EMPLOYEE BENEFIT AND SHARE-BASED COMPENSATION PLANS

Retirement Plans

The Company established a 401(k) retirement plan effective July 1, 1997, available to substantially all employees. An employee can contribute up to a maximum of 25% of compensation to the plan, or the maximum allowable contribution by the Internal Revenue Code, whichever is less. The Company chooses, annually, to match 50% of the first 6% of compensation contributed. Employees vest ratably in employer-matching contributions over a period of four years of service. The employer-matching contributions, net of forfeitures, totaled approximately $0.7 million, $0.8 million and $0.6 million in 2013, 2012 and 2011, respectively.

The Company does not sponsor any post-retirement or post-employment benefit plans.

Stock Incentive Plans

Prior to May 2008, the Company had several stock incentive plans that permitted the Company to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans were stock options and restricted shares of Class A Common Stock. The Compensation Committee of the Board was authorized to grant awards for up to a maximum of 10,000,000 underlying shares of Class A Common Stock under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the “1999 Plan”), and awards for up to a maximum of 600,000 underlying shares of Class A Common Stock under the Company’s Non-Employee Director Stock and Option Compensation Plan (the “Non-Employee Director Plan”).

In April 2008, the Board adopted the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (the “Stock Plan”), which was approved by the Company’s stockholders at the Company’s 2008 annual meeting in May 2008. The Stock Plan initially had 10,000,000 shares of Class A Common Stock available for issuance. In March 2012, the Board adopted an amendment to the Stock Plan, which was approved by the Company's stockholder's at the Company's annual meeting in May 2012. The amendment provided for an increase of 4,557,000 in the number of shares of Class A Common Stock available for award. The primary types of incentives that have been granted under the Stock Plan are stock options and RSUs. The number of shares available for grant under the Stock Plan as of December 31, 2013 was 6,517,550.

Compensation expense is recognized in: production, distribution and editorial; selling and promotion; general and administrative; and restructuring expense lines of the Company’s consolidated statements of operations. For 2013, 2012 and 2011, the Company recorded non-cash equity compensation expense of $2.0 million, $3.9 million, and $5.0 million, respectively.

Stock Options

Options which were issued under the 1999 Plan were granted with an exercise price equal to the closing price of Class A Common Stock on the most recent prior date for which a closing price was available, without regard to after-hours trading. Options granted under the Stock Plan are granted with an exercise price equal to the closing price of the Class A Common Stock on the date of grant. Stock options have a term not to exceed 10 years. The Compensation Committee determines the vesting period and terms for the Company’s stock options, which may include service period-based, performance-based, or price-based vesting triggers. Generally, service period-based employee stock options vest over a period typically ranging from two to four years. Service period-based non-employee director options generally vest over a one-year period from the date of grant. Performance-based and price-based options vest only when the specific vesting triggers of the award are achieved. Option awards do not provide for accelerated vesting upon retirement, death, or disability unless specifically included in the applicable award agreement. The amount of non-cash equity compensation expense the Company recognizes during a period is based on the portion of the option awards that are ultimately expected to vest. The Company estimates option forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.

Non-cash equity compensation expense derived from options for 2013, 2012 and 2011 was $0.8 million, $1.7 million and $2.9 million, respectively. As of December 31, 2013, there was $1.0 million of total unrecognized compensation cost related to stock options to be recognized over a weighted average period of 2.87 years. Such amounts will be adjusted for changes in estimated forfeitures. The intrinsic value (defined as the difference between the market price on the date of exercise and the grant date price) of options exercised during 2013 was insignificant; in 2012 and 2011 this value was $0.1 million and $2.1 million, respectively.

