marketing, presentation, promotion and advertisement of the Licensed Products in connection therewith shall be subject to the same approvals, rights, and processes as the sale, marketing, presentation, promotion, and advertisement of the Licensed Products under this Agreement generally. XVII. Termination. (1) Subject to subparagraph (2) below, this Agreement may be immediately terminated by either party in the event a material breach hereof by the other party continues uncured for a period of 30 days after written notice thereof, provided, however, such cure period shall be 15 days with respect to payments due hereunder. (2) In the event of termination or expiration of this Agreement, all rights granted hereunder shall terminate and revert to MSO for its sole use and disposition without any further obligation to Kmart. XVIII. Uniqueness of Services. The services to be performed by MSO and the rights and privileges granted to Kmart hereunder are special, unique and incapable of replacement and the loss thereof may not be reasonably or adequately compensated in an action at law. Additionally, MSO's failure or refusal to perform the obligations hereunder may cause irreparable harm or damage. In the event of a material breach by MSO, Kmart shall be entitled, in addition to any other remedies available to it, to seek injunctive or other equitable relief against it to prevent the continuance of such failure or refusal or to prevent it from performing services or granting rights to others in violation of this Agreement. XIX. Services. MSO assumes no liability whatsoever for service, defects or breach of warranty or any type of product liability claim whatsoever regarding Licensed Products. In the event that an ultimate purchaser of such a Licensed Product or any other third party claims it to be defective, in breach of warranty or in need of service, Kmart or its vendor shall assume all obligations, liability, cost and expense relating in any manner to such Licensed Product 12 13 including, without limitation, any claimed defect, breach of warranty or service need. In the event any such Licensed Product is returned to MSO on account of any claimed defect, breach of warranty or service need, MSO shall promptly notify Kmart regarding such Licensed Product and claim and shall forward the same within a reasonable time to a reasonable destination designated by Kmart for handling of the returned Licensed Product by Kmart or its vendor. Kmart agrees to reimburse MSO for all reasonable costs incurred in connection with such returns. Kmart agrees to keep MSO timely informed of any material problems with any Licensed Product and shall meaningfully consult with MSO in a timely fashion in the event Kmart and/or any vendors of Licensed Products interact with the United States Consumer Product Safety Commission ("CPSC") and before any Section 15 Report relating to any Licensed Product is filed with CPSC. XX. Creative Services. As reasonably requested by Kmart, MSO shall periodically provide creative personnel to consult with Kmart regarding issues relating to overall Kmart advertising, store layout and other brand issues. XXI. Assignment. No party may assign any right or obligation under this Agreement, other than the right to receive money, to any person or entity other than its parent or subsidiary companies or a purchaser of all or substantially all of the assets of a party, without the express written consent of the other party, provided that MSO shall have the right to assign its interests under this Agreement to any entity in which Martha Stewart owns a majority of the equity, and which at or about the time of such assignment acquires the rights to the Licensed Property licensed to Kmart hereunder. Notwithstanding the foregoing, in the event either party enters into a transaction in which it sells or otherwise conveys substantially all of the assets relevant to such party's performance of its obligations hereunder, the other party shall have the right to compel assignment of this Agreement as part of such transaction. MSO shall have the right to cause any of its contractual obligations hereunder to be fulfilled by an affiliate of MSO, and any such fulfillment shall be deemed a fulfillment of such obligation by MSO. For purposes of clarity, it is acknowledged that Martha Stewart Living Omnimedia LLC and Martha Stewart Living Omnimedia, Inc. (collectively, "MSLO") were each predecessors-in-interest to MSO under the Prior Agreements, and references herein to MSO in connection with the Prior Agreements or actions taken thereunder shall include references to MSLO as the context requires. XXII. Choice of Law. This Agreement shall be construed and enforced in accordance with laws of the State of Michigan. XXIII. No Joint Venture. Neither party shall be or be deemed to be an agent, employee, partner or joint venturer of or for the other