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4-Traders Homepage  >  Shares  >  Nyse  >  Martha Stewart Living Omnimedia, Inc.    MSO

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MARTHA STEWART LIVING OMNIMEDIA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

08/05/2015 | 01:42pm US/Eastern
Forward-looking Statements and Risk Factors
Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein
referred to as "we," "us," "our," "MSLO," or the "Company." 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, as amended, filed with the
Securities and Exchange Commission (the "SEC") with respect to our fiscal year
ended December 31, 2014 under the heading Part I, Item IA. Risk Factors and as
updated in our subsequent Quarterly Reports on Form 10-Q and 8-K filed with the
SEC by the Company:
•         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;

• 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;

• our inability to successfully and profitably develop or introduce new

products and services;



• our failure to predict, respond to and influence trends in consumer taste;


•         disruption in our partnership with Meredith Corporation and Meredith's
          inability to successfully market and sell our magazines and websites;


•         our failure to meet competitive pressures or respond to industry

changes with respect to our content and products;

• continued weak and uncertain worldwide economic conditions;

• loss of key executives;

• the cost of defending certain litigations we are party to, which have

been and may continue to be significant;

• future asset impairment charges;

• the impact of unauthorized access to our electronically-stored data; and

• failure to protect our intellectual property.



As described elsewhere in this Quarterly Report on Form 10-Q, we have entered
into a definitive merger agreement with Sequential Brands Group, Inc.
("Sequential") pursuant to which Sequential would acquire 100% of the
outstanding shares of MSLO for aggregate consideration valued at $6.15 per
share, payable 50% in stock and 50% in cash (the "Merger"). Risk, uncertainties
and assumptions relating to the Merger include, but are not limited to: (1) the
occurrence of any event, change or other circumstances that could give rise to
the termination of the merger agreement; (2) the inability to complete the
Merger due to the failure to obtain stockholder approvals for the Merger or the
failure to satisfy other conditions to completion of the Merger; (3) the failure
of Sequential to obtain the necessary financing arrangements to consummate the
Merger; (4) risks related to disruption of management's attention from the
Company's ongoing business operations due to the Merger; (5) the effect of the
announcement of the Merger on the Company's relationships with its licensing
partners, operating results and business generally; (6) the occurrence of
problems in successfully integrating the business of Sequential and the Company;
(7) the failure of Sequential to realize the synergies expected from the Merger;
and (8) other risks that are described in Merger-related materials filed by
Singer Madeline Holdings, Inc., Sequential and the Company with the SEC,
including the registration statement on Form S-4 filed with the SEC by Singer
Madeline Holdings, Inc. on July 29, 2015 and the preliminary combined
statement/prospectus contained therein (the "Registration Statement on Form
S-4").
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.

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EXECUTIVE SUMMARY
Martha Stewart Living Omnimedia, Inc. is a globally recognized lifestyle company
committed to providing consumers with inspiring content and well-designed, high
quality products.
Our core strategy is to enhance the value and reach of our brand and our content
to accelerate our growth in a manner that provides value to our shareholders. We
hope to grow our merchandising business by capitalizing on our brand equity and
diversifying into new categories, distribution channels and markets.
Specifically, we aim to negotiate new partnerships that fully reward us for the
value of our brands and our active role in product development and design.
Further, we aim to continue to create inspirational content, appealing to our
loyal customers, to be distributed and monetized through our owned and operated
social platforms and across our licensed publishing partners' platforms. With
our partnership with Meredith Corporation, we are in a position to focus on our
core strength as a Company: creating and licensing award-winning, inspirational
content.
On June 22, 2015, the Company and Sequential entered into a definitive merger
agreement, as defined above. Under the terms of the Merger, each of Sequential
and MSLO will merge with and into subsidiaries of Singer Madeline Holdings,
Inc., a newly formed public holding company ("TopCo"). TopCo will continue as a
publicly traded company on the Nasdaq Stock Market and be renamed Sequential
Brands Group, Inc. Pursuant to the terms of the Merger, each share of Sequential
common stock will be converted into one share of TopCo common stock. MSLO
stockholders will be entitled to elect to receive either (a) $6.15 in cash or
(b) a number of shares of TopCo common stock equal to $6.15 divided by the
volume weighted average price of Sequential common stock during the five-day
period ending on the trading day immediately prior to the closing of the Merger,
for each share of MSLO common stock held. The cash and stock elections by MSLO
stockholders will be subject to proration in the event of oversubscription,
although any shareholder who elects 50% stock and 50% cash will not be subject
to proration. The transaction is subject to customary closing conditions and
approval by the holders of a majority of MSLO outstanding common stock not owned
directly or indirectly by Martha Stewart or her affiliates. For full details of
the Merger, refer to TopCo's Registration Statement on Form S-4.
We are currently organized into three business segments: Publishing,
Merchandising and Broadcasting. Summarized below are our operating results for
the three and six months ended June 30, 2015 and 2014.
                                       Three months ended June 30,            Six months ended June 30,
                                         2015               2014               2015               2014
(in thousands)                       (unaudited)         (unaudited)        (unaudited)       (unaudited)
Total Revenues                     $      18,244       $      37,620      $     35,296       $     70,888
Total Operating Costs and Expenses       (20,692 )           (35,376 )         (40,097 )          (70,834 )
Total Operating (Loss) / Income    $      (2,448 )     $       2,244      $ 

