MARTHA STEWART LIVING OMNIMEDIA INC - FORM 10-Q - October 31, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
 
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 001-15395 
MARTHA STEWART LIVING OMNIMEDIA, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
52-2187059
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
601 West 26th Street,
New York, NY
 
10001
(Address of principal executive offices)
 
(Zip Code)
(212) 827-8000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
o
Accelerated filer
 
þ
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ 
 
Outstanding as of October 29, 2014
Class A, $0.01 par value
31,851,843

Class B, $0.01 par value
25,234,625

Total
57,086,468



Martha Stewart Living Omnimedia, Inc.
Index to Form 10-Q


PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
 
September 30, 2014 (unaudited)
 
December 31, 2013
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
5,747

 
$
21,884

Short-term investments
47,343

 
19,268

Restricted cash and investments
—

 
5,072

Accounts receivable, net
20,491

 
39,694

Paper inventory
317

 
2,901

Other current assets
4,301

 
3,876

Total current assets
78,199

 
92,695

PROPERTY AND EQUIPMENT, net
3,916

 
7,961

GOODWILL
—

 
850

INTANGIBLE ASSET - TRADEMARKS
34,700

 
45,200

OTHER NONCURRENT ASSETS
1,477

 
1,661

Total assets
$
118,292

 
$
148,367

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
11,659

 
$
12,464

Accrued payroll and related costs
3,978

 
8,665

Current portion of deferred subscription revenue
6,357

 
7,632

Current portion of other deferred revenue
13,778

 
17,227

Total current liabilities
35,772

 
45,988

DEFERRED SUBSCRIPTION REVENUE
2,654

 
3,587

OTHER DEFERRED REVENUE
11,785

 
17,307

DEFERRED INCOME TAX LIABILITY
3,560

 
7,094

OTHER NONCURRENT LIABILITIES
3,341

 
3,916

Total liabilities
57,112

 
77,892

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY
 
 
 
Class A Common Stock, $0.01 par value, 350,000,000 shares authorized; 31,911,243 and 30,704,491 shares issued in 2014 and 2013, respectively; 31,851,843 and 30,645,091 shares outstanding in 2014 and 2013, respectively
319

 
307

Class B Common Stock, $0.01 par value, 150,000,000 shares authorized; 25,234,625 and 25,984,625 shares issued and outstanding in 2014 and 2013, respectively
252

 
260

Capital in excess of par value
344,346

 
342,213

Accumulated deficit
(282,952
)
 
(271,051
)
Accumulated other comprehensive loss
(10
)
 
(479
)
 
61,955

 
71,250

Less: Class A treasury stock – 59,400 shares at cost
(775
)
 
(775
)
Total shareholders’ equity
61,180

 
70,475

Total liabilities and shareholders’ equity
$
118,292

 
$
148,367

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

3

MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Operations
(unaudited, in thousands, except share and per share amounts) 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Publishing
$
15,781

 
$
19,401

 
$
57,516

 
$
68,073

Merchandising
13,691

 
14,153

 
41,494

 
41,776

Broadcasting
139

 
294

 
1,489

 
3,421

Total revenues
29,611

 
33,848

 
100,499

 
113,270

Production, distribution and editorial
(13,988
)
 
(16,579
)
 
(44,697
)
 
(56,332
)
Selling and promotion
(9,081
)
 
(10,401
)
 
(27,343
)
 
(32,348
)
General and administrative
(9,259
)
 
(10,097
)
 
(27,254
)
 
(31,456
)
Depreciation and amortization
(783
)
 
(847
)
 
(4,651
)
 
(2,940
)
Impairment of trademark and goodwill
(11,350
)
 
—

 
(11,350
)
 
—

Restructuring charges
—

 
—

 
—

 
(675
)
Gain on sale of subscriber list, net
—

 
—

 
—

 
2,724

OPERATING LOSS
(14,850
)
 
(4,076
)
 
(14,796
)
 
(7,757
)
Interest income / (expense) and other, net
52

 
118

 
(513
)
 
85

LOSS BEFORE INCOME TAXES
(14,798
)
 
(3,958
)
 
(15,309
)
 
(7,672
)
Income tax benefit / (provision)
3,733

 
(337
)
 
3,408

 
(1,076
)
NET LOSS
$
(11,065
)
 
$
(4,295
)
 
$
(11,901
)
 
$
(8,748
)
LOSS PER SHARE – BASIC AND DILUTED
 
 
 
 
 
 
 
Net loss
$
(0.19
)
 
$
(0.06
)
 
$
(0.21
)
 
$
(0.13
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic and diluted
57,074,872

 
67,490,820

 
56,908,036

 
67,366,285

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

4

MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(11,065
)
 
$
(4,295
)
 
$
(11,901
)
 
$
(8,748
)
Other comprehensive income / (loss):
 
 
 
 
 
 
 
Amounts reclassified for net realized losses on available-for-sale securities included in net loss
—

 
6

 
491

 
373

Net unrealized losses on available-for-sale securities occurring during the period
—

 
(54
)
 
(22
)
 
(349
)
Other comprehensive (loss) / income
—

 
(48
)
 
469

 
24

Total comprehensive loss
$
(11,065
)
 
$
(4,343
)
 
$
(11,432
)
 
$
(8,724
)
The accompanying notes are an integral part of these consolidated financial statements.

5

MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2014
(unaudited, in thousands)
 
  
Class A
Common Stock
 
Class B
Common Stock
 
 
 
 
 
 
 
Class A
Treasury Stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital in 
excess
of par value
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Shares
 
Amount
 
Total
Balance at December 31, 2013
30,705

 
$
307

 
25,985

 
$
260

 
$
342,213

 
$
(271,051
)
 
$
(479
)
 
(59
)
 
$
(775
)
 
$
70,475

Net loss
—

 
—

 
—

 
—

 
—

 
(11,901
)
 
—

 
—

 
—

 
(11,901
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
469

 
—

 
—

 
469

Conversion of shares (1)
750

 
8

 
(750
)
 
(8
)
 
—

 
—

 
—

 
—

 
—

 
—

Issuance of shares of stock in conjunction with stock option exercises
282

 
3

 
—

 
—

 
907

 
—

 
—

 
—

 
—

 
910

Issuance of shares of stock and restricted stock, net of cancellations and tax withholdings
174

 
1

 
—

 
—

 
(287
)
 
—

 
—

 
—

 
—

 
(286
)
Non-cash equity compensation
—

 
—

 
—

 
—

 
1,513

 
—

 
—

 
—

 
—

 
1,513

Balance at September 30, 2014
31,911

 
$
319

 
25,235

 
$
252

 
$
344,346

 
$
(282,952
)
 
$
(10
)
 
(59
)
 
$
(775
)
 
$
61,180


(1) The converted shares of Class B Common Stock were retired and returned to the authorized but unissued shares of Class B Common Stock.


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

6

MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine months ended September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(11,901
)
 
$
(8,748
)
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
 
 
 
Non-cash revenue
(5,311
)
 
(403
)
Depreciation and amortization
4,651

 
2,940

Impairment of trademark and goodwill
11,350

 
—

Non-cash equity compensation
1,513

 
1,356

Deferred income tax (benefit) / expense
(3,534
)
 
925

Gain on sale of subscriber list, net
—

 
(2,724
)
Other non-cash charges, net
1,209

 
60

Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
19,203

 
9,427

Paper inventory
2,584

 
851

Accounts payable and accrued liabilities and other
(749
)
 
360

Accrued payroll and related costs
(4,687
)
 
(4,460
)
Deferred subscription revenue
(2,208
)
 
(4,956
)
Deferred revenue
(3,660
)
 
(1,725
)
Other changes
(942
)
 
(178
)
Total changes in operating assets and liabilities
9,541

 
(681
)
Net cash provided by / (used in) operating activities
7,518

 
(7,275
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(624
)
 
(908
)
Purchases of short-term investments
(41,569
)
 
(16,353
)
Sales of short-term investments
17,337

 
19,270

Proceeds from the sale of subscriber list, net
—

 
673

Net cash (used in) / provided by investing activities
(24,856
)
 
2,682

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds received from stock option exercises
910

 
60

Shares withheld in payment of employee tax obligations
(286
)
 
(443
)
Change in restricted cash
577

 
(470
)
Net cash provided by / (used in) financing activities
1,201

 
(853
)
Net decrease in cash
(16,137
)
 
(5,446
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
21,884

 
19,925

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
5,747

 
$
14,479

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

7

Martha Stewart Living Omnimedia, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. General
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as “we,” “us,” “our,” or the “Company.”
The information included in the foregoing interim consolidated financial statements is unaudited. In the opinion of management, all adjustments, all of 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 therein. The results of operations for interim periods do not necessarily indicate the results to be expected for the entire year. These unaudited consolidated financial statements 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 (the “SEC”) with respect to the Company’s fiscal year ended December 31, 2013 (the “2013 Form 10-K”) which may be accessed through the SEC’s website at http://www.sec.gov.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company’s consolidated financial statements.
2. Significant Accounting Policies
Recent accounting standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued an update on "Revenue from Contracts with Customers" (Topic 606), which completes the joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and international financial reporting standards ("IFRS"). The joint project clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and IFRS. Specifically, it removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. For the Company, this update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The update may be applied using one of two methods: retrospective application to each prior reporting period presented, or retrospective application with the cumulative effect of initially applying the update recognized at the date of initial application. The Company is currently evaluating the transition method that will be elected and the impact of the update on its financial statements and disclosures.
The Company’s significant accounting policies are discussed in detail in its 2013 Form 10-K.
3. Fair Value Measurements
The Company categorizes its assets measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are:
•
Level 1: Observable inputs such as quoted prices for identical assets and liabilities in active markets obtained from independent sources.
•
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data. The fair values of the Company’s level 2 securities are primarily obtained from observable market prices for identical underlying securities that may not be actively traded.
•
Level 3: Unobservable inputs for which there is little or no market data and require the Company to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.