party. XXIV. Confidentiality. After the date hereof, each of Kmart and MSO (i) shall hold and shall cause its officers, directors, employees, agents, accountants, representatives and advisors ("Representatives") to hold in strict confidence all the terms of this Agreement and the Prior Agreements and all information furnished to such party or its Representatives in connection with the transactions contemplated by this Agreement as well as information concerning the other party contained in analyses, compilations, studies or other documents prepared by or on behalf of such party (collectively, the "Information"); provided that the Information shall not include any information which has become (A) generally available to the public other than as a result of a disclosure by such party or such party's Representatives, (B) available to such party on a non- 13 14 confidential basis from a source other than the other party or the agents of one of them if such source is to such party's knowledge entitled to disclose such information, or (C) independently acquired or developed by such party; and (ii) shall not, without the prior written consent of the other party, release or disclose any Information to any other person, except (A) to such person's Representatives who need to know the Information in connection with the consummation of the transactions contemplated by this Agreement, who are informed by such person of the confidential nature of the Information and who are caused by the relevant party to comply with the terms and conditions of this Section XXV, and (B) as may be required by applicable law, regulations or legal processes (including, without limitation, any disclosures of Information which are required to be made by applicable securities laws in connection with any financing activities of either party or standard disclosure requirements under the Securities Exchange Act of 1934, as amended). The parties hereto agree to cooperate with respect to a joint press release announcing the execution of this Agreement. XXV. Notice. All notices under this Agreement shall be in writing and shall be given by either party by certified mail, guaranteed express mail or facsimile (confirmation of delivery received) as follows: If to MSO: MSO IP Holdings, Inc. 11100 Santa Monica Boulevard Suite 600 Los Angeles, California 90025 copy to: Howard Shire, Esq. Kenyon & Kenyon One Broadway New York, New York 10004 If to Kmart: Kmart Corporation 3100 West Big Beaver Road Troy, MI 48084 Attention: General Counsel Facsimile No. (248) 463-1054 copy to: Kmart of Michigan, Inc. Suite 329 3250 West Big Beaver Road Troy, MI 48084 Attention: Intellectual Property Counsel. 14 15 Facsimile No. (248) 637-3057 XXVI. Compliance with Human Rights and Labor Standards. Kmart warrants and represents that purchase order terms and conditions for the purchase of all Licensed Products require that such merchandise conforms in all respects with all applicable federal, state and local laws, orders and regulations. Kmart will require all manufacturers of Licensed Products hereunder to sign a Certification of Compliance substantially similar to the form attached hereto as Schedule XXVII. Upon written request from MSO, Kmart shall supply MSO with the identification of all manufacturers of Licensed Products. Upon reasonable prior written notice of MSO and at MSO's sole expense, MSO shall have the right to inspect the physical facilities of any manufacturer of Licensed Products for the purpose of assuring that such manufacturer is in satisfactory compliance with legal and ethical human rights and labor standards and shall have the right to refuse approval of any Licensed Product manufactured by any such manufacturer which after such inspection may be reasonably found not to be in substantial compliance with such standards. XXVII. Bankruptcy. Kmart and MSO shall each, in addition to its other rights, have the right, on written notice to the other, to terminate this Agreement if the other party files a petition in bankruptcy, or is adjudicated a bankrupt, or if a petition in bankruptcy is filed against it and is not dismissed within (60) days thereafter, or if it becomes insolvent, or makes an assignment for the benefit of creditors, or files a petition or otherwise seeks relief under or pursuant to any federal or state bankruptcy, insolvency or reorganization statute or procedure, or if a custodian, receiver or trustee is appointed for it or a substantial portion of its business or assets (and such receivership is not discharged within sixty (60) days thereafter). XXVIII. Integration. This Agreement shall be the final and complete agreement between Kmart and MSO with respect to the subject matter hereof. No representations, inducements, premises or understandings exist in relation to the subject matter hereof, whether oral or written, except as expressly set forth herein, and this