MARTHA STEWART LIVING OMNIMEDIA INC - FORM 10-Q - October 29, 2013

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EX-31.1 - EXHIBIT - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - MARTHA STEWART LIVING OMNIMEDIA INCmso-9302013ex311.htm
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EX-32 - EXHIBIT - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER & CHIEF FINANCIAL OFFICER - MARTHA STEWART LIVING OMNIMEDIA INCmso-9302013ex32.htm

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, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 001-15395 
MARTHA STEWART LIVING OMNIMEDIA, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
52-2187059
(State or other jurisdiction of
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 25, 2013
Class A, $0.01 par value
30,549,627

Class B, $0.01 par value
25,984,625

Total
56,534,252



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, 2013 (unaudited)
 
December 31, 2012
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
14,479

 
$
19,925

Short-term investments
21,265

 
29,182

Restricted cash and investments
5,009

 
—

Accounts receivable, net
28,646

 
38,073

Paper inventory
3,593

 
4,580

Deferred television production costs
150

 
434

Other current assets
3,810

 
3,335

Total current assets
76,952

 
95,529

PROPERTY AND EQUIPMENT, net
8,594

 
10,738

GOODWILL
850

 
850

OTHER INTANGIBLE ASSETS, net
45,200

 
45,203

OTHER NONCURRENT ASSETS, net
1,637

 
1,940

Total assets
$
133,233

 
$
154,260

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
12,849

 
$
12,770

Accrued payroll and related costs
4,856

 
9,316

Current portion of deferred subscription revenue
7,310

 
13,168

Current portion of other deferred revenue
4,590

 
5,605

Total current liabilities
29,605

 
40,859

DEFERRED SUBSCRIPTION REVENUE
3,193

 
4,478

OTHER DEFERRED REVENUE
—

 
1,113

DEFERRED INCOME TAX LIABILITY
8,042

 
7,117

OTHER NONCURRENT LIABILITIES
4,628

 
5,177

Total liabilities
45,468

 
58,744

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY
 
 
 
Series A Preferred Stock, 1 share issued and outstanding in 2013 and 2012
—

 
—

Class A Common Stock, $0.01 par value, 350,000,000 shares authorized; 41,599,948 and 41,220,689 shares issued in 2013 and 2012, respectively; 41,540,548 and 41,161,289 shares outstanding in 2013 and 2012, respectively
416

 
412

Class B Common Stock, $0.01 par value, 150,000,000 shares authorized; 25,984,625 shares issued and outstanding in 2013 and 2012
260

 
260

Capital in excess of par value
341,555

 
340,586

Accumulated deficit
(253,277
)
 
(244,529
)
Accumulated other comprehensive loss
(414
)
 
(438
)
 
88,540

 
96,291

Less: Class A treasury stock – 59,400 shares at cost
(775
)
 
(775
)
Total shareholders’ equity
87,765

 
95,516

Total liabilities and shareholders’ equity
$
133,233

 
$
154,260

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,
 
2013
 
2012
 
2013
 
2012
REVENUES
 
 
 
 
 
 
 
Publishing
$
19,401

 
$
27,572

 
$
68,073

 
$
87,208

Merchandising
14,153

 
13,233

 
41,776

 
41,355

Broadcasting
294

 
2,744

 
3,421

 
12,701

Total revenues
33,848

 
43,549

 
113,270

 
141,264

Production, distribution and editorial
(16,579
)
 
(24,487
)
 
(56,332
)
 
(78,877
)
Selling and promotion
(10,401
)
 
(13,028
)
 
(32,348
)
 
(37,954
)
General and administrative
(10,097
)
 
(10,972
)
 
(31,456
)
 
(33,636
)
Depreciation and amortization
(847
)
 
(1,003
)
 
(2,940
)
 
(3,028
)
Restructuring charges
—

 
(491
)
 
(675
)
 
(1,268
)
Goodwill impairment
—

 
(44,257
)
 
—

 
(44,257
)
Gain on sale of subscriber list, net
—

 
—

 
2,724

 
—

OPERATING LOSS
(4,076
)
 
(50,689
)
 
(7,757
)
 
(57,756
)
Interest income, net
194

 
327

 
571

 
908

Other (expense) / income, net
(76
)
 
(106
)
 
(486
)
 
862

LOSS BEFORE INCOME TAXES
(3,958
)
 
(50,468
)
 
(7,672
)
 
(55,986
)
Income tax provision
(337
)
 
(410
)
 
(1,076
)
 
(1,209
)
NET LOSS
$
(4,295
)
 
$
(50,878
)
 
$
(8,748
)
 
$
(57,195
)
LOSS PER SHARE – BASIC AND DILUTED
 
 
 
 
 
 
 
Net loss
$
(0.06
)
 
$
(0.76
)
 
$
(0.13
)
 
$
(0.85
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic and diluted
67,490,820

 
67,271,211

 
67,366,285

 
67,198,281

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,
 
2013
 
2012
 
2013
 
2012
Net loss
$
(4,295
)
 
$
(50,878
)
 
$
(8,748
)
 
$
(57,195
)
Other comprehensive (loss) / income:
 
 
 
 
 
 
 
Unrealized (loss) / gain on securities
(48
)
 
(34
)
 
24

 
(220
)
Other comprehensive (loss) / income
(48
)
 
(34
)
 
24

 
(220
)
Total comprehensive loss
$
(4,343
)
 
$
(50,912
)
 
$
(8,724
)
 
$
(57,415
)
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, 2013
(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, 2012
41,221

 
$
412

 
25,985

 
$
260

 
$
340,586

 
$
(244,529
)
 
$
(438
)
 
(59
)
 
$
(775
)
 
$
95,516

Net loss
—

 
—

 
—

 
—

 
—

 
(8,748
)
 
—

 
—

 
—

 
(8,748
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
24

 
—

 
—

 
24

Issuance of shares of stock in conjunction with stock option exercises
31

 
—

 
 
 
 
 
60

 
—

 
—

 
—

 
—

 
60

Issuance of shares of stock and restricted stock, net of cancellations and tax withholdings
348

 
4

 
—

 
—

 
(447
)
 
—

 
—

 
—

 
—

 
(443
)
Non-cash equity compensation
—

 
—

 
—

 
—

 
1,356

 
—

 
—

 
—

 
—

 
1,356

Balance at September 30, 2013
41,600

 
$
416

 
25,985

 
$
260

 
$
341,555

 
$
(253,277
)
 
$
(414
)
 
(59
)
 
$
(775
)
 
$
87,765

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,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(8,748
)
 
$
(57,195
)
Adjustments to reconcile net loss to net cash (used in) / provided by operating activities:
 
 
 
Non-cash revenue
(403
)
 
(405
)
Depreciation and amortization
2,940

 
3,028

Amortization of deferred television production costs
457

 
6,870

Goodwill impairment
—

 
44,257

Non-cash equity compensation
1,356

 
3,118

Deferred income tax expense
925

 
932

Gain on sales of cost-based investments
—

 
(1,165
)
Gain on sale of subscriber list, net
(2,724
)
 
—

Other-than-temporary loss on cost-based investment
—

 
88

Other non-cash charges, net
(397
)
 
130

Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
9,427

 
17,993

Paper inventory
851

 
3,190

Deferred television production costs
(173
)
 
(7,804
)
Accounts payable and accrued liabilities and other
195

 
(5,202
)
Accrued payroll and related costs
(4,460
)
 
(2,293
)
Deferred subscription revenue
(4,956
)
 
(3,603
)
Deferred revenue
(1,725
)
 
980

Other changes
(283
)
 
(462
)
Total changes in operating assets and liabilities
(1,124
)
 
2,799

Net cash (used in) / provided by operating activities
(7,718
)
 
2,457

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(908
)
 
(1,217
)
Purchases of short-term investments
(16,353
)
 