8

The Company has no liabilities that are measured at fair value on a recurring basis. The following tables present the Company’s assets that are measured at fair value on a recurring basis:
 
September 30, 2014
(in thousands)
Quoted
Market
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Measurements
Short-term investments:
 
 
 
 
 
 
 
Fixed income mutual fund
$
2,492

 
$
—

 
$
—

 
$
2,492

U.S. government and agency securities
—

 
2,914

 
—

 
2,914

Corporate obligations
—

 
28,059

 
—

 
28,059

Other fixed income securities
—

 
437

 
—

 
437

International securities
—

 
12,894

 
—

 
12,894

Municipal obligations
—

 
547

 
—

 
547

Total
$
2,492

 
$
44,851

 
$
—

 
$
47,343

 
December 31, 2013
(in thousands)
Quoted
Market
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Measurements
Short-term investments:
 
 
 
 
 
 
 
Fixed income mutual fund
$
2,485

 
$
—

 
$
—

 
$
2,485

U.S. government and agency securities
—

 
2,233

 
—

 
2,233

Corporate obligations
—

 
14,159

*
—

 
14,159

Other fixed income securities
—

 
361

 
—

 
361

International securities
—

 
3,048

 
—

 
3,048

Municipal obligations
—

 
1,477

 
—

 
1,477

Total
$
2,485

 
$
21,278

 
$
—

 
$
23,763

* Included in this amount is a corporate obligation of $4.5 million used to collateralize the Company's line of credit with Bank of America, and was included in the line item "Restricted cash and investments," a component of current assets, on the consolidated balance sheet as of December 31, 2013. Pursuant to an amendment to the loan agreement with Bank of America, effective May 19, 2014, the line of credit is no longer secured by cash or investment collateral. See Note 7, Credit Facilities, for further details.
Assets measured at fair value on a nonrecurring basis
The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. The Company evaluates the recoverability of its indefinite-lived intangible asset and goodwill by performing impairment tests on an annual basis, as of October 1st, or when events or changes in circumstances indicate that the carrying amounts may not be recoverable. Any resulting asset impairment requires that the asset be recorded at its fair value. The Company's valuation methods to determine fair value utilize significant Level 3 unobservable inputs, which include discount rates, long-term growth rates and royalty rates.


9

During the three months ended September 30, 2014, the Company performed an interim review of the indefinite-lived intangible asset and goodwill in our Merchandising segment associated with the Emeril Lagasse business. As a result, during the three and nine months ended September 30, 2014, the Company recorded an aggregate non-cash impairment charge of $11.4 million to write down the value of these assets to their fair value. See Note 6, Intangible Asset and Goodwill, for further information.
4. Short-Term Investments
The Company's investments consist of marketable debt securities that are classified as available-for-sale and presented as "Short-term investments," a component of current assets on the consolidated balance sheets. The Company's available-for-sale securities represent investments available for current operations and may be sold prior to their stated maturities for strategic or operational reasons. The available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported in "Accumulated other comprehensive loss." The amortized cost of the available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is netted against the related interest income and both are included in "Interest income/(expense) and other, net" in the Consolidated Statements of Operations.
Realized gains and losses are classified as other income or expense and included in "Interest income/(expense) and other, net" in the Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method.
As of September 30, 2014 and December 31, 2013, the Company's amortized cost of its available-for-sale securities approximated fair value. Gross unrealized losses of $(0.02) million as of September 30, 2014, were partially offset by gross unrealized gains of $0.01 million. As of December 31, 2013, gross unrealized losses of $(0.5) million were partially offset by gross unrealized gains of $0.03 million. The Company considered the declines in market value of its marketable available-for-sale securities investment portfolio to be temporary in nature and did not consider any of its investments other-than-temporarily impaired as of September 30, 2014 and December 31, 2013. Contractual maturities for the Company's available-for-sale securities are generally within two years of September 30, 2014.
During the three months ended September 30, 2014, the gross realized gains and losses on sales of available-for-sale marketable securities were insignificant. For the nine months ended September 30, 2014, the gross realized gains and losses were $0.03 million and $(0.5) million, respectively, including amounts reclassified out of accumulated other comprehensive loss of $0.03 million and $(0.5) million, respectively. See Note 5, Accumulated Other Comprehensive Loss, for further information.
5. Accumulated Other Comprehensive Loss
Accumulated other comprehensive income/(loss), included as a component of shareholders' equity, consists of unrealized gains and losses affecting equity that, under GAAP, are excluded from net income/(loss). For the Company, accumulated other comprehensive loss is impacted by unrealized gains/(losses) on available-for-sale securities as of the reporting period date and by reclassification adjustments resulting from sales or maturities of available-for-sale securities. The components of accumulated other comprehensive loss as of September 30, 2014 and December 31, 2013 are set forth in the schedule below: 
(in thousands)
Unrealized Gains/(Losses) on Available-for-sale Securities
 
Total Accumulated Other Comprehensive Loss
Balance at December 31, 2013
$
(479
)
 
$
(479
)
Amounts reclassified for net realized losses on available-for-sale securities included in net loss *
491

 
491

Net unrealized losses on available-for-sale securities occurring during the period
(22
)
 
(22
)
Balance at September 30, 2014
$
(10
)
 
$
(10
)
* Amounts reclassified for previously unrealized losses on available-for-sale securities are included in "Interest income/(expense) and other, net" in the Consolidated Statements of Operations.

10

6. Intangible Asset and Goodwill
Indefinite-lived intangible asset
The Company has an indefinite-lived intangible asset that is comprised of trademarks that were purchased on April 2, 2008 as part of the acquisition of the businesses owned and operated by Emeril Lagasse and certain affiliated parties, except for Emeril Lagasse’s restaurant-related business and foundation. This intangible asset, reported within the Merchandising segment, had carrying amounts as of December 31, 2013 and September 30, 2014 as set forth in the schedule below:
 
Intangible Asset - Trademarks
Balance at December 31, 2013
$
45,200

Impairment Charge
(10,500
)
Balance at September 30, 2014
$
34,700

The Company's trademarks, which are classified as intangible assets with indefinite useful lives, are reviewed annually on October 1st, or more frequently if circumstances warrant, for impairment by applying a fair-value based test in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other" ("ASC 350"). The Company performs the impairment test by comparing the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment charge for the excess value must be recorded. The Company estimates fair value using the discounted cash flow ("DCF") valuation methodology, in which future after-tax cash flows are discounted based on a market comparable weighted average cost of capital rate, adjusted for market and other risks where appropriate. The Company’s estimates, which are Level 3 unobservable inputs, are based on historical results and current economic and market trends, which drive key assumptions of revenue growth rates and operating margins, and therefore, are subject to uncertainty.
The Company’s annual test of its trademarks as of October 1, 2013 included a DCF analysis that was based on estimated long-term growth projections for the Emeril Lagasse business. At that time, the assumptions used for the 2014 fiscal year and beyond included growth in royalty revenue in the housewares and new food categories.
During the nine months ended September 30, 2014, the financial results of the Emeril Lagasse business were lower than expected, largely as a result of lower wholesale royalties in the housewares category that were impacted by a slower than expected start of certain new initiatives. In September 2014, in connection with the Company's 2015 budgeting process, the Company determined that: (1) the expected increase in wholesale royalties in the housewares category would be delayed; (2) the distribution of housewares products to wider retail outlets was less certain; and (3) new food licensing partnerships that were expected to generate long-term growth were not yet meeting expectations. Accordingly, the Company reduced its long-term projections with respect to both the housewares and new food licensing businesses. As a result of lower-than-expected financial results and lower long-term projections, and in conjunction with the overall evaluation of the business, the Company determined that a triggering event had occurred during the three months ended September 30, 2014.
The Company completed an evaluation of the fair value of its indefinite-lived trademarks as of September 30, 2014 using a DCF analysis, which included lower future growth assumptions, as discussed above. Other significant assumptions used in this DCF analysis included expected future margins, the discount rate and the perpetual growth rate. These assumptions are considered Level 3 unobservable inputs under the fair value hierarchy established by ASC 820, "Fair Value Measurements and Disclosures." As of September 30, 2014, the DCF analysis provided for a fair value of $34.7 million, which was below the carrying value of $45.2 million. This difference resulted in a non-cash intangible asset impairment charge of $10.5 million for the three months ended September 30, 2014. The impairment charge is included in "Impairment of trademark and goodwill" in the Consolidated Statements of Operations for the three and nine months ended September 30, 2014.
Although the Company considered all current information in calculating the amount of the impairment charge, future changes in events or circumstances could result in further decreases in the fair value of its indefinite-lived intangible asset. If actual results differ from the Company’s estimate of future cash flows, revenues, earnings and other factors, the Company may record additional impairment charges in the future.