Prior Plans:

Changes in outstanding options under the 1999 Plan and the Non-Employee Director Plan (collectively, the "Prior Plans") during 2013 were as follows:



	Number of shares subject to options		Weighted average exercise price		Weighted-average remaining contractual term
Outstanding as of December 31, 2012	1,900,000		$	13.31
Cancelled—service period-based	(1,025,000	)	21.01
Options exercisable and outstanding as of December 31, 2013	875,000		$	7.06	4.17

No stock options were granted under the Prior Plans in 2013, 2012 or 2011. Vesting of shares subject to stock options under the Prior Plans was completed in 2011. The total fair value of shares subject to stock options vested under the Prior Plans during 2011 was $0.9 million.

Stock Plan:

The fair value of employee service period-based option awards under the Stock Plan was estimated on the grant dates using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions:



	2013	2012	2011
Risk-free interest rates	0.5% – 1.0%	0.4% – 0.6%	0.17% - 2.09%
Dividend yields	Zero	Zero	Zero
Expected volatility	58.45% – 60.34%	61.80% – 63.48%	60.38% – 61.25%
Average expected term	3.7 years	3.7 years	1.0 – 7.0 years
Average fair market value per option granted	$1.15	$1.79	$1.67

Changes in outstanding options under the Stock Plan during 2013 were as follows:



	Number of shares subject to options		Weighted average exercise price		Weighted-average remaining contractual term	Aggregate intrinsic value
Outstanding as of December 31, 2012	5,126,684		$	5.08
Granted—service period-based	1,190,000		3.77
Exercised—service period-based	(60,000	)	1.96
Cancelled—service period-based	(1,875,009	)	6.43
Cancelled—priced-based	(725,000	)	9.56
Outstanding as of December 31, 2013	3,656,675		$	4.38	7.79	$3,624,040
Options exercisable at December 31, 2013	2,115,580		$	4.03	6.14	$2,615,240

The total fair value of shares subject to stock options vested under the Stock Plan during 2013, 2012 and 2011 was $1.4 million, $0.9 million and $2.5 million, respectively. Changes in the nonvested outstanding options are as follows:



	Shares		Weighted-average grant-date fair value
Nonvested options outstanding at December 31, 2010	3,220,171		$	2.23
Granted-service period-based	1,740,559		1.80
Granted-price-based	825,000		1.63
Vested-service period-based	(1,482,837	)	2.23
Forfeited or expired-service period-based	(1,096,542	)	2.18
Nonvested options outstanding at December 31, 2011	3,206,351		$	1.89
Granted-service period-based	505,000		1.72
Vested-service period-based	(635,758	)	1.75
Forfeited or expired-service period-based	(392,477	)	2.36
Nonvested options outstanding at December 31, 2012	2,683,116		$	1.79
Granted-service period-based	1,190,000		0.90
Vested-service period-based	(937,875	)	1.73
Forfeited or expired-service period-based	(669,146	)	1.82
Forfeited or expired-price-based	(725,000	)	1.71
Nonvested options outstanding at December 31, 2013	1,541,095		$	1.32

Stock option award to Chief Executive Officer in 2013

During the fourth quarter of 2013, the Company issued an option award under the Stock Plan to its newly appointed Chief Executive Officer, as provided for in his employment agreement. The award includes only service period-based vesting triggers and consists of an option to purchase an aggregate of 1,000,000 shares of Class A Common Stock comprised of four equal tranches with varying exercise prices. The stated exercise prices for each 250,000 option tranche is $2.75, $3.00, $4.00 and $5.00. One-third of each option tranche vests as to approximately 333,333 shares on each of December 31, 2014, 2015 and 2016. Non-cash equity compensation expense of approximately $0.1 million was recorded for the year ended December 31, 2013 related to this award. As of December 31, 2013, there was $0.7 million of total unrecognized compensation cost related to this service period-based stock option award to be recognized over a period of 3 years.