Agreement shall supercede all prior understandings, agreements, contracts or arrangements between the parties, whether oral or written, unless otherwise expressly incorporated herein. No agreement or other understanding purporting to add to or to modify the terms and conditions hereof shall be binding unless agreed to by the parties in writing. Any terms or conditions in any forms of the parties used in the performance of this Agreement which are in conflict with the terms and conditions hereof shall be void. Notwithstanding the foregoing, the Prior Agreements shall continue in full force and effect through July 31, 2001, and shall continue to govern matters arising under such agreements prior to August 1, 2001 (including, without limitation, payment obligations relating to periods prior to August 1, 2001), unless otherwise indicated herein. XXIX. Interim Period. From the date hereof through July 31, 2001, Kmart agrees that it shall continue to conduct its purchasing practices with vendors and inventory replenishment practices and all other matters relating to the calculation of the royalties payable under the Prior Agreements in a manner consistent with past practice and without any regard for the switch in the basis for calculating royalties to MSO from wholesale purchases to retail sales that will occur on August 1, 2001. 15 16 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. KMART CORPORATION By: /s/ Charles Conaway -------------------- Name: Charles Conaway Title: Chairman and CEO MSO IP HOLDINGS, INC. By: /s/ Martha Stewart ------------------ Name: Martha Stewart Title: Authorized Signatory 16 17 SCHEDULE I(a) Home Products BED ROOM Sheets (180 and 200 thread count) Mattress pads Slip covers Pillows (synthetic and natural) Pillow cases Pillow shams Comforters Quilts Bed Spreads Bed Skirts Duvet/comforter covers Blanket/throws Coordinating window treatments Coordinating decorative borders and wallpaper Coordinating rugs BATH Towels (sheet, beach, bath, hand and wash cloth) Shower Curtains Coordinating bath rugs Bath accessories (tooth brush holder, lotion dispenser, soap dish, tumbler, tissue cover, etc.) Waste baskets Coordinating window treatments Coordinating decorative borders and wallpaper KITCHEN Towels Pot holders Dish Cloths Tablecloths Napkins/Napkin rings Chairpads Placemats Coordinating decorative borders and wallpaper Coordinating window treatments (curtains, valances, fabric shades, vertical blinds, mini blinds, decorative hardware, drapery, panels, swags, tab tops, top treatments, tiers) Coordinating rugs GENERAL SOFT HOME Window treatments (valances, mini blinds, decorative hardware, tab tops, top treatments, tiers) Decorative pillows Home Fragrances Closet Organizers SEASONAL HOME TEXTILES HOME TEXTILES FOR BABIES 17 18 SCHEDULE I(b) Garden Products LIVE PLANTS INDOOR FLORAL/PLANT KIOSK OUTDOOR/GARDEN FURNITURE WATERING EQUIPMENT LONG HANDLE GARDEN TOOLS SHORT HANDLE GARDEN TOOLS GARDEN CUTTING TOOLS GARDEN GLOVES FERTILIZERS SOILS PEST CONTROL GARDEN STORAGE & CARRIERS GARDEN ACCESSORIES PLANT POTS GRILLING OUTDOOR LAWN DECORATION FALL BULBS SPRING BULBS SEED STARTING WATER GARDENING SEEDS BIRD LIGHTING 18 19 SCHEDULE I(c) Housewares Products HOME Dinnerware (ceramic, glass, enamel) Flatware (18/0-18/8) Glassware (glass, plastic) Decorative Accessories Lamps and shades Picture Frames Candles FOOD Kitchenware KEEPING Closet Accessories Dish Felt Pads Hangers Floor Savers Plastic Food Storage Containers Wood Kitchen Containers Metal Shelf Paper Cedar Products/Moth Protection Trash Receptacles Clothing Storage - Bags and Boxes Recycling Receptacles Shoes Sweaters Blankets Hanging Closet Shelving Organization Systems Laundry Organization Items Underbed Storage Containers Wire and Cable Ties Kitchen Organization Containers Kitchen Labels Dish Storage Containers SEASONAL VARIATIONS OF HOUSEWARES PRODUCTS 19 20 SCHEDULE I(d) Seasonal Products [***] 20 21 SCHEDULE II(3) ADDITIONAL PRODUCT CATEGORIES Small appliances Notions and crafts Ready-to-assemble furniture Decorative artificial flowers Area rugs Hardware 21 22 SCHEDULE IV Royalty Rates [ * * * ] 22 23 SCHEDULE V(2) Minimum Royalty Amounts [ * * * ] 23 24 SCHEDULE VI(1)(ii) VENDOR CONFIDENTIALITY AND PROPRIETARY MATERIALS AGREEMENT MARTHA STEWART LIVING OMNIMEDIA, INC. 11 WEST 42ND STREET NEW YORK, NEW YORK 10036 As of ____________________ [Vendor Name and Address] Re: "Martha Stewart Everyday" Dear ______________________: As you know, you may soon be, or have been, manufacturing products to be sold under the "Martha Stewart Everyday" brand. Although these products will be and/or have been manufactured by you pursuant to agreements between you and certain retailers, you recognize that such retailers have made this agreement a condition to your manufacturing "Martha Stewart Everyday" products (the "Products") for them. Accordingly, in consideration of your