11

Goodwill
The Company also had goodwill that was generated upon the April 2, 2008 acquisition of certain businesses owned and operated by Emeril Lagasse and certain affiliated parties. This goodwill, reported within the Merchandising segment, had carrying amounts as of December 31, 2013 and September 30, 2014 as set forth in the schedule below:
 
Goodwill
Balance at December 31, 2013
$
850

Impairment charge
(850
)
Balance at September 30, 2014
$
—

The Company reviews goodwill for impairment by applying a fair-value based test annually on October 1st, or more frequently if circumstances warrant, in accordance with ASC 350. Goodwill impairment is measured based upon a two-step process. In the first step, the Company compares the fair value of a reporting unit with its carrying amount, including goodwill, using a DCF valuation method. Future after-tax cash flows are discounted based on a market comparable weighted average cost of capital rate, adjusted for market and other risks where appropriate. The Company’s estimates, which are Level 3 unobservable inputs, are based on historical results and current economic and market trends, which drive key assumptions of revenue growth rates and operating margins, and therefore, are subject to uncertainty. If the fair value of a reporting unit exceeds its carrying value, the goodwill of the reporting unit is considered not impaired, thus rendering the second step in impairment testing unnecessary. If the fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of the reporting unit's goodwill is compared to the carrying value of the goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. The implied fair value of the reporting unit’s goodwill is compared with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment charge for the excess value must be recorded.
As a result of the intangible asset impairment charge associated with the Emeril Lagasse trademarks, described above, the Company determined that a triggering event had also occurred with respect to the goodwill associated with the Emeril Lagasse business during the three months ended September 30, 2014. The Company considers all business related to Emeril Lagasse to be aggregated into a single reporting unit, which is a component of the Merchandising segment. The Company calculated the fair value of the reporting unit using a DCF analysis based upon updated long-term projections as of September 30, 2014, which included lowered expectations for both the housewares and new food categories and lower future growth assumptions. Other significant assumptions used in this DCF analysis included expected future margins, the discount rate and the perpetual growth rate. All these assumptions are considered Level 3 unobservable inputs under the fair value hierarchy established by ASC 820, "Fair Value Measurements and Disclosures."
The step one impairment test as of September 30, 2014 resulted in a fair value of the reporting unit that was less than its carrying value. Therefore, the Company performed the second step of the goodwill impairment test in which the implied fair value of the reporting unit’s goodwill was compared to the carrying value of its goodwill. The implied fair value of the reporting unit’s goodwill was determined based on the difference between the fair value of the reporting unit and the net fair value of its identifiable assets and liabilities, which included minimal accounts receivable, accounts payable and deferred revenue. The reporting unit’s identifiable assets also included the revalued indefinite-lived intangible asset described above. As a result of performing this goodwill impairment test as of September 30, 2014, the Company determined that the implied fair value of the Emeril Lagasse reporting unit’s goodwill was zero. Therefore, the Company also recorded a non-recurring, non-cash goodwill impairment charge of $0.9 million for the three-month period ended September 30, 2014. The impairment charge is included in "Impairment of trademark and goodwill" in the Consolidated Statements of Operations for the three and nine months ended September 30, 2014.
7. Credit Facilities
On May 19, 2014, the Company entered into an Amendment to the Amended and Restated Loan Agreement between the Company and Bank of America, N.A., dated February 14, 2012, (the "Amended Credit Agreement"), which provided for the continued arrangement for a line of credit with Bank of America, N.A. of $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. The annual interest rate on outstanding amounts is equal to a floating rate of 1-month LIBOR Daily Floating Rate plus 1.85%. The annual unused commitment fee is equal to 0.25%.

12

Prior to the Amended Credit Agreement, the line of credit had been obligated to be secured by cash or investment collateral of at least $5.0 million. Accordingly, the Company maintained restricted investments of $4.5 million and restricted cash of $0.6 million as of December 31, 2013. The aggregate of these amounts was included in the line item "Restricted cash and investments," a component of current assets, on the Consolidated Balance Sheet as of December 31, 2013. Effective with the May 19, 2014 amendment, the line of credit is no longer secured by cash or investment collateral; instead the Company must maintain unencumbered liquid assets having an aggregate market value of not less than 100% of any outstanding principal amounts, in addition to the aggregate standby letters of credit issued, under the facility.
The Amended Credit Agreement expires on June 30, 2015, at which time outstanding amounts borrowed under the agreement, if any, become due and payable. As of September 30, 2014 and December 31, 2013, the Company had no outstanding borrowings against its line of credit, but had outstanding letters of credit of $1.0 million and $1.6 million, respectively.
8. Depreciation and Amortization
Depreciation and amortization expense was $4.7 million for the nine months ended September 30, 2014, including $2.1 million from the non-recurring accelerated amortization of leasehold improvements related to the consolidation of the Company's primary office space during February 2014.
9. Income Taxes
The Company follows ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in the Company’s judgment about the future realization of deferred tax assets. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax assets will be realized.
The Company recorded $3.4 million of net tax benefit during the nine months ended September 30, 2014. The benefit was primarily related to the tax impact from the impairment of an indefinite-lived intangible asset and goodwill (see Note 6, Intangible Asset and Goodwill, for further information). Due to the indefinite life of the intangible asset and goodwill for book purposes, the related deferred tax liability cannot serve as a source of taxable income to support deferred tax assets. Therefore, the impairment resulted in a reduction to the deferred tax liability previously recorded to the Consolidated Statements of Operations. In addition, the amount recorded during the nine months ended September 30, 2014 included a non-recurring tax benefit to revalue deferred tax liabilities as a result of the change in the state rate for which deferred taxes are measured.
ASC 740 further establishes guidance on the accounting for uncertain tax positions. As of September 30, 2014, the Company had a liability for uncertain tax positions balance of $0.06 million, of which $0.04 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate, and $0.02 million of interest expense. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2005 and state examinations for the years before 2003.
10. Industry Segments
The Company is an integrated media and merchandising company providing consumers with inspiring lifestyle content and well-designed, high-quality products. The Company is organized into three business segments: Publishing; Merchandising; and Broadcasting.
The Publishing segment primarily consists of the Company’s operations related to its magazines (Martha Stewart Living, Martha Stewart Weddings and special weddings issues) and books, as well as its digital operations, which include the content-driven website, marthastewart.com, and the digital distribution of video content. Publishing segment results can vary from quarter to quarter due to publication schedules and seasonality of certain types of advertising. Certain costs vary from quarter to quarter, particularly newsstand marketing costs associated with the distribution of the Company's magazines.
Subsequent to the Company's fiscal quarter ended September 30, 2014, the Company entered into two agreements on October 14, 2014 with Meredith Corporation (“Meredith”), whereby Meredith will assume responsibility for advertisement sales, circulation and production in the United States and Canada of the Martha Stewart Living, Martha Stewart Weddings and related special weddings magazines, and will host, operate, maintain, and provide advertisement sales and related functions for marthastewart.com, marthastewartweddings.com and the Company's related digital assets, including its vast video library. The Company will continue to create and provide all editorial content for these magazines and digital properties. The agreements

13

are effective November 1, 2014 and Meredith will begin delivering editions starting with the February 2015 issue of Martha Stewart Living and the Winter 2015 issue of Martha Stewart Weddings. See Note 13, Subsequent Events, for further discussion of these Publishing segment agreements.
The Merchandising segment primarily consists of the Company’s operations related to the design and branding of merchandise and related collateral and packaging materials that are manufactured and distributed by its retail and wholesale partners in exchange for royalty income. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to changes in product mix, new product launches and the performance of certain seasonal product lines. The Merchandising segment also includes the licensing of talent services for television programming produced by or on behalf of third parties.
The Broadcasting segment consists of the Company's limited television production operations, television content library licensing and satellite radio operations.
Segment information for the three months ended September 30, 2014 and 2013 is as follows:
(in thousands)
Publishing
 