(36,182
)
Sales of short-term investments
19,270

 
12,587

Proceeds from the sales of cost-based investments
—

 
1,165

Proceeds from the sale of subscriber list, net
673

 
—

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

 
(23,647
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds received from stock option exercises
60

 
153

Change in restricted cash
(470
)
 
—

Dividends paid
—

 
(2
)
Net cash (used in) / provided by financing activities
(410
)
 
151

Net decrease in cash
(5,446
)
 
(21,039
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
19,925

 
38,453

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
14,479

 
$
17,414

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, 2012 (the “2012 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 February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, "Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” ("ASU 2013-02") which supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income" and 2011-12 "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" for all public organizations. The amendment requires an entity to provide additional information about reclassifications out of accumulated other comprehensive income. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. The adoption of ASU 2013-02 concerns disclosure only and the Company does not expect ASU 2013-02 to have an impact on its consolidated financial position, results of operations or cash flows. The Company adopted ASU 2013-02 on January 1, 2013 and has elected to present the required disclosures in the Notes to Consolidated Financial Statements, specifically Note 4, Accumulated Other Comprehensive Loss, in this Quarterly Report on Form 10-Q.
In July 2012, the FASB issued ASU 2012-02, "Intangibles - Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"), which amended Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other" ("ASC 350"). This amendment is intended to simplify how an entity tests indefinite-lived intangible assets for impairment and allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity no longer is required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not the indefinite-lived intangible asset is impaired. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2012-02 was effective for the Company beginning January 1, 2013. The adoption of ASU 2012-02 did not have an impact on its consolidated financial position, results of operations or cash flows.
The Company’s other significant accounting policies are discussed in detail in its 2012 Form 10-K.

8

3. Fair Value Measurements
The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing the asset or liability. The three levels of the fair value hierarchy are:
•
Level 1: Observable inputs such as quoted prices for identical assets and liabilities in active markets obtained from independent sources.
•
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data. The fair 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. Certain of these securities may have different market prices from multiple market data sources, in which case a weighted average market price is used.
•
Level 3: Unobservable inputs for which there is little or no market data and require the Company to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.
The following tables present the Company’s assets that are measured at fair value on a recurring basis:
 
September 30, 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:
 
 
 
 
 
 
 
 
Mutual fund
$
2,487

 
$
—

 
$
—

 
$
2,487

 
U.S. government and agency securities
—

 
2,964

 
—

 
2,964

 
Corporate obligations
—

 
14,131

*
—

 
14,131

 
Other fixed income securities
—

 
441

 
—

 
441

 
International securities
—

 
3,809

 
—

 
3,809

 
Municipal obligations
—

 
1,972

 
—

 
1,972

 
Total short-term investments
$
2,487

 
$
23,317

 
$
—

 
$
25,804

 
* Included in this amount is a $4.5 million corporate obligation which has been used to collateralize the Company's line of credit with Bank of America, and is included in the line item "Restricted cash and investments," a component of current assets, on the consolidated balance sheets. See Note 5, Credit Facilities, for further details.
 
December 31, 2012
(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:
 
 
 
 
 
 
 
Mutual fund
$
2,507

 
$
—

 
$
—

 
$
2,507

U.S. government and agency securities
—

 
3,510

 
—

 
3,510

Corporate obligations
—

 
12,796

 
—

 
12,796

Other fixed income securities
—

 
588

 
—

 
588

International securities
—

 
9,781

 
—

 
9,781

Total
$
2,507

 
$
26,675

 
$
—

 
$
29,182


9

Assets measured at fair value on a nonrecurring basis
The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment, are initially measured at cost or fair value. In the event there is an indicator of impairment, such asset's carrying value is adjusted to current fair value only when an impairment charge is recognized. Such impairment charges incorporate fair value measurements based on Level 3 inputs.
The Company has no liabilities that are measured at fair value on a recurring basis.
4. Accumulated Other Comprehensive Loss
The total net loss realized from accumulated other comprehensive loss was $0.1 million and $0.5 million for the three and nine months ended September 30, 2013, respectively. These amounts have been presented as "Other (expense) / income, net," on the consolidated statements of operations.
5. Credit Facilities
In May 2013, pursuant to the Amendment to Amended and Restated Loan Agreement between the Company and Bank of America, N.A., (the "Amended Credit Agreement"), the Company reduced its line of credit with Bank of America from $10.0 million to $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. The annual interest rate on outstanding amounts is equal to a floating rate of 1-month LIBOR Daily Floating Rate plus 1.85%. The unused commitment fee is equal to 0.25%. In connection with the Amended Credit Agreement, the Company entered into a Pledge Agreement, which provides that the line of credit must be secured by cash or investment collateral. This restricted amount is included in the line item "Restricted cash and investments," a component of current assets, on the consolidated balance sheets.
The Amended Credit Agreement expires June 12, 2014, at which time any outstanding amounts borrowed under the agreement are then due and payable. As of September 30, 2013 and December 31, 2012, the Company had no outstanding borrowings against its line of credit or the predecessor line of credit, but had outstanding letters of credit of $1.6 million on both dates.
6. Contingencies
In August 2013, the Company entered into an agreement with agents of the State of Delaware (“the State”) who will assist in administrating the State’s abandoned property reporting outreach program (“VDA Program”) in which the Company is enrolled and under which the Company will disclose information regarding its compliance with certain abandoned property procedures. As the VDA Program is in its early stages, the Company cannot quantify the State’s findings, if any, on its consolidated results of operations, financial condition, or liquidity. In the normal course of conduct, the Company records amounts due for abandoned property.
7. Income Taxes
The Company follows ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in the Company’s judgment about the future realization of deferred tax assets. ASC 740 places greater emphasis on historical information, such as the Company’s cumulative operating results than it places on estimates of future taxable income. Therefore, the Company has added $4.3 million to its valuation allowance in the nine months ended September 30, 2013, resulting in a cumulative balance of $93.2 million. The Company considered all income sources, including other comprehensive income, in determining the amount of deferred taxes recorded. The Company has recorded $1.1 million of tax expense during the nine months ended September 30, 2013, which is primarily attributable to differences between the financial statement carrying amounts of past acquisitions of certain indefinite-lived intangible assets and their respective tax bases. As a result, the Company has a cumulative net deferred tax liability of $8.0 million at September 30, 2013. The Company intends to maintain a valuation allowance until evidence would support the conclusion that it is more likely than not that the deferred tax asset will be realized.
ASC 740 further establishes guidance on the accounting for uncertain tax positions. As of September 30, 2013, the Company had a liability for uncertain tax positions balance of $0.07 million, of which $0.05 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

8. Gain on Sale of Subscriber List, net
On January 2, 2013 the Company sold certain intangible assets related to Whole Living magazine in exchange for consideration of approximately $1.0 million. Pursuant to the sale, the subscription contracts for the print and digital editions of the magazine, as well as the rights and benefits of the subscribers, were transferred to the buyer. The agreement also required that the Company reimburse the buyer up to $0.1 million for customer refunds resulting from the transaction and paid by the buyer through June 30, 2013. Accordingly, the Company received $0.9 million in cash on the close of the transaction, and, in early July 2013, received the remainder of the refund reserve which was not utilized by the buyer. As a result of selling the Whole Living subscriber list, and thus transferring the subscription liability fulfillment obligation to the buyer, the Company recorded its' existing $2.2 million deferred subscription revenue, resulting in a gain of $2.7 million as a component of operations. This gain on sale of subscriber list, net, reflected on the Company's consolidated statement of operations for the nine months ended September 30, 2013, was recorded within the Publishing segment and consisted of the $1.0 million list sale price, less broker fees and other costs of $0.5 million incurred in connection with the transaction, as well as the $2.2 million release of the deferred subscription revenue liability.
9. Industry Segments
The Company is an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. The Company’s business segments are Publishing, Merchandising and Broadcasting.
The Publishing segment primarily consists of the Company’s operations related to its magazines (Martha Stewart Living, Martha Stewart Weddings, and special interest publications) and books, as well as its digital operations, which includes 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. As part of the Company's restructuring announced in November 2012, Everyday Food ceased publication as a stand-alone title with its December 2012 issue and Whole Living was discontinued after its January/February 2013 issue.
The Merchandising segment primarily consists of the Company’s operations related to the design and branding of merchandise and related collateral and packaging materials that are manufactured and distributed by its retail and wholesale partners in exchange for royalty income. 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 third parties.
In 2012, the Company significantly restructured its Broadcasting segment, which included the termination of the Company's live audience television production operations. Subsequent to the restructuring, the Broadcasting segment consists of the Company's limited television production operations, television content library licensing and satellite radio operations. While future revenues and assets from these operations are not expected to be significant, the Company plans to continue reporting activities under the Broadcasting segment to provide historical context.