selection, or potential selection, to manufacture certain Products, you hereby agree with Martha Stewart Living Omnimedia, Inc. ("MSLO") as follows: 1. For the purposes of this Agreement, "Proprietary Materials" shall mean all (i) information or material, whether or not in tangible form, relating to MSLO or Martha Stewart or which is supplied to you by MSLO, or which is supplied to you by an Approved Retailer (as hereafter defined) in connection with the Products, other than (A) any such information known to you, or material in your possession, prior to the commencement of your discussions regarding the manufacture of Products with any Approved Retailer or MSLO, as the case may be, (B) any such information generally known to, or such materials generally possessed by, the public at large (other than as a result of (X) a breach of this agreement by you, (Y) distribution of the Products, or (Z) the acts of any other party which you know, or have reason to know, is under an obligation of confidentiality to MSLO), and (C) any such information or material acquired by you from a third party (other than a third party which you know, or have reason to know, is under an obligation of confidentiality to MSLO or who acquired such information or material as a result of the distribution of the Products), (ii) materials, whether or not in tangible form, which you develop with MSLO or with any contribution, input, advice or direction whatsoever from MSLO (the "Vendor Materials") (for the sake of clarity, Vendor Materials shall include the entire applicable material, not just the portion developed with MSLO's contribution, input, advice or direction), and (iii) information or materials, whether or not in tangible form, with respect to which you gain access or knowledge as a direct result of (A) your relationship relating to the Products with an Approved Retailer 24 25 or MSLO, as the case may be, or (B) carrying out any of your obligations to MSLO or an Approved Retailer relating to the Products. Notwithstanding the foregoing, the Proprietary Materials shall include any Materials (as defined below) in which MSLO owns any proprietary rights (including, without limitation, any copyright rights, trademark rights, or other intellectual property rights). The Proprietary Materials may include, but are not necessarily limited to, the following: concepts; techniques; data; documentation; research and development; customer lists; advertising plans; distribution networks; new product concepts; intellectual property of all types, including, without limitation, designs, patterns, ideas, and any physical manifestations thereof; prints; sketches; planned introduction dates; processes; marketing procedures; "know-how"; marketing techniques and materials; development plans; names and other information related to strategic partners, suppliers, or vendors; pricing policies and strategic, business or financial information, including business plans and financial pro formas (all of the foregoing, "Materials"). Notwithstanding the foregoing, the Proprietary Materials shall not include materials you develop at your sole cost and expense with no contribution, input, advice or direction whatsoever from MSLO (the "_____ Materials"); provided, however, that no ______ Materials may in any way contain, embody or reference any Proprietary Materials, including, without limitation, any MSLO trademark, servicemark, mark, name or other designation. For purposes of this Agreement, "Approved Retailers" shall mean those entities set forth on Exhibit A hereto, which exhibit may be amended from time to time by MSLO. 2. You acknowledge that MSLO exclusively owns, in perpetuity and throughout the world, all right, title and interest, including, without limitation, all copyrights, trademarks and other proprietary rights (and all renewals and extensions thereof) embodied in, or related to, the Proprietary Materials, and any and all good will therein. You recognize the great value of the publicity and good will associated with the Proprietary Materials and acknowledge that such value and good will belongs exclusively to MSLO. You agree that you shall not acquire any rights in or to the Proprietary Materials by virtue of your performance of any obligations to MSLO or any Approved Retailer or otherwise. Any use which you may make of the Proprietary Materials shall solely be pursuant to your agreements with MSLO or the Approved Retailers in connection with the Products and shall not restrict, limit or otherwise diminish MSLO's rights therein with respect to any other products or use. You hereby acknowledge and agree that the Vendor Materials shall be and/or have been solely created by you as a "work-made-for-hire" specially commissioned by MSLO for use in connection with the Products pursuant to the United States Copyright Act, and any and all extensions and/or renewals thereof, it being understood that in the event any of the Vendor Materials are determined not to be a "work-made-for-hire", then you hereby irrevocably assign to MSLO all rights therein. You represent and warrant that (i) 25 26 you shall not undertake or cause any third party to undertake any act that violates, infringes, diminishes, challenges or otherwise conflicts with MSLO's exclusive ownership of all rights, title and interest in and to the Proprietary Materials, and (ii) that MSLO's exploitation of the Vendor Materials shall not infringe the rights of any third party. 