Merchandising
 
Broadcasting
 
Corporate
 
Consolidated
2014
 
 
 
 
 
 
 
 
 
Revenues *
$
15,781

 
$
13,691

 
$
139

 
$
—

 
$
29,611

Non–cash equity compensation
(28
)
 
(10
)
 
—

 
(436
)
 
(474
)
Depreciation and amortization
(135
)
 
(11
)
 
(1
)
 
(636
)
 
(783
)
Impairment of trademark and goodwill
—

 
(11,350
)
 
—

 
—

 
(11,350
)
Operating loss
(6,246
)
 
(1,548
)
 
(36
)
 
(7,020
)
 
(14,850
)
2013
 
 
 
 
 
 
 
 
 
Revenues
$
19,401

 
$
14,153

 
$
294

 
$
—

 
$
33,848

Non–cash equity compensation
(85
)
 
(57
)
 
(1
)
 
(276
)
 
(419
)
Depreciation and amortization
(200
)
 
(12
)
 
(1
)
 
(634
)
 
(847
)
Operating (loss) / income
(6,260
)
 
9,479

 
(214
)
 
(7,081
)
 
(4,076
)

Segment information for the nine months ended September 30, 2014 and 2013 is as follows:
(in thousands)
Publishing
 
Merchandising
 
Broadcasting
 
Corporate
 
Consolidated
2014
 
 
 
 
 
 
 
 
 
Revenues *
$
57,516

 
$
41,494

 
$
1,489

 
$
—

 
$
100,499

Non–cash equity compensation
(111
)
 
(89
)
 
(1
)
 
(1,312
)
 
(1,513
)
Depreciation and amortization
(458
)
 
(40
)
 
(3
)
 
(4,150
)
 
(4,651
)
Impairment of trademark and goodwill
—

 
(11,350
)
 
—

 
—

 
(11,350
)
Operating (loss) / income
(10,746
)
 
18,747

 
26

 
(22,823
)
 
(14,796
)
Total Assets ***
13,230

 
43,451

 
894

 
60,717

 
118,292

2013
 
 
 
 
 
 
 
 
 
Revenues
$
68,073

 
$
41,776

 
$
3,421

 
$
—

 
$
113,270

Non–cash equity compensation **
(330
)
 
(181
)
 
(7
)
 
(863
)
 
(1,381
)
Depreciation and amortization
(729
)
 
(39
)
 
(26
)
 
(2,146
)
 
(2,940
)
Restructuring charges **
(140
)
 
(392
)
 
—

 
(143
)
 
(675
)
Gain on sale of subscriber list, net
2,724

 
—

 
—

 
—

 
2,724

Operating (loss) / income
(12,994
)
 
26,872

 
1,812

 
(23,447
)
 
(7,757
)
* Included in revenues is the pro rata recognition of non-cash revenue that resulted from the return of 11 million shares of the Company's Class A Common Stock from J.C. Penney in October 2013 pursuant to a contract amendment with J.C. Penney, which resulted in an initial increase to deferred revenue of $24.9 million that is recognized ratably as non-cash revenue through June 30, 2017. For the three and nine months ended September 30, 2014, these non-cash revenues totaled $1.7 million and $5.0 million, respectively.

14

** As disclosed on the Company's Consolidated Statements of Cash Flows, total non-cash equity compensation expense was $1.4 million during the nine months ended September 30, 2013. Included in non-cash equity compensation expense were net reversals of expense of approximately $0.03 million, which was generated in connection with restructuring activities. Accordingly, these amounts are reflected as restructuring charges in the Company's 2013 Consolidated Statements of Operations.
*** In accordance with ASC 280, Segment Reporting, total assets are disclosed as of September 30, 2014 in order to reflect the material change in the Merchandising segment’s intangible asset and goodwill from the amount disclosed as of December 31, 2013. See Note 6, Intangible Asset and Goodwill, for discussion of the impairment charges which reduced these asset values.
11. Other Information
Production, distribution and editorial expenses; selling and promotion expenses; and general and administrative expenses are each presented exclusive of depreciation and amortization, restructuring charges and gain on sale of subscriber list, net, which are disclosed separately on the Company's consolidated statements of operations. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.
12. Legal Matters
The Company is party to legal proceedings in the ordinary course of business, including product liability claims for which the Company is indemnified by its licensees. None of these proceedings is deemed material.
13. Subsequent Events
On October 14, 2014, the Company and Meredith Corporation entered into the Magazine, Content Creation and Licensing Agreement (the “MS Living Agreement”).
Pursuant to the MS Living Agreement, Meredith will assume responsibility for advertisement sales, circulation and production in the United States and Canada of the Martha Stewart Living magazine and host, operate, maintain, and provide advertisement sales and related functions for www.marthastewart.com, www.marthastewartweddings.com and MSLO’s related digital assets, including its vast video library. The Company will continue to create and provide all editorial content for Martha Stewart Living and www.marthastewart.com. Pursuant to the MS Living Agreement: (1) Meredith will pay the Company for content for Martha Stewart Living; (2) the Company will share in digital advertising revenues, including video advertising revenues, received by Meredith; and (3) Meredith will pay the Company a share of the operating profit from producing and distributing Martha Stewart Living.
Concurrently with the MS Living Agreement, the parties also entered into the Magazine Publishing Agreement (the “MS Weddings Agreement”), under which Meredith will assume responsibility for advertisement sales, circulation and production in the United States and Canada of the Martha Stewart Weddings magazine and related special publications, including Martha Stewart’s Real Weddings. The MS Weddings Agreement provides that Meredith will provide such services on a cost-plus basis.
The MS Living Agreement and the MS Weddings Agreement are each effective November 1, 2014 and Meredith will begin delivering editions starting with the February 2015 issue of Martha Stewart Living and the Winter 2015 issue of Martha Stewart Weddings.
During the three months ending December 31, 2014, the Company expects to incur restructuring charges, principally for severance, of approximately $2.0 million to $3.0 million.

15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-looking Statements and Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate,” “estimate,” “expect,” “intend,” “believe,” “continue,” “potential” or similar words or phrases and involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed in or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, each of which is described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2013 under the heading “Part I, Item IA. Risk Factors”:
•
the continued success of our brands and the reputation and popularity of Martha Stewart and Emeril Lagasse;
•
adverse reactions to publicity relating to Ms. Stewart or Mr. Lagasse by consumers, advertisers and business partners;
•
loss of the services of Ms. Stewart or Mr. Lagasse;
•
loss of key executives;
•
our ability to successfully implement our growth strategies;
•
our ability to develop new or expand existing merchandising and licensing programs or the loss or failure of existing programs, including as a result of financial instability of or disputes with our partners;
•
failure to predict, respond to and influence trends in consumer taste;
•
our inability to successfully and profitably develop or introduce new products and services;
•
our ability to effectively transition certain of our Publishing segment operations to Meredith Corporation, effective November 1, 2014;
•
softening of, or increased competition for, advertising revenues, including increased competitive pressure on digital display advertising rates as a result of programmatic buying of advertising inventory;
•
inability to successfully capitalize on digital, mobile and video initiatives, including establishing relationships with additional distribution partners;
•
our ability to drive and retain visitors to our digital platforms and to effectively monetize our digital platforms;
•
disruption in the industries in which our publishing and digital third-party vendors operate;
•
continued weak and uncertain worldwide economic conditions;
•
increases in paper, postage, freight or printing costs;
•
weakening in circulation, particularly in newsstand sales;
•
failure to protect our intellectual property; and
•
failure to realize expected efficiencies and benefits from our restructuring activities.
Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may occur and it is not possible for us to predict them all. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future development or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

16

EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and well-designed, high-quality products. We are organized into three business segments: Publishing; Merchandising; and Broadcasting.
Our strategy to generate growth and profitability includes the following imperatives:
•
Grow our merchandising business, both domestically and internationally, by leveraging our brand equity to diversify into new categories and distribution channels, and negotiate new partnerships that fully reward us for the value of our brands and our active role in product development and design; and
•
Strengthen our media business by using our content across existing and new distribution channels, including through Meredith Corporation, and other international opportunities.
Summarized below are our operating results for the three and nine months ended September 30, 2014 and 2013. 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
2014
(unaudited)
 
2013
(unaudited)
Total Revenues
$
29,611

 
$
33,848

 
$
100,499

 
$
113,270

Total Operating Costs and Expenses
(44,461
)
*
(37,924
)
 
(115,295
)
*
(123,751
)
Gain on Sale of Subscriber List, net
—

 
—

 
—

 
2,724

Total Operating Loss
$
(14,850
)
 
$
(4,076
)
 
$
(14,796
)
 