Restricted stock and RSUs

Restricted stock represents shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. RSUs represent the contingent right to one share of Class A Common Stock. The Compensation Committee determines the vesting period and terms for the Company’s restricted stock and RSUs, which may include service period-based, performance-based, or price-based vesting triggers. Service period-based restricted stock and RSUs generally vest over a period typically ranging from two to four years. Performance-based and price-based RSUs vest only when the specific vesting triggers of the award are achieved. The amount of non-cash equity compensation expense the Company recognizes during a period is based on the portion of the restricted stock and RSU awards that are ultimately expected to vest. The Company estimates restricted stock and RSU forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Restricted stock and RSUs do not provide for accelerated vesting upon retirement, death, or disability unless specifically included in the applicable award agreement.

Restricted stock and RSU expense for 2013, 2012 and 2011 was $1.1 million, $2.3 million and $2.1 million, respectively.

Service period-based restricted stock

The fair value of service period-based nonvested restricted stock under the Prior Plans was determined based on the most recent prior date for which a closing price was available, without regard to after-hours trading. Vesting of these awards was completed as of December 31, 2011. The total fair value of shares vested during 2011 was $0.4 million.

The fair value of service period-based nonvested restricted stock under the Stock Plan was determined based on the closing price of the Company’s Class A Common Stock on the grant dates. The total fair value of shares vested in each of 2013 and 2012 was $0.1 million; in 2011 this amount was $0.9 million. A summary of the shares of service period-based restricted stock is as follows:



	Shares		Weighted Average Grant Date Value
Outstanding and nonvested at December 31, 2010	320,922		$	8.24
Granted	33,037		4.08
Vested	(128,097	)	7.45
Forfeitures	(217,510	)	8.53
Outstanding and nonvested at December 31, 2011	8,352		$	4.49
Granted	25,202		3.26
Vested	(33,554	)	3.65
Outstanding and nonvested at December 31, 2012	—		$	—
Granted	26,966		2.71
Vested	(26,966	)	2.71
Outstanding and nonvested at December 31, 2013	—		$	—

Service period-based RSUs

The fair value of service period-based nonvested RSUs under the Stock Plan was determined based on the closing price of the Company’s Class A Common Stock on the grant dates. The total fair value of shares vested during 2013 and 2012 was $1.4 million and $0.4 million, respectively. The fair value of shares vested during 2011 was insignificant. As of December 31, 2013, there was $1.4 million of total unrecognized compensation cost related to service period-based nonvested RSUs to be recognized over a weighted-average period of 2.8 years. A summary of the shares of service period-based RSUs is as follows:



	Shares		Weighted Average Grant Date Value
Outstanding and nonvested at December 31, 2010	—		$	—
Granted	639,698		4.24
Vested	(12,500	)	3.95
Forfeitures	(87,500	)	3.95
Outstanding and nonvested at December 31, 2011	539,698		$	4.29
Granted	302,163		3.19
Vested	(119,635	)	4.14
Forfeitures	(2,500	)	3.95
Outstanding and nonvested at December 31, 2012	719,726		$	3.93
Granted	814,500		2.53
Vested	(438,353	)	3.64
Forfeitures	(353,790	)	3.89
Outstanding and nonvested at December 31, 2013	742,083		$	2.69

Performance-based RSUs

During 2010 and 2009, the Company granted 550,000 and 351,625 RSUs, respectively, which contain vesting triggers based upon the Company’s achievement of certain adjusted EBITDA targets over a performance period.

During 2010, in recognition of changing economic conditions and to ensure the continued retention and motivation of key employees, the Company’s Compensation Committee approved modifications to the performance conditions associated with the RSUs issued during 2010 and 2009. The modifications effectively replaced performance condition vesting triggers with service-period vesting triggers. Consistent with requirements of ASC Topic 718, Compensation—Stock Compensation, the awards were amortized over the requisite service period on a prospective basis from the date the Compensation Committee approved the removal of the performance conditions (December 3, 2010), which is deemed to be the grant date for accounting purposes. As of December 31, 2013, all such awards had vested. The total fair value of these shares vested during 2013, 2012 and 2011 was $0.6 million, $0.2 million and $0.8 million, respectively. A summary of the performance-based RSUs is as follows:



	Shares		Weighted Average Grant Date Value (1)
Outstanding and nonvested at December 31, 2010	720,000		$	4.62
Vested	(170,000	)	4.62
Forfeitures	(341,500	)	4.62
Outstanding and nonvested at December 31, 2011	208,500		$	4.62
Vested	(50,500	)	4.62
Forfeitures	(17,500	)	4.62
Outstanding and nonvested at December 31, 2012	140,500		$	4.62
Vested	(135,500	)	4.62
Forfeitures	(5,000	)	4.62
Outstanding and nonvested at December 31, 2013	—		$	—


(1)	The weighted average grant date value included in the table above was adjusted to reflect the impact of the modifications approved on December 3, 2010 to the 2010 and 2009 awards.

Price-based RSUs

The fair value of nonvested price-based RSUs under the Stock Plan was determined based on the closing price of the Company’s Class A Common Stock on the grant dates using the Monte Carlo Simulation method which takes into account assumptions such as volatility of the Company’s Class A Common Stock, the risk-free interest rate based on the contractual term of the award, the expected dividend yield, the vesting schedule, and the probability that the market conditions of the award will be achieved. As of December 31, 2013, 2012 and 2011 no price-based RSUs had vested. As of December 31, 2013, there was $0.5 million of total unrecognized compensation cost related to nonvested price-based RSUs to be recognized over a weighted-average period of approximately 1.8 years.

A summary of the shares of price-based RSUs is as follows:



	Shares		Weighted Average Grant Date Value
Outstanding and nonvested at December 31, 2010	—		$	—
Granted	440,000		3.07
Outstanding and nonvested at December 31, 2011	440,000		$	3.07
No activity during 2012	—		—
Outstanding and nonvested at December 31, 2012	440,000		$	3.07
Granted	930,000		0.65
Forfeitures	(400,000	)	3.19
Outstanding and nonvested at December 31, 2013	970,000		$	0.77

RSU awards to Chief Executive Officer in 2013

During the fourth quarter of 2013 the Company issued RSU awards under the Stock Plan to its newly appointed Chief Executive Officer, as provided for in his employment agreement. The first RSU award provides that the Chief Executive Officer receive 400,000 RSUs, with service-period based vesting triggers, of which approximately 133,333 RSUs vest on each December 31, 2014, 2015 and 2016. Non-cash equity compensation expense of approximately $0.1 million was recorded during the year ended December 31, 2013 related to this award. As of December 31, 2013, there was $0.9 million of total unrecognized compensation cost related to this service-period based RSU to be recognized over a period of 3 years.

The Company also made an RSU award to this executive which includes price-based vesting triggers. The price-based RSUs consist of the contingent right to receive an aggregate of 800,000 shares of Class A Common Stock, of which 200,000 RSUs will vest at such time as the trailing average closing price during any thirty (30) consecutive days during the period beginning on October 28, 2013 and ending on December 31, 2016 (the “Performance Period”) has been at least $6, an additional 200,000 RSUs will vest at such time as such trailing average closing price during any thirty (30) consecutive days during the Performance Period has been at least $8, an additional 200,000 RSUs will vest at such time as such trailing average closing price during any thirty (30) consecutive days during the Performance Period has been at least $10, and the final 200,000 RSUs will vest at such time as such trailing average closing price during any thirty (30) consecutive days during the Performance Period has been at least $12. Non-cash equity compensation expense of approximately $0.1 million was recorded during the year ended December 31, 2013 related to this price-based award. As of December 31, 2013, there was $0.4 million of total unrecognized compensation cost related to this price-based RSU award to be recognized over varying derived service periods. The following table summarizes the assumptions used in applying the Monte Carlo Simulation method to value this price-based award:



Risk-free interest rate	0.65%
Dividend	Zero
Expected volatility	48.31%
Derived service periods	1.84 - 2.44 years
Estimated value of price-based RSUs	$0.29 - $0.94