1. All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any way incorporating or reflecting any of the Proprietary Materials shall belong exclusively to MSLO and you agree to turn over all copies of such materials in your possession or control to MSLO upon the earlier of MSLO's request or termination of the final agreement pursuant to which you manufacture any Products. 2. You shall hold in confidence and not directly or indirectly reveal, report, publish, disclose or transfer any of the Proprietary Materials in any form to any person or entity, nor shall you utilize any of the Proprietary Materials for any purpose, except in each case as may be necessary in the course of your manufacture of Products, provided that no Proprietary Materials which are designated as being "confidential" by MSLO may be revealed, reported, published, disclosed or transferred without the express written consent of MSLO. You shall cause each of your employees, agents or representatives that is provided access to any Proprietary Materials to abide by the same obligations and restrictions to which you are subject hereunder. 3. You agree that you shall not sell any products incorporating any of the Proprietary Materials to any entity other than MSLO or an Approved Retailer, except as expressly permitted herein. 4. Upon receipt of a notice from MSLO or an Approved Retailer that any Products manufactured by you are deficient in quality or are not consistent with the relevant specifications, or in the event of an Overrun (as hereafter defined), you may sell such deficient Products or Products with respect to which there has been an Overrun (collectively, "Excess Products") to parties other than Approved Retailers, provided that (i) no use of or reference to the name Martha Stewart, MSLO or any variation thereof is used in connection with any advertising, publicity, labeling, wrapping or packaging with respect to any such sales, (ii) that prior to making any such sale you receive assurances from the party to whom you sell such Excess Products that they will comply, and will cause any subsequent purchasers to comply, with the terms of sub-clause (i) above, and (iii) that such sales are made to purchasers who have warranted to you in writing that they shall only re-sell the Excess Products outside of North America (unless prior approval for North American sales is received from MSLO or the Approved Retailer for whom the Excess Products were originally manufactured). For purposes of this Agreement, there shall be an "Overrun" on a Product only in the event that (1) you have received notice from all Approved Retailers for whom you manufacture such Product that such Approved Retailers do not intend to purchase any more of such Product from you in the future, (2) you have delivered to the relevant Approved Retailers and to MSLO the amount of Product in your possession with 26 27 respect to which there is an Overrun, and (3) MSLO and the relevant Approved Retailers have approved the quantity of such Overrun. MSLO and the Approved Retailers may, in their sole discretion, limit the amount of Excess Product you may dispose of pursuant to the terms of this paragraph if they determine that the amount of such Products that you have on hand for such disposal is excessive and beyond the quantity you would have possessed had you followed a normal and prudent manufacturing schedule. 5. In the event that you receive a request to disclose any Proprietary Materials under a subpoena or court order, you will (a) promptly notify MSLO thereof, (b) consult with MSLO on the advisability of taking steps to resist or narrow such request, and (c) if disclosure is required or deemed advisable, cooperate with MSLO in any attempt that it may make to obtain an order or other reliable assurance that confidential treatment will be accorded to designated portions of the Proprietary Materials. 