$
(7,757
)
* Merchandising segment operating costs and expenses included a non-cash intangible asset and goodwill impairment charge of $11.4 million.
We generate revenue from various sources such as advertising customers, magazine circulation and licensing partners. Publishing is our largest business segment, accounting for 57% of our total revenues for the nine months ended September 30, 2014. Publishing segment revenues are comprised of advertising sales, magazine subscriptions and newsstand sales of Martha Stewart Living, Martha Stewart Weddings and special weddings issues, as well as royalties from our book business. Publishing segment revenue also includes advertising revenue generated from our digital properties, primarily marthastewart.com, as well as revenue derived from the digital distribution of our video content. Merchandising segment revenues are generated from the licensing of our trademarks and designs for a variety of products sold at multiple price points through a wide range of distribution channels. Our retail partnerships include our programs at The Home Depot, Macy's, J.C. Penney and PetSmart. Our wholesale partnerships include Avery, through December 2014, for our Martha Stewart Home Office line (currently sold at Staples) and Wilton Properties, Plaid Enterprises and Orchard Yarn and Thread, Inc. (d/b/a Lion Brand Yarn) for our Martha Stewart Crafts program (currently sold at Michaels and other crafts stores), as well as with a variety of wholesale partnerships to produce products under the Emeril brand. Merchandising segment revenues are also derived from the licensing of talent services for television programming produced by or on behalf of third parties. Broadcasting segment revenues include our limited television production operations, television content library licensing and satellite radio operations.
We incur expenses primarily consisting of compensation and related charges across all segments. In addition, we incur expenses related to the physical costs associated with producing and distributing magazines, the editorial costs associated with creating content across our media platforms, the selling and promotion costs that support our advertising, marketing, circulation marketing and research efforts, the technology costs associated with our digital properties and the costs associated with producing and distributing our video programming. We also incur general overhead costs, including facilities and related expenses.
Subsequent to our fiscal quarter ended September 30, 2014, we entered into two agreements on October 14, 2014 with Meredith Corporation (“Meredith”), whereby Meredith will assume responsibility for advertisement sales, circulation and production in the United States and Canada of the Martha Stewart Living magazine, Martha Stewart Weddings and related special weddings magazines and will host, operate, maintain, and provide advertisement sales and related functions for www.marthastewart.com, www.marthastewartweddings.com and our related digital assets, including our vast video library. We will continue to create and provide all editorial content for these magazines and digital properties. The agreements are effective November 1, 2014 and Meredith will begin delivering editions starting with the February 2015 issue of Martha Stewart Living and the Winter 2015 issue of Martha Stewart Weddings. During the three months ending December 31, 2014, we expect to incur restructuring charges, principally for severance, of approximately $2.0 to $3.0 million.

17

Detailed segment operating results for the three and nine months ended September 30, 2014 and 2013 are summarized below:
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
2014
(unaudited)
 
2013
(unaudited)
Segment Revenues:
 
 
 
 
 
 
 
Publishing
$
15,781

 
$
19,401

 
$
57,516

 
$
68,073

Merchandising
13,691

 
14,153

 
41,494

 
41,776

Broadcasting
139

 
294

 
1,489

 
3,421

TOTAL REVENUES
29,611

 
33,848

 
100,499

 
113,270

Segment Operating Costs and Expenses:
 
 
 
 
 
 
 
Publishing
(22,027
)
 
(25,661
)
 
(68,262
)
 
(83,791
)
Merchandising *
(15,239
)
 
(4,674
)
 
(22,747
)
 
(14,904
)
Broadcasting
(175
)
 
(508
)
 
(1,463
)
 
(1,609
)
TOTAL OPERATING COSTS AND EXPENSES Before Corporate Expenses and Gain on Sale of Subscriber List, Net
(37,441
)
 
(30,843
)
 
(92,472
)
 
(100,304
)
Publishing - Gain on sale of subscriber list, net
—

 
—

 
—

 
2,724

Segment Operating Income / (Loss):
 
 
 
 
 
 
 
Publishing
(6,246
)
 
(6,260
)
 
(10,746
)
 
(12,994
)
Merchandising
(1,548
)
 
9,479

 
18,747

 
26,872

Broadcasting
(36
)
 
(214
)
 
26

 
1,812

Total Segment Operating Income Before Corporate Expenses
(7,830
)
 
3,005

 
8,027

 
15,690

Corporate Expenses **
(7,020
)
 
(7,081
)
 
(22,823
)
 
(23,447
)
TOTAL OPERATING LOSS
$
(14,850
)
 
$
(4,076
)
 
$
(14,796
)
 
$
(7,757
)
* Merchandising segment operating costs and expenses included a non-cash intangible asset and goodwill impairment charge of $11.4 million.
** Corporate expenses include unallocated costs of items such as compensation and related costs for certain departments, such as executive (including Martha Stewart, our Founder and Chief Creative Officer), finance, legal, human resources, corporate communications, office services and information technology, as well as allocated portions of rent and related expenses for these departments that reflect current utilization of office space. Unallocated Corporate expenses are directed and controlled by central management and not by our segment management, and therefore are not included as part of our segment operating performance.




18

Three months ended September 30, 2014 Operating Results Compared to Three Months ended September 30, 2013 Operating Results
For the three months ended September 30, 2014, total revenues decreased 13%, compared to the three months ended September 30, 2013, due to lower newsstand and subscription revenue, lower print advertising revenue and lower Merchandising segment royalty revenue, partially offset by higher digital advertising revenue.
During the three months ended September 30, 2014, our operating costs and expenses before Corporate expenses included a non-cash intangible asset and goodwill impairment charge of $11.4 million in the Merchandising segment related to the Emeril Lagasse business. Excluding this impairment charge, our operating costs and expenses before Corporate expenses decreased $4.8 million or 15% from the prior-year period, primarily due to lower production, distribution and editorial costs in our Publishing segment, which included lower physical costs associated with producing and distributing Martha Stewart Living, as well as savings from lower editorial headcount as a result of 2013 restructuring activities. Publishing segment costs also decreased from lower selling and promotion expenses. Additionally, Merchandising segment operating costs and expenses, excluding the non-cash impairment charge, were lower primarily from decreased compensation related costs.
Corporate expenses decreased 1% for the three months ended September 30, 2014, as compared to the prior-year period, due to general cost savings, partially offset by higher legal costs and higher non-cash equity compensation.
Nine months ended September 30, 2014 Operating Results Compared to Nine Months ended September 30, 2013 Operating Results
For the nine months ended September 30, 2014, total revenues decreased 11%, compared to the nine months ended September 30, 2013, primarily due to lower print advertising revenues, as well as lower newsstand and subscription revenues. A portion of the decrease in print advertising and circulation revenues was attributable to revenues earned during the nine months ended September 30, 2013 from the special interest publications, Cakes and Cupcakes and Martha Stewart Halloween, the final issue of Whole Living and several Everyday Food supplements, with no comparable revenue in the current-year period. In addition, total revenues decreased due to lower Broadcasting segment revenues.
During the nine months ended September 30, 2014, our operating costs and expenses before Corporate expenses included a non-cash intangible asset and goodwill impairment charge of $11.4 million in the Merchandising segment related to the Emeril Lagasse business. Excluding this impairment charge, our operating costs and expenses before Corporate expenses decreased $19.2 million or 19% from the prior-year period, primarily due to lower production, distribution and editorial costs in our Publishing segment, which included savings from the four print publications (Cakes and Cupcakes, Martha Stewart Halloween, Whole Living and Everyday Food supplements) that were not produced during the nine months ended September 30, 2014. Additionally, there were savings from lower editorial headcount as a result of 2013 restructuring activities, as well as lower physical costs associated with producing and distributing Martha Stewart Living. Publishing segment costs also decreased from lower selling and promotion expenses. Merchandising segment operating costs and expenses, excluding the non-cash impairment charge, were also lower primarily from decreased compensation related costs.
The nine months ended September 30, 2013 included the net gain on the sale of the Whole Living subscriber list of $2.7 million, with no comparable gain in the current-year period.
Corporate expenses decreased 3% for the nine months ended September 30, 2014, as compared to the prior-year period, due to lower legal fees and general cost savings, partially offset by an increase of $2.0 million in depreciation and amortization expense. The increase in depreciation and amortization was the result of the non-recurring accelerated amortization of leasehold improvements related to vacating 21% of our primary office space during February 2014. The company-wide decrease in rent expense attributable to this office consolidation was allocated to our business segments based on current utilization of office space.
Liquidity
During the nine months ended September 30, 2014, our overall cash, cash equivalents and short-term investments increased $6.9 million from December 31, 2013. The increase was primarily due to the collection of receivables from royalties and advertising. Cash, cash equivalents and short-term investments were $53.1 million and $46.2 million as of September 30, 2014 and December 31, 2013, respectively.