11

Segment information for the three months ended September 30, 2013 and 2012 is as follows:
(in thousands)
Publishing
 
Merchandising
 
Broadcasting
 
Corporate
 
Consolidated
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
)
2012
 
 
 
 
 
 
 
 
 
Revenues
$
27,572

 
$
13,233

 
$
2,744

 
$
—

 
$
43,549

Non–cash equity compensation
(169
)
 
(75
)
 
(11
)
 
(702
)
 
(957
)
Depreciation and amortization
(187
)
 
(14
)
 
(87
)
 
(715
)
 
(1,003
)
Restructuring charges
(491
)
 
—

 
—

 
—

 
(491
)
Goodwill impairment
(44,257
)
 
—

 
—

 
—

 
(44,257
)
Operating (loss) / income
(51,264
)
 
8,525

 
281

 
(8,231
)
 
(50,689
)

Segment information for the nine months ended September 30, 2013 and 2012 is as follows:
(in thousands)
Publishing
 
Merchandising
 
Broadcasting
 
Corporate
 
Consolidated
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
)
2012
 
 
 
 
 
 
 
 
 
Revenues
$
87,208

 
$
41,355

 
$
12,701

 
$
—

 
$
141,264

Non–cash equity compensation *
(484
)
 
(378
)
 
(42
)
 
(2,197
)
 
(3,101
)
Depreciation and amortization
(552
)
 
(37
)
 
(305
)
 
(2,134
)
 
(3,028
)
Restructuring charges *
(584
)
 
(81
)
 
(529
)
 
(74
)
 
(1,268
)
Goodwill impairment
(44,257
)
 
—

 
—

 
—

 
(44,257
)
Operating (loss) / income
(59,686
)
 
28,147

 
(599
)
 
(25,618
)
 
(57,756
)
Total assets **
24,538

 
80,833

 
20,740

 
26,085

 
152,196

* As disclosed on the Company's consolidated statements of cash flows, total non-cash equity compensation expense was $1.4 million and $3.1 million for the nine months ended September 30, 2013 and 2012, respectively. Included in non-cash equity compensation expense for the nine months ended September 30, 2013 were net reversals of expense of approximately $0.03 million. The nine months ended September 30, 2012 include net expense of $(0.02) million, which was generated in connection with restructuring activities. Accordingly, these amounts are reflected as restructuring charges in the Company's consolidated statements of operations for the nine months ended September 30, 2013 and 2012, respectively.
** In accordance with ASC 280, Segment Reporting, total assets are disclosed as of September 30, 2012 in order to reflect the material change in the Publishing segment’s goodwill from the amount disclosed as of December 31, 2011.
10. Other Information
Production, distribution and editorial expenses; selling and promotion expenses; and general and administrative expenses are each presented exclusive of depreciation and amortization, as well as restructuring charges, 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

11. Legal Matters
On January 23, 2012, Macy's Inc. and Macy's Merchandising Group, Inc. ( collectively, "Macy's") filed a lawsuit against the Company in the Supreme Court of the State of New York, County of New York titled Macy's, Inc. and Macy's Merchandising Group, Inc. v. Martha Stewart Living Omnimedia, Inc. In such lawsuit, Macy's claims that the Company's planned activities under the Company's commercial agreement with J.C. Penney Corporation, Inc. ("J.C. Penney") materially breach the agreement between the Company and Macy's Merchandising Group, Inc. dated April 3, 2006 (the "Agreement"). Macy's seeks a declaratory judgment, preliminary and permanent injunctive relief, and incidental and other damages. The Court entered a preliminary injunction on July 31, 2012 which limited the Company's activities with J.C. Penney in certain respects. In November 2012, Macy's amended its complaint to assert a second claim which alleges additional breaches of the Agreement. In January 2013, the lawsuit was consolidated with an action titled Macy's Inc. and Macy's Merchandising Group, Inc. v. J.C. Penney Corporation, Inc. The trial of the consolidated cases began on February 20, 2013. During a break in the trial in March 2013, the Court ordered mediation among the parties. The mediation did not result in a settlement and the trial resumed on April 7, 2013. On April 10 and 11, 2013, the Court dismissed the portions of the claim regarding confidentiality and disgorgement of profits, but did not dismiss the portion of Macy's claim that the Company is prohibited from designing for third parties in certain product categories.
On April 12, 2013, the Court denied Macy's request to expand the existing preliminary injunction against J.C. Penney and the Company. Macy's filed an appeal of that denial, as well as an appeal of the Court's decisions on April 10 and 11, 2013. On April 30, 2013, the New York State Supreme Court's Appellate Division, First Department, denied Macy's request for a preliminary injunction blocking the sale of goods at J.C. Penney. Closing arguments in the underlying case were heard on August 1, 2013. The Company believes that it has meritorious defenses to the claims made by Macy's, and the Company is vigorously defending such claims. Litigation costs in this matter are significant.
As set forth in Note 12, Subsequent Events, below, on October 21, 2013, the Company entered into a revised agreement with J.C. Penney.
The Company is also party to legal proceedings in the ordinary course of business, including product liability claims for which the Company is indemnified by its licensees. Other than the Macy's proceedings, none of these proceedings is deemed material.
12. Subsequent Events
On October 21, 2013, the Company and J.C. Penney entered into an amendment to their original commercial agreement, dated December 6, 2011, covering the companies' licensing partnership. Under this amendment, which reduced the term of the original commercial agreement from ten years to four and a half years, the Company will continue to design Martha Stewart branded products in the following categories: window treatments and hardware, lighting, holiday and celebrations, in exchange for design fees and guaranteed minimum royalty payments. Pursuant to the amendment, J.C. Penney made an upfront payment of the 2014 guaranteed minimum royalty, returned 11,000,000 shares of the Company's Class A Common Stock and one share of the Company's Series A Preferred Stock and removed its directors from the Board. Upon cancellation of the Series A Preferred Stock, J.C. Penney no longer has the right to designate directors to the Board.
On October 28, 2013, the Company announced the appointment of Daniel W. Dienst, a member of our Board, to the position of Chief Executive Officer. Mr. Dienst joined the Company’s Board in August 2013.