6. Because of the unique nature of the Proprietary Materials, you understand and agree that MSLO will suffer irreparable harm in the event that you fail to comply with any of your obligations hereunder and that monetary damages may be inadequate to fully compensate MSLO for such breach. Accordingly, you agree that MSLO will, in addition to any other remedies available to it at law or in equity, be entitled to injunctive relief, including, without limitation, temporary restraining orders and/or preliminary injunctions, to enforce the terms of this Agreement. In the event of any breach or purported breach by MSLO hereunder, your rights shall be limited to an action at law for money damages actually suffered. In no event shall you be entitled to rescission, injunction or other equitable relief of any kind. 7. In case any one or more of the provisions (or portions of the provisions) of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions (or portions of the provisions) of this Agreement and this Agreement shall be construed as if the invalid, illegal or unenforceable provisions (or portions of the provisions) had never been contained therein. 8. In the interest of being guided by a well-developed body of law in the event of a dispute, the parties agree that this Agreement, including the validity and enforceability hereof, shall be interpreted in accordance with the laws of the State of New York pertaining to agreements made and performed therein, and the courts located in the State of New York, County of New York (federal, if jurisdiction is present, state, if federal jurisdiction is lacking), shall have exclusive jurisdiction and venue over all disputes hereunder. Upon execution hereof by your authorized signatory, this letter shall constitute a binding agreement between you and MSLO, enforceable according to its terms. Sincerely yours, 27 28 MARTHA STEWART LIVING OMNIMEDIA, INC. By:_______________________________ Name: Title: ACCEPTED AND AGREED BY: ______________________________ By:____________________________ Name: Title: 28 29 EXHIBIT A Kmart Corporation Hudson's Bay Company 29 30 SCHEDULE VI(4) VENDOR SELECTION STANDARDS, POLICIES AND PROCEDURES A. BEST QUALITY DESIGN 1. An acceptance that Martha Stewart Everyday is the driver of product content defined as design, packaging, and all other consumer-related "facings"; and willingness to work in an open-minded and highly responsive development and design process that is based upon: a) hearing MSE's requirements, and b) meeting those needs through vendor knowledge and experience. REQUEST: MSE REQUESTS THAT KMART TAKE VENDOR WILLINGNESS TO WORK WITH AND FOR MSE DURING PRODUCT DESIGN AND DEVELOPMENT INTO ACCOUNT IN SELECTING MANUFACTURERS FOR THE MSE PRODUCT COLLECTIONS AND LINES. 2. A desire to work with MSE and Kmart to meet and beat "best of industry" standards for all product SKU's and agreement to work within a process of prototype-testing with Kmart that ensures all product meets "best" standards prior to production and shipment. REQUEST: MSE REQUESTS THAT KMART AND THE VENDORS WORK WITH MSE TO DEVELOP "BEST OF INDUSTRY" STANDARDS FOR ALL MSE SKU'S, AND THAT ALL SKU'S BE TESTED TO "MEET OR BEAT" THESE STANDARDS. FOR THOSE SKU'S THAT FAIL TO MEET "BEST OF" STANDARDS, PRODUCT IS RECALLED AND IS NOT STOCKED OR RESTOCKED UNTIL STANDARDS ARE MET. B. MAINTAIN QUALITY THROUGH MANUFACTURING 1. A willingness of the vendor to inspect, inspect, inspect "out the door". REQUEST: VENDORS SET A "ZERO" DEFECT TOLERANCE TARGET LEVEL TO BE MONITORED ON SITE BY KMART FOR ALL MSE PRODUCT PRODUCED AND SHIPPED, INCLUDING THE OUTPUT OF ALL SUBCONTRACTED MANUFACTURING. 2. A willingness by Kmart to inspect, inspect, inspect "in the door" and "on the floor". REQUEST: MSE REQUESTS THAT KMART SIGNIFICANTLY IMPROVE ITS IN-STORE AUDIT WORKFORCE AND CAPABILITIES TO FILTER OUT ANY IN-STORE MSE MERCHANDISE THAT DOES NOT MEET APPROVED PRODUCT STANDARDS AND THAT THIS PRODUCT BE RECALLED AND RETURNED TO THE MANUFACTURER WITHOUT PENALTY TO MSE. C. COMMUNICATE WITH THE CUSTOMER IN BRAND TERMS 1. Over and above "best of breed" product, willingness to honestly disclose to MSE any and all potential "maintenance" problems with the product, set reasonable consumer expectations, and immediately rectify all problems. REQUEST: THE SEWN IN LABELS AND HANG TAGS FULLY DISCLOSE ALL POTENTIAL MAINTENANCE "ADVISORIES" AND CARE TIPS, AND EXPECTED SHRINKAGE/STRETCH ADJUSTMENTS. CONSUMER PROBLEMS BE IMMEDIATELY RECTIFIED IN WRITING AND THROUGH REFUND PROGRAMS. 30 31 2. Agreement to qualify foreign manufacturing operations up-front against Kmart/MSE standards prior to commencing manufacturing. REQUEST: MSE REQUESTS THAT THE PROCEDURES RECENTLY INSTITUTED BE FORMALLY DOCUMENTED AND THAT ALL RESULTS BE PROMPTLY PASSED TO MSE AND THE VENDORS. ALSO THAT A HIGH LEVEL POINT PERSON (EXECUTIVE) BE RESPONSIBLE AND ACCESSIBLE TO MSE TO ASSURE PROMPT RESOLUTION AND FOLLOW UP WHEN PROBLEMS ARISE. 