19

Comparison of the three months ended September 30, 2014 to the three months ended September 30, 2013
PUBLISHING SEGMENT
  
Three months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
Publishing Segment Revenues
 
 
 
 
 
Print advertising
$
6,650

 
$
8,769

 
$
(2,119
)
Digital advertising
4,789

 
3,852

 
937

Circulation
4,131

 
6,519

 
(2,388
)
Books
23

 
88

 
(65
)
Other
188

 
173

 
15

Total Publishing Segment Revenues
15,781

 
19,401

 
(3,620
)
 
 
 
 
 
 
Production, distribution and editorial
(12,004
)
 
(13,886
)
 
1,882

Selling and promotion
(8,498
)
 
(9,901
)
 
1,403

General and administrative
(1,390
)
 
(1,674
)
 
284

Depreciation and amortization
(135
)
 
(200
)
 
65

Publishing Segment Operating Loss
$
(6,246
)
 
$
(6,260
)
 
$
14

Publishing segment revenues decreased 19% for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Print advertising revenue decreased $2.1 million primarily due to fewer advertising pages sold for Martha Stewart Living and Martha Stewart Weddings. Digital advertising revenue increased $0.9 million due to higher display advertising units sold partially offset by lower display advertising rates. Circulation revenue declined $2.4 million due to prior-year period newsstand revenue from the special interest publication, Martha Stewart Halloween, with no comparable revenues during the three months ended September 30, 2014. In addition, subscription revenue from Martha Stewart Living decreased due to an average lower rate per copy.
Production, distribution and editorial expenses decreased $1.9 million primarily due to lower physical costs associated with producing and distributing Martha Stewart Living from fewer advertising and editorial pages. In addition, editorial expenses decreased as a result of lower editorial headcount from 2013 restructuring activities. The prior-year period also included physical costs associated with the special interest publication, Martha Stewart Halloween, with no comparable costs during the three months ended September 30, 2014. Selling and promotion expenses decreased $1.4 million primarily due to lower advertising sales and marketing headcount and lower commissions on decreased advertising revenues. In addition, the prior-year period included expenses associated with the advertising and marketing event, American Made by Martha Stewart; whereas expenses related to the current-year event are expected to be incurred primarily during the three months ended December 31, 2014. Selling and promotion expenses also decreased from lower newsstand marketing expenses associated with Martha Stewart Living. These decreases in selling and promotion expenses were partially offset by higher subscriber acquisition costs for Martha Stewart Living and higher costs associated with the increased utilization of third parties to generate digital revenues. The decrease in general and administrative expenses included $0.3 million from lower allocated rent expense, which was offset by an increase in our Corporate rent allocation to reflect current utilization of office space.

20

MERCHANDISING SEGMENT
 
Three months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
Merchandising Segment Revenues
 
 
 
 
 
Royalty and other
$
13,691

 
$
14,153

 
$
(462
)
Total Merchandising Segment Revenues
13,691

 
14,153

 
(462
)
 
 
 
 
 
 
Production, distribution and editorial
(1,856
)
 
(2,211
)
 
355

Selling and promotion
(550
)
 
(498
)
 
(52
)
General and administrative
(1,472
)
 
(1,953
)
 
481

Depreciation and amortization
(11
)
 
(12
)
 
1

Impairment of trademark and goodwill
(11,350
)
 
—

 
(11,350
)
Merchandising Segment Operating (Loss) / Income
$
(1,548
)
 
$
9,479

 
$
(11,027
)
Merchandising segment revenues decreased 3% for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, due to: lower royalties from J.C. Penney reflecting fewer licensed categories sold at J.C. Penney; the impact of transitioning our Martha Stewart Pets line from Age Group to a direct license relationship with PetSmart; the impact of certain expired partnerships including our home office product line with Avery; lower sales at The Home Depot; and the timing of revenues related to television talent services provided by Emeril Lagasse. These revenue declines were partially offset by the pro rata recognition of non-cash revenue that resulted from the return of 11 million shares of our Class A Common Stock from J.C. Penney, with no comparable revenue during the three months ended September 30, 2013. The return of those shares was the result of the October 21, 2013 amendment with J.C. Penney, which resulted in an initial increase to deferred revenue of approximately $25 million that will be recognized ratably as non-cash revenue through June 30, 2017. In addition, the current-year period included higher revenues related to television talent services provided by Martha Stewart.
Production, distribution and editorial expenses decreased $0.4 million primarily due to a decrease in compensation related costs from a reduction of headcount. General and administrative expenses decreased $0.5 million due to a charge recorded in the prior-year period of $0.4 million related to certain Macy's royalties, with no comparable expense during the three months ended September 30, 2014. General and administrative expenses also decreased $0.1 million from lower allocated rent expense that was offset by an increase in our Corporate rent allocation to reflect current utilization of office space. During the three months ended September 30, 2014, we performed an interim review of our indefinite-lived intangible asset and goodwill associated with the Emeril Lagasse business. As a result, we recorded an aggregate non-cash impairment charge of $11.4 million to write down the value of these assets to its fair value. For further details on this intangible asset and goodwill impairment charge, see the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, specifically Note 6, Intangible Asset and Goodwill.

21

BROADCASTING SEGMENT
 
Three months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
Broadcasting Segment Revenues
 
 
 
 
 
Advertising
$
40

 
$
49

 
$
(9
)
Licensing and other
99

 
245

 
(146
)
Total Broadcasting Segment Revenues
139

 
294

 
(155
)
 
 
 
 
 
 
Production, distribution and editorial
(128
)
 
(482
)
 
354

Selling and promotion
(33
)
 
(2
)
 
(31
)
General and administrative
(13
)
 
(23
)
 
10

Depreciation and amortization
(1
)
 
(1
)
 
—

Broadcasting Segment Operating Loss
$
(36
)
 
$
(214
)
 
$
178

Broadcasting segment revenues decreased $0.2 million for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, due to lower radio licensing fees from Sirius XM and lower international television licensing revenue.
Broadcasting segment expenses decreased $0.3 million due to production expenses in the prior-year period, with no comparable costs during the three months ended September 30, 2014, as well as lower distribution costs associated with our television programming on PBS.

22

CORPORATE
 
Three months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
General and administrative
$
(6,384
)
 
$
(6,447
)
 
$
63

Depreciation and amortization
(636
)
 
(634
)
 
(2
)
Corporate Operating Costs and Expenses
$
(7,020
)
 
$
(7,081
)
 
$
61

Corporate operating costs and expenses decreased 1% for the three months ended September 30, 2014, compared to the three months ended September 30, 2013, due to a decrease in general and administrative expenses of $0.1 million from general cost savings, partially offset by higher legal costs and higher non-cash equity compensation. Total company-wide rent expense decreased $0.4 million due to savings from vacating approximately 21% of our primary office space in February 2014. However, for Corporate, these rent savings were offset by $0.4 million in higher allocated rent expense to Corporate from the reallocation of rent charged to reflect current utilization of office space. The increase in rent allocated to Corporate was offset by a decrease in our Publishing and Merchandising segment rent allocation, as discussed above.

OTHER ITEMS
Income tax benefit / (expense). The three months ended September 30, 2014 included a net tax benefit that resulted from the non-cash impairment of an indefinite-lived intangible asset and goodwill in our Merchandising segment associated with the Emeril Lagasse business.
Net Loss. Net loss was $(11.1) million for the three months ended September 30, 2014, compared to $(4.3) million for the three months ended September 30, 2013, as a result of the factors described above.


23

Comparison of the nine months ended September 30, 2014 to the nine months ended September 30, 2013
PUBLISHING SEGMENT
  
Nine months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
Publishing Segment Revenues
 
 
 
 
 
Print advertising
$
25,594

 
$
31,646

 
$
(6,052
)
Digital advertising
13,882

 
14,019

 
(137
)
Circulation
16,735

 
20,874

 
(4,139
)
Books
602

 
920

 
(318
)
Other
703

 
614

 
89

Total Publishing Segment Revenues
57,516

 
68,073

 
(10,557
)
 
 
 
 
 
 
Production, distribution and editorial
(38,016
)
 
(47,109
)
 
9,093

Selling and promotion
(25,766
)
 
(30,736
)
 
4,970

General and administrative
(4,022
)
 
(5,077
)
 
1,055

Depreciation and amortization
(458
)
 
(729
)
 
271

Restructuring charges
—

 
(140
)
 
140

Gain on sale of subscriber list, net
—

 
2,724

 
(2,724
)
Publishing Segment Operating Loss
$
(10,746
)
 
$
(12,994
)
 