13

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 may contain certain statements that we believe are, or may be considered to be, "forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by the use of statements that include phrases such as we "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "potential" or "continue" or other similar references to future periods or the negative of these terms. Examples of forward-looking statements include, but are not limited to, statements we make regarding future financial performance, potential opportunities, expected product line changes, future acceptability of our content and our businesses, the success of our strategic initiative and our anticipated growth.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include economic, business, competitive, national or global political, market and regulatory conditions and the following, each of which is described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2012 under the heading “Part I, Item IA. Risk Factors”:
•
adverse reactions to publicity relating to Martha Stewart or Emeril Lagasse by consumers, advertisers and business partners;
•
loss of the services of Ms. Stewart or Mr. Lagasse;
•
continued management turnover;
•
failure to realize the anticipated benefits from transitioning certain of our media brands from print publication to digital distribution;
•
inability to successfully capitalize on digital, mobile and video initiatives, including creating compelling digital media content and establishing relationships with additional distribution partners;
•
softening of or increased competition in the domestic advertising market, including increased competitive pressure on digital display advertising rates as a result of programmatic buying of advertising inventory;
•
failure by the economy to sustain any meaningful recovery and other economic developments that limit consumers' discretionary spending or affect the value of our assets or access to credit or other funds;
•
inability to expand merchandising and licensing programs or the loss or failure of existing programs, including as a result of litigation or disputes with Merchandising segment partners;
•
inability to grow our online presence;
•
failure to successfully implement our cost savings initiatives;
•
failure to protect our intellectual property;
•
changes in media consumption behavior;
•
increases in paper, postage, freight or printing costs;
•
weakening in circulation, particularly in newsstand sales;
•
operational or financial problems at any of our business partners;
•
our inability to successfully and profitably develop or introduce new products;
•
consolidation of our principal print business vendors, which may lead to increased prices and service delays; and
•
failure to predict, respond to and influence trends in consumer taste and/or shifts in business strategies.
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.


14

EXECUTIVE SUMMARY
We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and high-quality products. We are organized into three business segments: Publishing, Merchandising and Broadcasting. Summarized below are our operating results for the three and nine months ended September 30, 2013 and 2012. 
 
Three months ended September 30,
 
Nine months ended September 30,
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
2013
(unaudited)
 
2012
(unaudited)
 
Total Revenues
$
33,848

 
$
43,549

 
$
113,270

 
$
141,264

 
Total Operating Loss
$
(4,076
)
 
$
(50,689
)
*
$
(7,757
)
 
$
(57,756
)
*
* Publishing segment operating costs and expenses in 2012 included a non-cash goodwill impairment charge of $44.3 million.
We generate revenue from various sources such as advertising customers, magazine circulation and licensing partners. Publishing is our largest business segment, accounting for 60% of our total revenues for the nine months ended September 30, 2013. Publishing segment revenues are comprised of advertising sales, magazine subscriptions and newsstand sales of Martha Stewart Living, Martha Stewart Weddings and special interest magazines, as well as royalties from our book business. Publishing segment revenue also includes advertising revenue generated from our digital properties, primarily marthastewart.com, as well as revenue derived from the digital distribution of our video content. Merchandising segment revenues are generated from the licensing of our trademarks and designs for a variety of products sold at multiple price points through a wide range of distribution channels. Our retail partnerships include our programs at Macy's, The Home Depot and J.C. Penney. Our wholesale partnerships include Avery for our Martha Stewart Home Office line (currently sold at Staples), Wilton Properties and Plaid Enterprises for our Martha Stewart Crafts program (currently sold at Michael’s and other crafts stores) and Age Group for our Martha Stewart Pets line (currently sold at Petsmart), as well as with a variety of wholesale partnerships to produce products under the Emeril brand. Merchandising segment revenues are also derived from the licensing of talent services for television programming produced by third parties. Broadcasting segment revenues include our limited television production operations, television content library licensing and satellite radio operations.
We incur expenses primarily consisting of compensation and related charges across all segments. In addition, we incur expenses related to the physical costs associated with producing and distributing magazines, the editorial costs associated with creating content across our media platforms, the selling and promotion costs that support our advertising, marketing, circulation marketing and research efforts, the technology costs associated with our digital properties and the costs associated with producing and distributing our video programming. We also incur general overhead costs, including facilities and related expenses.
In 2012, we implemented several restructuring actions in our Publishing segment ("Publishing Restructuring"), which included the transition of the print publication Everyday Food from a stand-alone title to a digital-focused brand distributed across multiple platforms. Everyday Food ceased publication as a stand-alone title with its December 2012 issue, but is being issued as an occasional supplement to Martha Stewart Living subscribers beginning in 2013. In addition, we discontinued publication of Whole Living with the January/February 2013 issue, and sold the related subscriber list in January 2013. We also significantly restructured the Broadcasting segment in 2012 ("Broadcasting Restructuring"), which included the termination of our live audience television production operations. While future revenues and assets from these operations are not expected to be significant, we plan to continue reporting activities under the Broadcasting segment to provide historical context.
These 2012 restructuring initiatives in both segments impacted the comparability of the results for the three and nine months ended September 30, 2013. In particular, the Publishing Restructuring impacted the comparability of the Publishing segment's print advertising and circulation revenues, as well as production, distribution and editorial costs and selling and promotion expenses. Some of the cost savings achieved from the Publishing Restructuring have been and are expected to be partially offset by continued investment in our digital properties. The Broadcasting Restructuring impacted the comparability of the Broadcasting segment's advertising revenue, as well as all costs and expenses.

15

Detailed segment operating results for the three and nine months ended September 30, 2013 and 2012 are summarized below:
 
Three months ended September 30,
 
Nine months ended September 30,
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
2013
(unaudited)
 
2012
(unaudited)
 
Segment Revenues:
 
 
 
 
 
 
 
 
Publishing
$
19,401

 
$
27,572

 
$
68,073

 
$
87,208

 
Merchandising
14,153

 
13,233

 
41,776

 
41,355

 
Broadcasting
294

 
2,744

 
3,421

 
12,701

 
TOTAL REVENUES
$
33,848

 
$
43,549

 
$
113,270

 
$
141,264

 
 
 
 
 
 
 
 
 
 
Segment Operating Income / (Loss):
 
 
 
 
 
 
 
 
Publishing
$
(6,260
)
 
$
(51,264
)
*
$
(12,994
)
 
$
(59,686
)
*
Merchandising
9,479

 
8,525

 
26,872

 
28,147

 
Broadcasting
(214
)
 
281

 
1,812

 
(599
)
 
Total Segment Operating Income / (Loss) Before Corporate Expenses
$
3,005

 
$
(42,458
)
 
$
15,690

 
$
(32,138
)
 
Corporate Expenses **
(7,081
)
 
(8,231
)
 
(23,447
)
 
(25,618
)
 
TOTAL OPERATING LOSS
$
(4,076
)
 
$
(50,689
)
 
$
(7,757
)
 
$
(57,756
)
 
* Publishing segment operating costs and expenses for 2012 included a non-cash goodwill impairment charge of $44.3 million.
** Corporate expenses include unallocated costs of items such as compensation and related costs for certain departments, such as executive (including Martha Stewart, our Founder and Chief Creative Officer), finance, legal, human resources, corporate communications, office services and information technology, as well as allocated portions of rent and related expenses for these departments that reflect current utilization of office space. Unallocated Corporate expenses are directed and controlled by central management and not by our segment management, and therefore are not included as part of our segment operating performance.