3. Agreement by all vendors, foreign and domestic, to uphold the highest level of manufacturing standards with regard to Human Rights and fair treatment of the vendors' workforce. REQUEST: ALL VENDORS USE THE KMART 35-PAGE CHECKLIST TO QUALIFY AND ALL FOREIGN AND DOMESTIC PLANTS PRIOR TO COMMENCING ANY MSE MANUFACTURING AND THAT VENDORS ALLOW KMART AND MSE ACCESS TO ITS FACILITIES TO HELP ASSURE THAT COMPLIANCE STANDARDS ARE MET. KMART AGREES THAT NO VENDOR WILL BE USED WHO DOES NOT MEET THESE STANDARDS. EXCLUSIVELY AT KMART 31 32 SCHEDULE VI(8) Specifics to Garden Products (A) Under the Garden Agreement, live plants sold in connection with the Licensed Property were intended to be sold pursuant to Schedule VI(7) of that agreement. Following the execution of this Agreement the parties will cooperate in good faith to revise that Schedule VI(7) to eliminate the roll of the Designated Broker and the Required System and to otherwise simplify the program in mutually agreeable ways, provided that the program will continue to be comprised of Martha Picks and MSEG Commodities, that MSO will continue to have the ability to determine the Martha Picks and will endeavor, along with Kmart, to maintain the secrecy of such picks, and that MSO will be permitted to approve all care and other instructions relating to the live plants. The revised Schedule VI(7) will be adopted and become a part of this schedule. (B) Garden Products that are intended for indoor use shall generally be available for sale at Kmart year-round. Garden Products that are intended for outdoor use shall generally be available at all times from March 1 to September 15 of each year (the "Outdoor Availability Period") and at any other times the parties deem desirable, provided that, with respect to certain Kmart Stores located in the southern, southwestern and western portions of the Territory, such products shall be available during longer periods (such periods and such individual stores to be mutually determined by the parties). In the event of unseasonal weather in particular regions of the Territory, Kmart and MSO shall mutually agree on whether certain products intended for outdoor use should be withheld from sale during a portion of the Outdoor Availability Period. (C) MSO shall be entitled to select the vendors who supply Licensed Products that fall within the "All Natural Organics" product categories. (D) Kmart hereby agrees to dedicate funds annually throughout the Term to the promotion of Sales of the Garden Products through innovative, MSO sponsored events or promotions consistent with the publication of the Martha Stewart Everyday Garden magazine in 2001 or the planned sponsorship of the National Flower Show in 2000. MSO and Kmart shall mutually agree each year on the nature of the event or project and the cost thereof, but it shall generally be a Martha Stewart-branded project or promotion intended to enhance Martha Stewart-brand awareness and Sales of Garden Products at Kmart. 32 33 SCHEDULE XIII GUARANTEED PRODUCTS GARDEN
1999 2000 2001 TOOL SHED Garden Fork Compost Bin "Best" Level Round Point Shovel LH Bulb Planter Flat Head Hoe Square Spade Bamboo Rake Border Spade Garden Rake Heart Hoe Wheel barrow Hedge Shears Loppers Small Bamboo Rake Compost Fork Pistol Grip Saw Large Pruning Saw Pole Pruner Bow Saw TOOL BAG Pruning Shears SH Bulb Planter "Best" Level Trowel Garden Reel Hand Cultivator Fishtail Weeder Hand Weeder Holster for Shears Planting Dibber Mini Claw Cultivator Tool Bag STORAGE Large Galvanized Bin Garden Cart Storage Hooks Galvanized Bucket Large Plastic Bin/Leaf Med Plastic Bin Soil Scoop Small Bucket w/ Handle Small Plastic Bin Harvest Basket Compost Pail w/ Lid Wire Harvest Basket Folding Tarp/Leaf Small galvanized Bucket Lid for Galv. Bucket Scoops - large and small Tool Storage Rack INDOOR FLORAL Floral Shears Plant Mister Small Watering Can Folding Floral Knife Floral Buckets Thinning Clippers Arranging Kit WATERING Watering Can (4) Sprinklers 50' Garden Hose 80' & 100' Garden Hose Quick Coupler Set Watering Wand
33 34 Adjustable Grip Nozzle Soaker Hose Skylands Sprinkler Hose Hanger or Reel Manual Irrigation Timer Electronic Irrigation Timer Misting Rose Shut Off Valve ACCESSORIES Bamboo Stakes (3', 5') Sharpener for Shovel Wide Brim Hat Metal Plant Labels Clogs Wooden Plant Labels 2 sizes Bamboo Stakes (7') Tool Belt Pen for Plant Markers Twine (2 weights_ Apron Plant Supports Nails SEED STARTING Planting Tray Large Cell Seed Starting Insert Small Cell Seed Starting Insert Planting Dome Seed Starting Mix Mist Bottle Small Wood Plant Labels Cold Frame GLOVES Printed Jersey (W) Plaid Jersey Non-Skid Jersey Dot Jersey w/ Vinyl Printed Jersey (K) Plaid Jersey w/ Vinyl Solid Jersey w/ Suede Non-Skid Jersey (M) Leather/Goatskin (W) Suede Work Glove (W) Solid Twill (W) Surgical (W) 1 x 1 Rib Knit/Nitrile (W) Velux Fleece Chore Glove (M) Solid Jersey (M) Leather (M) Surgical (M) Heavy Suede & Twill (M) Twill (M) Heather Jersey (K) Solid Jersey w/ Suede (K) OUTDOOR POTS Garland Rose "Better" / "Best" Plastic/Seasonal Rolled Rim - Large "Better" / "Best" Clay Rolled Rim - Small Basketweave SOILS General Soil Mix Orchid Mix Soilless Mix with Bark Bulb Mix Indoor Plant Mix