$
2,248

Publishing segment revenues decreased 16% for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, primarily due to a decrease in print advertising revenue of $6.1 million from fewer advertising pages sold at lower rates for both Martha Stewart Living and Martha Stewart Weddings. In addition, the nine months ended September 30, 2013 included $0.9 million of advertising revenue from the final issue of Whole Living and several Everyday Food supplements, with no comparable revenue in the current-year period. Digital advertising revenue was flat for the nine months ended September 30, 2014 as compared to the prior-year period due to higher display advertising units sold offset by lower display advertising rates. Circulation revenue decreased $4.1 million primarily due to $2.1 million of prior-year period newsstand revenue from the special interest publications, Cakes and Cupcakes and Martha Stewart Halloween, and newsstand and subscription revenues from the final issue of Whole Living, with no comparable revenues during the nine months ended September 30, 2014. In addition, subscription revenue from Martha Stewart Living decreased due to an average lower rate per copy. Royalties from Martha Stewart books from our multi-book agreement with The Crown Publishing Group (Clarkson Potter) decreased $0.3 million due to the delivery of a high-value manuscript during the nine months ended September 30, 2013, with no similar manuscript delivery in the current-year period. The decrease in books revenue was partially offset by a non-recurring benefit during the nine months ended September 30, 2014 from the early termination of our agreement with HarperCollins Publishers related to Emeril Lagasse branded books, which arrangement has been replaced with Time Home Entertainment.
Production, distribution and editorial expenses decreased $9.1 million primarily due to $2.6 million in costs in the prior-year period related to the special interest publications, Cakes and Cupcakes and Martha Stewart Halloween, as well as several Everyday Food supplements and the final issue of Whole Living, with no comparable expenses during the nine months ended September 30, 2014. Physical magazine costs associated with producing and distributing Martha Stewart Living were also lower during the current-year period due to fewer advertising and editorial pages. In addition, editorial expenses decreased as a result of lower editorial headcount from 2013 restructuring activities. Selling and promotion expenses decreased $5.0 million primarily due to lower advertising sales and marketing headcount and lower commissions on decreased advertising revenues. In addition, the prior-year period included expenses associated with the advertising and marketing event, American Made by Martha Stewart, whereas expenses related to the current-year event are expected to be incurred primarily during the three months ended December 31, 2014. Selling and promotion expenses also decreased from lower newsstand marketing expenses associated with Martha Stewart Living. These decreases in selling and promotion expenses were partially offset by higher subscriber acquisition costs for Martha Stewart Living and higher costs associated with the increased utilization of third parties to generate digital revenues. General and administrative expenses decreased $1.1 million primarily due to lower allocated rent expense of $0.9 million, which was offset by an increase in our Corporate rent allocation to reflect current utilization of office space.

24

During the nine months ended September 30, 2013, we sold our Whole Living subscriber list for an aggregate net gain of $2.7 million, with no comparable gain in the current-year period. Pursuant to this sale, the subscription contracts for the print and digital editions of Whole Living, as well as the rights and benefits of the subscribers, were transferred to the buyer in exchange for cash. As a result of selling the Whole Living subscriber list, and thus transferring the subscription liability fulfillment obligation to the buyer, we also recognized the remaining deferred subscription revenue.

MERCHANDISING SEGMENT
 
Nine months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
Merchandising Segment Revenues
 
 
 
 
 
Royalty and other
$
41,494

 
$
41,776

 
$
(282
)
Total Merchandising Segment Revenues
41,494

 
41,776

 
(282
)
 
 
 
 
 
 
Production, distribution and editorial
(5,432
)
 
(7,737
)
 
2,305

Selling and promotion
(1,403
)
 
(1,592
)
 
189

General and administrative
(4,522
)
 
(5,144
)
 
622

Depreciation and amortization
(40
)
 
(39
)
 
(1
)
Impairment of trademark and goodwill
(11,350
)
 
—

 
(11,350
)
Restructuring charges
—

 
(392
)
 
392

Merchandising Segment Operating Income
$
18,747

 
$
26,872

 
$
(8,125
)
Merchandising segment revenues decreased less than 1% for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013, due to: lower royalties and design fees from J.C. Penney reflecting fewer licensed categories sold at J.C. Penney; the impact of certain expired partnerships including our home office product line with Avery; lower sales at The Home Depot; the impact of transitioning our Martha Stewart Pets line from Age Group to a direct license relationship with PetSmart; and lower royalties related to our Emeril Lagasse brand. These revenue declines were partially offset by the pro rata recognition of non-cash revenue of $5.0 million that resulted from the return of 11 million shares of our Class A Common Stock from J.C. Penney, with no comparable revenue during the nine months ended September 30, 2013. The return of those shares was the result of the October 21, 2013 amendment with J.C. Penney, which resulted in an initial increase to deferred revenue of approximately $25 million that will be recognized ratably as non-cash revenue through June 30, 2017. In addition, the current-year period included higher revenues related to television talent services provided by Martha Stewart.
Production, distribution and editorial expenses decreased $2.3 million primarily due to a decrease in compensation related costs, including the reduction of employees who had supported the J.C. Penney design efforts in the prior-year period. General and administrative expenses decreased $0.6 million due to a charge recorded in the prior-year period of $0.4 million related to certain Macy's royalties, with no comparable expense during the nine months ended September 30, 2014. General and administrative expenses also decreased $0.2 million from lower allocated rent expense that was offset by an increase in our Corporate rent allocation to reflect current utilization of office space. During the nine months ended September 30, 2014, we performed an interim review of our indefinite-lived intangible asset and goodwill associated with the Emeril Lagasse business. As a result, we recorded an aggregate non-cash impairment charge of $11.4 million to write down the value of these assets to its fair value. For further details on this intangible asset and goodwill impairment charge, see the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, specifically Note 6, Intangible Asset and Goodwill. Additionally, during the nine months ended September 30, 2013, we incurred restructuring charges of $0.4 million that represented employee severance costs.



25

BROADCASTING SEGMENT
 
Nine months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
Broadcasting Segment Revenues
 
 
 
 
 
Advertising
$
916

 
$
1,728

 
$
(812
)
Licensing and other
573

 
1,693

 
(1,120
)
Total Broadcasting Segment Revenues
1,489

 
3,421

 
(1,932
)
 
 
 
 
 
 
Production, distribution and editorial
(1,249
)
 
(1,486
)
 
237

Selling and promotion
(174
)
 
(20
)
 
(154
)
General and administrative
(37
)
 
(77
)
 
40

Depreciation and amortization
(3
)
 
(26
)
 
23

Broadcasting Segment Operating Income
$
26

 
$
1,812

 
$
(1,786
)
Broadcasting segment revenues decreased $1.9 million for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013. Advertising revenue decreased $0.8 million due to lower fees earned from sponsorship revenue related to the third seasons of Martha Stewart's Cooking School and Martha Bakes on PBS with lower rates, as compared to the second seasons of those shows on PBS in the prior-year period. Licensing and other revenue decreased $1.1 million primarily due to the inclusion in the prior-year period of cable retransmission royalties associated with the historical distribution rights to air The Martha Stewart Show, and lower international television licensing revenue for the nine months ended September 30, 2014, as compared to the prior-year period.
Production, distribution and editorial expenses decreased $0.2 million primarily due to lower distribution costs associated with our television programming on PBS and our lower international distribution costs. Selling and promotion expenses increased $0.2 million due to the inclusion of headcount to support advertising sales efforts.


26

CORPORATE
 
Nine months ended September 30,
 
 
(in thousands)
2014
(unaudited)
 
2013
(unaudited)
 
Better /
(Worse)
General and administrative
$
(18,673
)
 
$
(21,158
)
 
$
2,485

Depreciation and amortization
(4,150
)
 
(2,146
)
 
(2,004
)
Restructuring charges
—

 
(143
)
 
143

Corporate Operating Costs and Expenses
$
(22,823
)
 
$
(23,447
)
 
$
624

Corporate operating costs and expenses decreased 3% for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013. General and administrative expenses decreased $2.5 million primarily due to lower legal and related fees and general cost savings. The prior-year period included costs related to the then ongoing litigation with Macy's. Total company-wide rent expense decreased $1.1 million due to savings from vacating approximately 21% of our primary office space in February 2014. However, for Corporate, these rent savings were offset by $1.1 million in higher allocated rent expense to Corporate from the reallocation of rent charged to reflect current utilization of office space. The increase in rent allocated to Corporate was offset by a decrease in our Publishing and Merchandising segment rent allocation, as discussed above. Depreciation and amortization increased $2.0 million due to the non-recurring accelerated amortization of leasehold improvements related to vacating 21% of our primary office space.

OTHER ITEMS
Income tax benefit/(provision). The nine months ended September 30, 2014 included a net tax benefit that resulted from the non-cash impairment of an indefinite-lived intangible asset and goodwill in our Merchandising segment associated with the Emeril Lagasse business. In addition, there was a non-recurring tax benefit to revalue deferred tax liabilities as a result of the change in the state rate for which deferred taxes are measured.
Net loss. Net loss was $(11.9) million for the nine months ended September 30, 2014, compared to $(8.7) million for the nine months ended September 30, 2013, as a result of the factors described above.