16

Three months ended September 30, 2013 Operating Results Compared to Three Months ended September 30, 2012 Operating Results
For the three months ended September 30, 2013, total revenues decreased 22%, compared to the three months ended September 30, 2012, primarily due to the impact from both the Publishing Restructuring and Broadcasting Restructuring. Additionally, the three months ended September 30, 2012 included Broadcasting segment licensing revenue from television programming on the Hallmark Channel featuring Emeril Lagasse, with no comparable revenue in the current-year period. These declines were partially offset by royalty revenue from J.C. Penney, with no comparable revenue in the prior-year period.
For the three months ended September 30, 2013, total operating income before Corporate expenses increased $45.5 million from the prior-year period. However, total operating loss before Corporate expenses for the three months ended September 30, 2012 included a non-cash goodwill impairment charge in our Publishing segment of $44.3 million. The remaining $1.2 million increase in operating income before Corporate expenses was primarily due to the increase in Merchandising segment revenues and the savings achieved from the Publishing Restructuring, partially offset by new expenses associated with producing and distributing short-form video programming for our digital properties, as well as the negative impact of the timing of expenses associated with the October 2013 advertising and marketing event, American Made by Martha Stewart. The Broadcasting segment's operating loss of $(0.2) million for the three months ended September 30, 2013 was due to the timing of certain distribution and other fees associated with our television programming on PBS. However, the Broadcasting Restructuring reduced our costs by $2.0 million during the three months ended September 30, 2013.
Corporate expenses decreased 14% for the three months ended September 30, 2013, as compared to the prior-year period, primarily due to lower compensation costs related to executive management and lower legal fees.
Nine months ended September 30, 2013 Operating Results Compared to Nine Months ended September 30, 2012 Operating Results
For the nine months ended September 30, 2013, total revenues decreased 20%, compared to the nine months ended September 30, 2012, primarily due to the impact from both the Publishing Restructuring and Broadcasting Restructuring. Additionally, the nine months ended September 30, 2012 included Broadcasting segment licensing revenue from television programming on the Hallmark Channel featuring Emeril Lagasse, with no comparable revenue in the current-year period. We also experienced declines in our newsstand revenue and radio licensing revenue. These declines were partially offset by higher digital advertising revenue, higher print advertising revenue from Martha Stewart Living, revenue associated with our television shows on PBS and higher revenue from our Merchandising segment.
For the nine months ended September 30, 2013, total operating income before Corporate expenses increased $47.8 million, as compared to the prior-year period. However, as discussed above, during the nine months ended September 30, 2012, we recorded a non-cash goodwill impairment charge in our Publishing segment of $44.3 million. The remaining $3.5 million increase in operating income before Corporate expenses was primarily due to the net gain on the sale of the Whole Living subscriber list in our Publishing segment of $2.7 million for the nine months ended September 30, 2013 with no comparable gain in the prior-year period. The savings achieved from both the Publishing Restructuring and Broadcasting Restructuring were partially offset by new costs associated with producing and distributing short-form video programming for our digital properties, as well as higher costs associated with the increase in print and digital advertising revenues and the timing of expenses associated with the advertising and marketing event, American Made by Martha Stewart.
Corporate expenses decreased 8% for the nine months ended September 30, 2013 as compared to the prior-year period, primarily due to lower compensation costs related to executive management, partially offset by higher legal fees.
Liquidity
During the nine months ended September 30, 2013, our overall cash, cash equivalents, short-term investments and restricted cash and investments decreased $8.3 million from December 31, 2012. The decrease was largely due to our operating loss, which included certain non-cash gains, that was partially offset by the collection of receivables from advertising and royalties. Cash, cash equivalents, short-term investments and restricted cash and investments were $40.8 million and $49.1 million at September 30, 2013 and December 31, 2012, respectively.

17

Comparison of Three months ended September 30, 2013 to Three months ended September 30, 2012
PUBLISHING SEGMENT
  
Three months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
Publishing Segment Revenues
 
 
 
 
 
Print advertising
$
8,769

 
$
13,287

 
$
(4,518
)
Digital advertising
3,852

 
3,711

 
141

Circulation
6,519

 
10,068

 
(3,549
)
Books
88

 
222

 
(134
)
Other
173

 
284

 
(111
)
Total Publishing Segment Revenues
19,401

 
27,572

 
(8,171
)
 
 
 
 
 
 
Production, distribution and editorial
(13,886
)
 
(19,320
)
 
5,434

Selling and promotion
(9,901
)
 
(12,469
)
 
2,568

General and administrative
(1,674
)
 
(2,112
)
 
438

Depreciation and amortization
(200
)
 
(187
)
 
(13
)
Restructuring charges
—

 
(491
)
 
491

Goodwill impairment
—

 
(44,257
)
 
44,257

Operating Loss
$
(6,260
)
 
$
(51,264
)
 
$
45,004

The comparability of the Publishing segment results for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, was significantly impacted by the Publishing Restructuring, as well as the reduction in the frequency of Martha Stewart Living from monthly to ten times per year, starting with the July/August 2013 issue. The impact of this frequency change of Martha Stewart Living resulted in one fewer issue during the three months ended September 30, 2013, as compared to the prior-year period, which specifically impacted comparability of print advertising and circulation revenues, as well as the physical costs associated with producing and distributing Martha Stewart Living.
Publishing segment revenues decreased 30% for the three months ended September 30, 2013, compared to the three months ended September 30, 2012. Print advertising revenue decreased $4.5 million primarily due to a $3.0 million impact from the Publishing Restructuring. Additionally, print advertising revenue declined due to the frequency change of Martha Stewart Living, partially offset by an increase in advertising pages in Martha Stewart Living for the two issues that were produced during the three months ended September 30, 2013, as compared to the similar two issues in the prior-year period. Digital advertising revenue increased $0.1 million due to higher video advertising units sold at higher rates, partially offset by fewer display advertising units sold. Circulation revenue decreased $3.5 million primarily due to a $2.2 million impact from the Publishing Restructuring. Additionally, circulation revenue declined due to the frequency change of Martha Stewart Living.
Production, distribution and editorial expenses decreased $5.4 million primarily due to the Publishing Restructuring, which eliminated approximately $4.2 million of physical costs and editorial expenses. Additionally, physical costs associated with producing and distributing Martha Stewart Living declined due to the frequency change of the magazine, partially offset by higher physical costs from an increase in advertising pages sold in Martha Stewart Living for the two issues that were produced during the three months ended September 30, 2013, as compared to the similar two issues in the prior-year period. Additionally, we incurred higher expenses associated with our investment in producing short-form video programming for our digital properties. Selling and promotion expenses decreased $2.6 million primarily due to the Publishing Restructuring, which eliminated approximately $2.5 million of magazine circulation-related costs and advertising and marketing expenses. In addition, selling and promotion expenses decreased due to lower subscriber acquisition costs associated with a smaller direct mail campaign during the three months ended September 30, 2013, as compared to the prior-year period, as well as lower subscription fulfillment expenses. These decreases in selling and promotion expenses were partially offset by higher selling costs associated with certain digital video advertising revenues, as well as the timing of expenses associated with the October 2013 advertising and marketing event, American Made by Martha Stewart. General and administrative expenses decreased $0.4 million primarily due to lower allocated rent expense, which was offset by an equal increase in our Merchandising segment and Corporate rent allocation. Rent expense is charged to our segments to reflect utilization of office space. The reallocation of rent expense was the result of the Publishing Restructuring, reflecting the lower headcount of the restructured Publishing segment. During the three months ended September 30, 2012, we incurred a non-cash goodwill impairment charge of $44.3 million, which was the result of the Publishing segment experiencing slower than anticipated growth in advertising.

18

MERCHANDISING SEGMENT
 
Three months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
Merchandising Segment Revenues
 
 
 
 
 
Royalty and other
$
14,153

 
$
13,233

 
$
920

Total Merchandising Segment Revenues
14,153

 
13,233

 
920

 
 
 
 
 
 
Production, distribution and editorial
(2,211
)
 
(3,100
)
 
889

Selling and promotion
(498
)
 
(492
)
 
(6
)
General and administrative
(1,953
)
 
(1,102
)
 
(851
)
Depreciation and amortization
(12
)
 
(14
)
 
2

Operating Income
$
9,479

 
$
8,525

 
$
954

Merchandising segment revenues increased 7% for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, primarily due to the recognition of royalty revenue from our commercial agreement with J.C. Penney, with no comparable royalty revenue from J.C. Penney in the prior-year period. Royalty and other revenues also increased due to higher wholesale sales of our pet products. These increases in royalty and other revenues were partially offset by lower design fees from J.C. Penney and lower royalties from The Home Depot's reduction in the number of styles offered of our patio products and lower sales of soft flooring, as well as the impact of certain expired partnerships with no comparable revenue during the three months ended September 30, 2013.
Production, distribution and editorial expenses decreased $0.9 million due to a decrease in compensation costs primarily from the reduction in headcount of our J.C. Penney design team. General and administrative expenses increased $0.9 million due to a reserve of $0.4 million for the collection of certain Macy's royalties, as well as a $0.2 million increase in compensation associated with the talent services of Emeril Lagasse for television programming produced by third parties that was recorded in the Broadcasting segment for the three months ended September 30, 2012. In addition, general and administrative expenses increased due to higher allocated rent expense of $0.2 million from the reallocation of rent charged to reflect current utilization of office space. The increase in our Merchandising segment rent allocation was offset by a decrease in our Publishing segment rent allocation, as discussed above.
On October 21, 2013, we entered into an amendment with J.C. Penney, which, among other items, included the prospective reduction of the guaranteed minimum royalties, design fees and term set forth in the original commercial agreement dated December 6, 2011. We believe that this amendment should eliminate any uncertainty with respect to future royalty and other revenue from J.C. Penney. See Note 12, Subsequent Events, in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further details of the amendment.