34 35 FOODS/FERTILIZERS Rose Soil Testing Kit Tomato/Vegetable Fish/Seaweed Concentrate Acid Loving Fish/Seaweed Concentrate Tree & Shrub Bonemeal Basic/Granular Tree & Shrub Bulb Food All Purpose OUTDOOR LIGHTING Solar/Low Voltage Outdoor Decor Lighting Lighting & Accessories TRELLIS/EDGING/FENCE Expandable Trellis Basis Arch Wild Lattice Components Pound-in Edging Rolled Edging CHILDREN'S GARDEN Children's Tool Set (Cultivator, trowel, weeder) Bamboo Leaf Rake Shovel Cultivator Garden Rake BIRDS Seed "Best" Level Suet Bird Baths Feeders Bird Houses LAWN/ORNAMENT/DECOR Stone/Concrete Decor "Better"/"Best" Levels PEST CONTROL Mosquito Barrier Garden Insecticide Yellow Jacket & Flying Garden Pesticide Insect Trap Garden Fungiside Flying Insect Killer Wasp & Hornet Killer Ant Killer
HOUSEWARES FOOD Enamel Cast Iron Cookware Cast Iron Cookware Enamel Steel Cookware Anodized Aluminum Cookware Stainless Steel Cookware Aluminum Cookware Metal Bakeware 35 36 Ceramic Bakeware Glass Bakeware Clear Colored Cutlery Serrated Non-Serrated Tea Kettles Kitchen Gadgets & Utensils Wooden Stainless Steel Nylon Melamine Ergonomic Specialty Cookware Ethnic Healthy Barbeque Accessories Baking Gadgets & Utensils Mixing Bowls Glass Stainless Steel Plastic Ceramic Spice Racks Cleaners for Stainless Steel Cookware HOME Embossed Whiteware Dinnerware Mix and Match Stoneware, Dinnerware and Serveware Glass Dinnerware Plastic Dinnerware Beverageware Stemware Glass Serveware Flatware 18/0 18/8 Wooden Serveware Enamelware Picture Frames Mirrors Lamps Accent Desk Floor Lamp Shades Clocks Candles Scented Non-Scented Candle Accessories Holders Snuffers Lanterns Hurricanes 36 37 Matches KEEPING Closet Accessories Hangers Plastic Wood Metal Cedar Products/Moth Protection Clothing Storage - Bags and Boxes Shoes Sweaters Blankets Hanging Closet Shelving Organization Systems Laundry Organization Items Underbed Storage Containers Wire and Cable Ties Kitchen Organization Containers Kitchen Labels Dish Storage Containers Dish Felt Pads Floor Savers Floor Storage Containers Kitchen Containers Shelf Paper Trash Receptacles Recycling Receptacles SEASONAL [TO COME FROM MSO] 37 38 SCHEDULE XIV Sales Projections [ * * * ] 38 39 SCHEDULE XXVI LABOR STANDARDS COMPLIANCE CERTIFICATE All Kmart Vendors: Kmart is strongly committed to full compliance with human rights and labor standards as related to the manufacturing of all merchandise sold at our stores. As a vendor to Kmart, you must ensure that there is no misstatements as to the true country of origin of your merchandise, and that none of your merchandise is made in whole or in part using any child, forced or prison labor. This obligation applies not only to your own company, but to any subcontractors you may use in producing goods for Kmart. If Kmart learns that a factory used by any of our vendors for the production of merchandise has committed legal violations, or failed to comply with our standard Kmart order terms, we will: - - Cancel the affected order(s) - - Terminate our relationship with the vendor - - Take legal action or pursue other equitable remedies to recoup any financial losses incurred by Kmart - - Assess a payment to the vendor, equivalent to 50 percent of the order(s), that Kmart will donate to a human rights or children's organization With our current and planned growth in global sourcing, Kmart is increasing our quality control staff to ensure compliance with all applicable human rights and labor standards as well as other critical elements of quality assurance. Consistent with these actions, we expect all of our vendors to increase their factory inspections and take vigilant and immediate action to eliminate any problems that are found to exist. Please sign and return the following Certification of Compliance to John Rutherford, _______________, 3100 W. Big Beaver, Troy, MI 48084 by _______________. Thank you for your prompt attention and personal commitment to this very important matter. Sincerely, Kmart Representative ________________________________________________________________________________ Certification of Compliance "By my signature below, as Chief Executive Officer, and on behalf of my company, I acknowledge receipt of the above letter, and do hereby certify and agree that the company will comply with all applicable labor laws and the order terms and conditions set forth on the back of this agreement for any and all goods supplied to Kmart regardless of country of origin. My company also agrees to make the above assessed payments for donation by Kmart to a human rights or children's organization in the event of failure to comply with the above requirements." ________________________________________________________________________________ (Print) Name & Title - Chief Executive Officer Signature Date ________________________________________________________________________________ Company Name & Address 39 -----END PRIVACY-ENHANCED MESSAGE-----