27

Liquidity and Capital Resources
Overview
During the nine months ended September 30, 2014, our overall cash, cash equivalents and short-term investments increased $6.9 million from December 31, 2013. The increase was primarily due to the collection of receivables from royalties and advertising. Cash, cash equivalents and short-term investments were $53.1 million and $46.2 million as of September 30, 2014 and December 31, 2013, respectively.
On May 19, 2014, we entered into an Amendment to the Amended and Restated Loan Agreement between the Company and Bank of America, N.A., dated February 14, 2012, (the "Amended Credit Agreement"), which provided for the continued arrangement for a line of credit with Bank of America, N.A. of $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. As of September 30, 2014, we had no borrowings against our line of credit. We believe that our available cash and cash equivalent balances and short-term investments, along with our line of credit, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months.
Cash Flows from Operating Activities
Our cash inflows from operating activities are generated by our business segments from revenues, as described previously, which include cash from advertising and magazine customers and licensing partners. Operating cash outflows generally include: employee and related costs; physical costs associated with producing and distributing magazines; editorial costs associated with creating content across our media platforms; selling and promotion costs that support our advertising, marketing, circulation marketing and research efforts; technology costs associated with our digital properties; costs associated with producing and distributing our video programming; and costs of facilities.
Cash provided by / (used in) operating activities was $7.5 million and $(7.3) million for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, we collected $19.2 million in cash from receivables outstanding as of December 31, 2013 related to royalties and advertising. In addition, our net loss of $(11.9) million for the nine months ended September 30, 2014 included non-cash charges, net of non-cash revenue, of $9.9 million, including the non-cash intangible asset and goodwill impairment charge in our Merchandising segment associated with the Emeril Lagasse business, as well as the non-recurring accelerated amortization of leasehold improvements related to vacating 21% of our primary office space. Cash provided by operating activities was partially offset by $4.7 million of cash used to pay certain payroll and related liabilities, including severance payments, which were expensed during 2013. In addition, we recognized $5.9 million of certain royalty, subscription and advertising revenues during the nine months ended September 30, 2014, which had been collected as of December 31, 2013.
Cash Flows from Investing Activities
Our cash inflows from investing activities generally include proceeds from the sale of short-term investments. Investing cash outflows generally include purchases of short-term investments and additions to property and equipment.
Cash (used in) / provided by investing activities was $(24.9) million and $2.7 million for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, cash used in investing activities primarily consisted of net purchases of short-term investments. We also used $0.6 million in cash for incremental capital improvements to our information technology infrastructure and to our corporate office space.
Cash Flows from Financing Activities
Cash flows provided by / (used in) financing activities were $1.2 million and $(0.9) million for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, cash provided by financing activities represented proceeds from the exercise of stock options for our Class A Common Stock issued under our equity incentive plans. Additionally, in connection with the Amended Credit Agreement, we are no longer obligated to secure our line of credit with cash or investment collateral and therefore released the restricted cash and investments that had been presented as a component of current assets on the consolidated balance sheets. Partially offsetting the cash provided by financing activities was cash used to pay employee tax obligations in connection with vesting of employee restricted stock unit awards.
Debt
Borrowings under our $5.0 million line of credit, pursuant to the Amended Credit Agreement, are available for investment opportunities, working capital, and the issuance of letters of credit. The annual interest rate on outstanding amounts is equal to a floating rate of 1-month LIBOR Daily Floating Rate plus 1.85%. The annual unused commitment fee is equal to 0.25%.

28

Prior to the Amended Credit Agreement, our line of credit had been obligated to be secured by cash or investment collateral of at least $5.0 million. Accordingly, we maintained restricted investments of $4.5 million and restricted cash of $0.6 million as of December 31, 2013. The aggregate of these amounts was included in the line item "Restricted cash and investments," a component of current assets, on the consolidated balance sheets as of December 31, 2013.
Pursuant to the Amended Credit Agreement, the line of credit is no longer secured by cash or investment collateral; instead we must maintain unencumbered liquid assets having an aggregate market value of not less than 100% of any outstanding principal amounts, in addition to the aggregate standby letters of credit issued, under the facility.
The Amended Credit Agreement expires on June 30, 2015, at which time outstanding amounts borrowed under the agreement, if any, become due and payable. As of September 30, 2014 and December 31, 2013, the Company had no outstanding borrowings against its line of credit, but had outstanding letters of credit of $1.0 million and $1.6 million, respectively.
Seasonality and Quarterly Fluctuations
Our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules (see chart below) and seasonality of certain types of advertising. In addition, advertising revenue on marthastewart.com and our other websites is tied to traffic, among other key factors, and is typically highest in the fourth quarter of the year and during national and religious holiday periods. Certain newsstand costs vary from quarter to quarter, particularly newsstand display marketing costs associated with the distribution of our magazines. These costs typically have a three-year life cycle, but the initial expenses can vary significantly. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to changes in product mix, new product launches and the seasonal performance of certain product lines.
 
  
First Quarter
  
Second Quarter
  
Third Quarter
2014 Magazine Publication Schedule:
  
 
  
 
  
 
Martha Stewart Living
  
3 Issues
  
3 Issues
  
2 Issues
Martha Stewart Weddings
  
1 Issue
  
1 Issue
  
1 Issue
Special Interest Publications *
  
—
  
1 Issue
  
—
 
 
 
 
2013 Magazine Publication Schedule:
  
 
  
 
  
 
Martha Stewart Living
  
3 Issues
  
3 Issues
  
2 Issues
Martha Stewart Weddings
  
1 Issue
  
1 Issue
  
1 Issue
Whole Living **
  
1 Issue
  
—
  
—
Special Interest Publications ***
  
1 Issue
  
1 Issue
  
1 Issue
* Special Interest Publications for the nine months ended September 30, 2014 consisted of one special weddings issue.
** Whole Living was discontinued after the January/February 2013 issue.
*** Special Interest Publications for the nine months ended September 30, 2013 consisted of Cakes and Cupcakes, one special weddings issue and Martha Stewart Halloween.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
General
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in our 2013 Form 10-K. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made. Changes in these estimates or different estimates could have a material effect on our results of operations. These critical estimates include those related to revenue recognition, allowance for doubtful accounts and sales returns, valuation of long-lived assets, goodwill and other intangible assets, income taxes, and non-cash equity compensation. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.

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Our critical accounting policies and estimates are discussed in detail in the 2013 Form 10-K, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” especially under the heading, “Critical Accounting Policies and Estimates.” With respect to critical accounting policies and estimates for goodwill and indefinite-lived intangible assets, during the three months ended September 30, 2014, we performed an interim review of the indefinite-lived intangible asset and goodwill in our Merchandising segment associated with the Emeril Lagasse business. As a result, during the three and nine months ended September 30, 2014, the Company recorded an aggregate non-cash impairment charge of $11.4 million to write down the value of these assets to their fair value. Significant judgments inherent in the interim review included estimating the amount of, and timing of, future cash flows and the selection of appropriate discount rates and long-term growth rate assumptions. Our estimates, which were Level 3 unobservable inputs, were based on historical results and current economic and market trends, which drive key assumptions of revenue growth rates and operating margins, and therefore, are subject to uncertainty. Although we considered all current information in calculating the amount of the impairment charge, future changes in events or circumstances could result in further decreases in the fair value of its indefinite-lived intangible asset. If actual results differ from our estimate of future cash flows, revenues, earnings and other factors, we may record additional impairment charges in the future. See Note 6, Intangible Asset and Goodwill, for further information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to our market rate risk for changes in interest rates, as those rates relate to our investment portfolio, from our market risk previously disclosed in our 2013 Form 10-K, under the heading Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk.”
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of that date to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have determined that, during the third quarter of fiscal 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are party to legal proceedings in the ordinary course of business, including product liability claims for which we are indemnified by our licensees. None of these proceedings is deemed material.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors as previously disclosed in our 2013 Form 10-K, under the heading Part I, Item 1A, “Risk Factors.”
ITEM 6. EXHIBITS.
 
 
 
Exhibit
Number
  
Exhibit Title
 
 
31.1
  
Certification of Principal Executive Officer
 
 
31.2
  
Certification of Principal Financial Officer
 
 
32
  
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
 
 
101.INS
  
XBRL Instance Document
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document


31

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:
 
October 31, 2014
 
 
 
 
/s/ Kenneth P. West
Name:
 
Kenneth P. West
Title:
 
Chief Financial Officer
 
 
(Principal Financial Officer and
duly authorized officer)

32

EXHIBIT INDEX
 
 
 
 
Exhibit
Number
  
Exhibit Title
 
 
31.1
  
Certification of Principal Executive Officer
 
 
31.2
  
Certification of Principal Financial Officer
 
 
32
  
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
 
 
101.INS
  
XBRL Instance Document
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

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MARTHA STEWART LIVING OMNIMEDIA INC Reports