19

BROADCASTING SEGMENT
 
Three months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
Broadcasting Segment Revenues
 
 
 
 
 
Advertising
$
49

 
$
943

 
$
(894
)
Licensing and other
245

 
1,801

 
(1,556
)
Total Broadcasting Segment Revenues
294

 
2,744

 
(2,450
)
 
 
 
 
 
 
Production, distribution and editorial
(482
)
 
(2,067
)
 
1,585

Selling and promotion
(2
)
 
(67
)
 
65

General and administrative
(23
)
 
(242
)
 
219

Depreciation and amortization
(1
)
 
(87
)
 
86

Operating (Loss) / Income
$
(214
)
 
$
281

 
$
(495
)
Broadcasting segment revenues decreased 89% for the three months ended September 30, 2013, compared to the three months ended September 30, 2012. Advertising revenue decreased $0.9 million due to the impact from the Broadcasting Restructuring, and consists only of radio advertising revenues from our agreement with Sirius XM. Licensing and other revenue decreased $1.6 million primarily due to the inclusion of licensing revenues during the three months ended September 30, 2012 associated with television programming on the Hallmark Channel featuring Emeril Lagasse, with no comparable revenue in the current-year period. In addition, licensing and other revenue decreased due to reduced radio licensing fees from our new agreement with Sirius XM.
Production, distribution and editorial expenses decreased $1.6 million primarily due to a $2.1 million impact from the Broadcasting Restructuring. The production, distribution and editorial expenses of $0.5 million incurred during the three months ended September 30, 2013 were primarily related to distribution and other fees associated with our television programming on PBS and costs related to our reduced radio programming. Selling and promotion expenses, as well as general and administrative expenses, decreased due to the Broadcasting Restructuring. General and administrative expenses primarily consist of overhead costs associated with the production of radio programming.



20

CORPORATE
 
Three months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
General and administrative
$
(6,447
)
 
$
(7,516
)
 
$
1,069

Depreciation and amortization
(634
)
 
(715
)
 
81

Restructuring charges
—

 
—

 
—

Operating Loss
$
(7,081
)
 
(8,231
)
 
$
1,150

Corporate operating costs and expenses decreased 14% for the three months ended September 30, 2013, compared to the three months ended September 30, 2012. General and administrative expenses decreased $1.1 million primarily due to reduced compensation related to executive management and lower legal fees. Partially offsetting the decreases in general and administrative expenses was higher allocated rent expense of $0.2 million from the reallocation of rent charged to reflect current utilization of office space. The increase in Corporate rent allocation was offset by a decrease in our Publishing segment rent allocation, as discussed above.
OTHER ITEMS
Net loss. Net loss was $(4.3) million for the three months ended September 30, 2013, compared to net loss of $(50.9) million for the three months ended September 30, 2012, as a result of the factors described above.

21

Comparison of Nine months ended September 30, 2013 to Nine months ended September 30, 2012
PUBLISHING SEGMENT
  
Nine months ended September 30, 2013
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
Publishing Segment Revenues
 
 
 
 
 
Print advertising
$
31,646

 
$
40,512

 
$
(8,866
)
Digital advertising
14,019

 
12,234

 
1,785

Circulation
20,874

 
32,820

 
(11,946
)
Books
920

 
1,015

 
(95
)
Other
614

 
627

 
(13
)
Total Publishing Segment Revenues
68,073

 
87,208

 
(19,135
)
 
 
 
 
 
 
Production, distribution and editorial
(47,109
)
 
(59,338
)
 
12,229

Selling and promotion
(30,736
)
 
(36,013
)
 
5,277

General and administrative
(5,077
)
 
(6,150
)
 
1,073

Depreciation and amortization
(729
)
 
(552
)
 
(177
)
Restructuring charges
(140
)
 
(584
)
 
444

Gain on sale of subscriber list, net
2,724

 
—

 
2,724

Goodwill impairment
—

 
(44,257
)
 
44,257

Operating Loss
$
(12,994
)
 
$
(59,686
)
 
$
46,692

The comparability of the Publishing segment results for the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, was significantly impacted by the Publishing Restructuring, as well as the reduction in the frequency of Martha Stewart Living from monthly to ten times per year, starting with the July/August 2013 issue. The impact of this frequency change of Martha Stewart Living resulted in one fewer issue during the nine months ended September 30, 2013, as compared to the prior-year period, which specifically impacted comparability of print advertising and circulation revenues, as well as the physical costs associated with producing and distributing Martha Stewart Living.
Publishing segment revenues decreased 22% for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. Print advertising revenue decreased primarily due to a $8.9 million impact from the Publishing Restructuring. Additionally, print advertising revenue declined due to the frequency change of Martha Stewart Living, partially offset by an increase in advertising pages in Martha Stewart Living. Digital advertising revenue increased $1.8 million due to higher display and video advertising units sold. Circulation revenue decreased $11.9 million primarily due to a $8.4 million impact from the Publishing Restructuring. The remaining $3.5 million decline in circulation revenue was primarily due to the frequency change of Martha Stewart Living. Additionally, circulation revenue declined due to lower newsstand unit sales of the special interest publication, Cakes and Cupcakes, as compared to the special interest publication, Organizing, sold during the nine months months ended September 30, 2012, as well as softness in newsstand sales of Martha Stewart Weddings and Martha Stewart Living.
Production, distribution and editorial expenses decreased $12.2 million primarily due to the Publishing Restructuring, which eliminated approximately $13.1 million of physical costs and editorial expenses. Additionally, physical costs associated with producing and distributing Martha Stewart Living declined due to the frequency change of the magazine, partially offset by higher physical costs from an increase in advertising pages sold in Martha Stewart Living. The decreases from the Publishing Restructuring were partially offset primarily by higher expenses associated with our investment in producing short-form video programming for our digital properties and higher editorial staff and story costs. Selling and promotion expenses decreased $5.3 million primarily due to the Publishing Restructuring, which eliminated approximately $8.4 million of magazine circulation-related costs and advertising and marketing expenses. Additionally, selling and promotion expenses decreased due to lower magazine circulation costs for Martha Stewart Living, which benefited from lower subscription acquisition and fulfillment costs. These decreases in selling and promotion expenses were partially offset by higher selling and commission costs associated with the increase in digital revenues, as well as the timing of expenses associated with the October 2013 advertising and marketing event, American Made by Martha Stewart. In addition, selling and promotion expenses increased due to an increase in average headcount in our advertising and marketing departments for the nine months ended September 30, 2013 as compared to the prior-year period, as well as higher costs for market research. General and administrative expenses decreased $1.1 million primarily due to lower allocated rent expense. The decrease in our Publishing

22

segment rent allocation of $1.2 million was offset by an equal increase in our Merchandising segment and Corporate rent allocation. Rent expense is charged to our segments to reflect utilization of office space. The reallocation of rent expense was the result of the Publishing Restructuring, reflecting the lower overall headcount of the restructured Publishing segment.
The net gain on the sale of Whole Living subscriber list was $2.7 million for the nine months ended September 30, 2013 with no comparable gain in the prior-year period. Pursuant to this sale, the subscription contracts for the print and digital editions of Whole Living, as well as the rights and benefits of the subscribers, were transferred to the buyer in exchange for cash. As a result of selling the Whole Living subscriber list, and thus transferring the subscription liability fulfillment obligation to the buyer, we also recognized the remaining deferred subscription revenue. See Note 8, Gain on Sale of Subscriber List, net in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further details. During the nine months ended September 30, 2012, we incurred a non-cash goodwill impairment charge of $44.3 million, which was the result of the Publishing segment experiencing slower than anticipated growth in advertising.

MERCHANDISING SEGMENT
 
Nine months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
Merchandising Segment Revenues
 
 
 
 
 
Royalty and other
$
41,776

 
$
41,355

 
$
421

Total Merchandising Segment Revenues
41,776

 
41,355

 
421

 
 
 
 
 
 
Production, distribution and editorial
(7,737
)
 
(8,381
)
 
644

Selling and promotion
(1,592
)
 
(1,423
)
 
(169
)
General and administrative
(5,144
)
 
(3,286
)
 
(1,858
)
Depreciation and amortization
(39
)
 
(37
)
 
(2
)
Restructuring charges
(392
)
 
(81
)
 
(311
)
Operating Income
$
26,872

 
$
28,147

 
$
(1,275
)
Merchandising segment revenues increased 1% for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, primarily due to the recognition of royalty revenue from our commercial agreement with J.C. Penney, with no comparable royalty revenue from J.C. Penney in the prior-year period. The increases in royalty and other revenues were partially offset by lower royalties from The Home Depot's reduction in the number of styles offered of our patio products and lower sales of soft flooring, lower design fees from J.C. Penney, as well as the impact of certain expired partnerships and certain non-recurring prior-year period benefits with no comparable revenue during the nine months ended September 30, 2013.
Production, distribution and editorial expenses decreased $0.6 million due to a decrease in compensation related costs. Selling and promotion expenses increased $0.2 million primarily due to an increase in compensation and other expenses related to marketing efforts. General and administrative expenses increased $1.9 million due to a $0.7 million increase in compensation associated with the talent services of Emeril Lagasse for television programming produced by third parties that was recorded in the Broadcasting segment for the nine months ended September 30, 2012, as well as a reserve of $0.4 million for the collection of certain Macy's royalties. In addition, general and administrative expenses increased due to higher allocated rent expense of $0.7 million from the reallocation of rent charged to reflect current utilization of office space. The increase in our Merchandising segment rent allocation was offset by a decrease in our Publishing segment rent allocation, as discussed above. Restructuring charges of $0.4 million for the nine months ended September 30, 2013 represented employee severance costs.
On October 21, 2013, we entered into an amendment with J.C. Penney, which, among other items, included the prospective reduction of the guaranteed minimum royalties, design fees and term set forth in the original commercial agreement dated December 6, 2011. We believe that this amendment should eliminate any uncertainty with respect to future royalty and other revenue from J.C. Penney. See Note 12, Subsequent Events, in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further details of the amendment.

23

BROADCASTING SEGMENT
 
Nine months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
Broadcasting Segment Revenues
 
 
 
 
 
Advertising
$
1,728

 
$
7,252

 
$
(5,524
)
Licensing and other
1,693

 
5,449

 
(3,756
)
Total Broadcasting Segment Revenues
3,421

 
12,701

 
(9,280
)
 
 
 
 
 
 
Production, distribution and editorial
(1,486
)
 
(11,158
)
 
9,672

Selling and promotion
(20
)
 
(518
)
 
498

General and administrative
(77
)
 
(790
)
 
713

Depreciation and amortization
(26
)
 
(305
)
 
279

Restructuring charges
—

 
(529
)
 
529

Operating Income / (Loss)
$
1,812

 
$
(599
)
 
$
2,411

Broadcasting segment revenues decreased 73% for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. Advertising revenue decreased $5.5 million primarily due to a $7.2 million impact from the Broadcasting Restructuring. Partially offsetting this decline in advertising revenue was sponsorship revenue related to Martha Stewart's Cooking School and Martha Bakes, each of which airs on PBS. Licensing and other revenue decreased $3.8 million primarily due to the inclusion of licensing revenues during the nine months ended September 30, 2012 associated with television programming on the Hallmark Channel featuring Emeril Lagasse, with no comparable revenue in the current-year period. In addition, licensing and other revenue reflected reduced radio licensing fees from our new agreement with Sirius XM.
Production, distribution and editorial expenses decreased $9.7 million primarily due to a $11.2 million impact from the Broadcasting Restructuring. The production, distribution and editorial expenses of $1.5 million incurred during the nine months ended September 30, 2013 were primarily related to the recognition of previously deferred television production costs associated with Martha Stewart's Cooking School, as well as distribution and other fees associated with our television programming on PBS. In addition, we incurred costs related to our reduced radio programming. Selling and promotion expenses, as well as general and administrative expenses, decreased due to the Broadcasting Restructuring. General and administrative expenses primarily consist of overhead costs associated with the production of our reduced radio programming. Restructuring charges for the nine months ended September 30, 2012 were $0.5 million and primarily included employee severance costs related to the Broadcasting Restructuring.





24

CORPORATE
 
Nine months ended September 30,
 
 
(in thousands)
2013
(unaudited)
 
2012
(unaudited)
 
Better /
(Worse)
General and administrative
$
(21,158
)
 
$
(23,410
)
 
$
2,252

Depreciation and amortization
(2,146
)
 
(2,134
)
 
(12
)
Restructuring charges
(143
)
 
(74
)
 
(69
)
Operating Loss
$
(23,447
)
 
$
(25,618
)
 
$
2,171

Corporate operating costs and expenses decreased 8% for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. General and administrative expenses decreased $2.3 million primarily due to reduced compensation related to executive management, partially offset by higher professional fees, principally legal costs, as well as higher allocated rent expense of $0.5 million from the reallocation of rent charged to reflect current utilization of office space. The increase in Corporate rent allocation was offset by a decrease in our Publishing segment rent allocation, as discussed above.

OTHER ITEMS
Other (expense) / income, net. Other expense, net, for the nine months ended September 30, 2013 included the net realized losses on certain of our short-term investments. Other income, net, included a gain on the sale of cost-based investments of $1.2 million for the nine months ended September 30, 2012 with no comparable gain in the current-year period. The gain was related to our sale of Ziplist and pingg common stock for aggregate cash of $1.2 million.
Net loss. Net loss was $(8.7) million for the nine months ended September 30, 2013, compared to net loss of $(57.2) million for the nine months ended September 30, 2012, as a result of the factors described above.

25

Liquidity and Capital Resources
Overview
During the nine months ended September 30, 2013, our overall cash, cash equivalents, short-term investments and restricted cash and investments decreased $8.3 million from December 31, 2012. The decrease was largely due to our operating loss, which included certain non-cash gains, that was partially offset by the collection of receivables from advertising and royalties. Cash, cash equivalents, short-term investments and restricted cash and investments were $40.8 million and $49.1 million at September 30, 2013 and December 31, 2012, respectively.
In May 2013, we reduced our line of credit with Bank of America from $10.0 million to $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. Pursuant to the terms of the Amendment to Amended and Restated Loan Agreement between the Company and Bank of America, N.A. ("Amended Credit Agreement") and the related Pledge Agreement, the line of credit must be secured by cash or investment collateral, which we have presented as "Restricted cash and investments," a component of current assets on our consolidated balance sheets. As of September 30, 2013, we had no borrowings against our line of credit. We believe that our available cash and cash equivalent balances and short-term investments, along with our line of credit, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months.
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 (used in) and provided by operating activities was $(7.7) million and $2.5 million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013, operating activities included the recognition of certain deferred subscription liabilities, which reflected cash collected in prior periods. The recognition of these liabilities was largely due to the impact of the Publishing Restructuring, which allowed us to redirect prior Everyday Food subscribers to Martha Stewart Living. In addition, the gain on the sale of the Whole Living subscriber list in January 2013 included the release of $2.2 million of related deferred subscription liability. We also used cash to pay severance payments in 2013, associated with restructuring charges that were expensed in 2012. Cash from operating activities also decreased due to our operating loss, as discussed earlier. Partially offsetting these decreases to cash from operating activities was the collection of receivables from advertising and royalties recorded in 2012.
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 provided by and (used in) investing activities was $2.7 million and $(23.6) million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013, cash provided by investing activities predominantly consisted of the net proceeds from the sales of short-term investments, as well as the cash portion associated with the sale of the Whole Living subscriber list during January 2013. Partially offsetting the cash provided by investing activities were amounts used for incremental capital improvements to our information technology infrastructure and to our corporate office space.
Cash Flows from Financing Activities
Cash flows (used in) and provided by financing activities were $(0.4) million and $0.2 million for the nine months ended September 30, 2013 and 2012, respectively. Cash used in financing activities was primarily the result of securing our line of credit pursuant to the terms of our Amended Credit Agreement. 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.
Debt
In May 2013, pursuant to the Amended Credit Agreement, we reduced our line of credit with Bank of America from $10.0 million to $5.0 million. Borrowings under this line of credit are available for investment opportunities, working capital, and the issuance of letters of credit. The annual interest rate on outstanding amounts is equal to a floating rate of 1-month LIBOR Daily

26

Floating Rate plus 1.85%. The unused commitment fee is equal to 0.25%. In connection with the Amended Credit Agreement, we entered into a Pledge Agreement, which provides that the line of credit must be secured by cash or investment collateral. This restricted amount is included in the line item "Restricted cash and investments," a component of current assets, on the consolidated balance sheets.
The Amended Credit Agreement expires June 12, 2014, at which time any outstanding amounts borrowed under the agreement are then due and payable. As of September 30, 2013 and December 31, 2012, we had no outstanding borrowings against our line of credit or the predecessor line of credit, but had outstanding letters of credit of $1.6 million on both dates.
Seasonality and Quarterly Fluctuations
Our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules (see chart below) and seasonality of certain types of advertising. In addition, advertising revenue on marthastewart.com and our other websites is tied to traffic, among other key factors, and is typically highest in the fourth quarter of the year. Certain newsstand costs vary from quarter to quarter, particularly newsstand marketing costs associated with the distribution of our magazines. These costs typically have a three-year life cycle, but can vary significantly throughout the term. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to changes in product mix, new product launches and the performance of certain seasonal product lines.
 
  
First Quarter
  
Second Quarter
  
Third Quarter
2013 Magazine Publication Schedule:
  
 
  
 
  
 
Martha Stewart Living *
  
3 Issues
  
3 Issues
  
2 Issues
Martha Stewart Weddings
  
1 Issue
  
1 Issue
  
1 Issue
Everyday Food *
 
—
 
—
 
—
Whole Living *
  
1 Issue
  
—
  
—
Special Interest Publications
  
1 Issue
  
1 Issue
  
1 Issue
 
 
 
 
2012 Magazine Publication Schedule:
  
 
  
 
  
 
Martha Stewart Living
  
3 Issues
  
3 Issues
  
3 Issues
Martha Stewart Weddings
  
1 Issue
  
1 Issue
  
1 Issue
Everyday Food
  
3 Issues
  
3 Issues
  
2 Issues
Whole Living
  
2 Issues
  
3 Issues
  
2 Issues
Special Interest Publications
  
1 Issue
  
1 Issue
  
1 Issue
* As part of the Publishing Restructuring, we transitioned the print publication Everyday Food from a stand-alone title to a digital-focused brand distributed across multiple platforms. In addition, we discontinued publication of Whole Living with the January/February 2013 issue, and sold the related subscriber list in January 2013. We also reduced the frequency of Martha Stewart Living from monthly to ten times per year, starting with the July/August 2013 issue.
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 2012 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 and changes in the estimate 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, television production costs, 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.

27

Our critical accounting policies and estimates are discussed in detail in the 2012 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.”
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market rate risk for changes in interest rates as those rates relate to our investment portfolio. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We attempt to protect and preserve our invested funds by limiting default, market and reinvestment risk. To achieve this objective, we invest our excess cash in debt instruments of the United States Government and its agencies and in high-quality corporate issuers (including bank instruments and money market funds) and, by internal policy, limit both the term and amount of credit exposure to any one issuer. As of September 30, 2013, net unrealized gains and losses on these investments were not material. For the three and nine months ended September 30, 2013, we recorded approximately $0.2 million and $0.6 million in interest income, respectively, compared to $0.3 million and $1.0 million in the respective prior-year periods. Our future investment income may fluctuate due to changes in interest rates and levels of cash balances, or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates before their maturity.
ITEM 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 2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 23, 2012, Macy's Inc. and Macy's Merchandising Group, Inc. (collectively, "Macy's") filed a lawsuit against us in the Supreme Court of the State of New York, County of New York titled Macy's, Inc. and Macy's Merchandising Group, Inc. v. Martha Stewart Living Omnimedia, Inc. In such lawsuit, Macy's claims that our planned activities under our commercial agreement with J.C. Penney materially breach the agreement between us and Macy's Merchandising Group, Inc. dated April 3, 2006 (the "Agreement"). Macy's seeks a declaratory judgment, preliminary and permanent injunctive relief, and incidental and other damages. The Court entered a preliminary injunction on July 31, 2012 which limited our activities with J.C. Penney in certain respects. In November 2012, Macy's amended its complaint to assert a second claim which alleges additional breaches of the Agreement. In January 2013, the lawsuit was consolidated with an action titled Macy's Inc. and Macy's Merchandising Group, Inc. v. J.C. Penney Corporation, Inc. The trial of the consolidated cases began on February 20, 2013. During a break in the trial in March 2013, the Court ordered mediation among the parties. The mediation did not result in a settlement and the trial resumed on April 7, 2013. On April 10 and 11, 2013, the Court dismissed the portions of the claim regarding confidentiality and disgorgement of profits, but did not dismiss the portion of Macy's claim that we are prohibited from designing for third parties in certain product categories.
On April 12, 2013, the Court denied Macy's request to expand the existing preliminary injunction against J.C. Penney and us. Macy's filed an appeal of that denial, as well as an appeal of the Court's decisions on April 10 and 11, 2013. On April 30, 2013, the New York State Supreme Court's Appellate Division, First Department, denied Macy's request for a preliminary injunction blocking the sale of goods at J.C. Penney. Closing arguments in the underlying case were heard on August 1, 2013. We believe that we have meritorious defenses to the claims made by Macy's, and we are vigorously defending such claims. Litigation costs in this matter are significant.
As set forth in Note 12, Subsequent Events, in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, on October 21, 2013, we entered into a revised agreement with J.C. Penney.  
We are also party to legal proceedings in the ordinary course of business, including product liability claims for which we are indemnified by our licensees. Other than the Macy's proceedings, 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 2012 Form 10-K, under the heading Part I, Item 1A, “Risk Factors.”

29

ITEM 6. EXHIBITS.
 
 
 
Exhibit
Number
  
Exhibit Title
 
 
10.1
  
Employment Agreement, dated as of October 25, 2013, between Martha Stewart Living Omnimedia, Inc. and Daniel W. Dienst.
 
 
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


30

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 29, 2013
 
 
 
 
/s/ Kenneth P. West
Name:
 
Kenneth P. West
Title:
 
Chief Financial Officer
 
 
(Principal Financial Officer and
duly authorized officer)

31

EXHIBIT INDEX
 
 
 
 
Exhibit
Number
  
Exhibit Title
 
 
10.1
  
Employment Agreement, dated as of October 25, 2013, between Martha Stewart Living Omnimedia, Inc. and Daniel W. Dienst.
 
 
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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