(4,801 ) $ 54



On October 14, 2014, we entered into the MS Living Agreement with Meredith
Corporation and, effective November 1, 2014, we discontinued publication of
Martha Stewart Living and our related digital operations. Pursuant to the MS
Living Agreement, Meredith assumed control of advertising sales, circulation and
production of Martha Stewart Living and special interest publications, and
hosting, operating, maintaining, and providing advertising sales and related
functions for marthastewart.com and marthastewartweddings.com, and our related
digital assets. We continue to own our underlying intellectual property, and
create and provide all editorial content for Martha Stewart Living,
marthastewart.com and marthastewartweddings.com. Concurrently with the MS Living
Agreement, we also entered into the MS Weddings Agreement with Meredith.
Pursuant to the MS Weddings Agreement, Meredith assumed responsibility for
advertising sales, circulation and production of Martha Stewart Weddings and
related special interest publications, including Martha Stewart's Real Weddings.
We continue to own our underlying intellectual property, and create and provide
all editorial content for Martha Stewart Weddings and related special interest
publications. Under the MS Weddings Agreement, Meredith provides these services
on a cost-plus basis. Meredith began delivering editions starting with the
February 2015 issue of Martha Stewart Living and the Winter 2015 issue of Martha
Stewart Weddings.
As expected, our partnership with Meredith has significantly impacted certain
Publishing segment revenues and expenses. Specifically, with the elimination of
Martha Stewart Living advertising and circulation revenues that began with the
February 2015 issue and the digital advertising revenue share arrangement that
began November 1, 2014, total advertising and circulation revenues for the
current period were, and are expected to continue to be, lower than our results
from 2014. These revenue declines have been, and will be, partially offset by
the recognition of licensing revenue for print and digital editorial content
that we began to provide to Meredith on November 1, 2014. We also expect our
Publishing segment expenses to continue to be lower than 2014 expenses due to
the elimination of almost all of our non-editorial related expenses for Martha
Stewart Living and our digital assets, including our websites. With respect to
Martha Stewart Weddings, we will continue to

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record advertising and circulation revenue generated by Meredith on our behalf
for Martha Stewart Weddings and related special interest publications, as well
as all costs associated with these magazines, including our editorial expenses
and Meredith's expenses for production, selling and distribution services that
are provided to us on a cost-plus basis. For further discussion of our revenue
recognition policies with respect to our partnership with Meredith, see the
Notes to Consolidated Financial Statements in our 2014 Form 10-K, specifically
Note 2, Summary of Significant Accounting Policies.
We generate revenue from various sources such as licensing partners and
advertising customers. Publishing segment revenues beginning January 1, 2015 are
comprised of advertising sales, magazine subscriptions and newsstand sales of
Martha Stewart Weddings and related special interest publications, as well as
royalties from our book business. Publishing segment revenues also include the
recognition of licensing revenue for editorial content provided to Meredith, as
well as our share of any advertising revenue generated by Meredith for our
digital properties, primarily marthastewart.com. 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 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 Lagasse brand. Merchandising segment revenues
are also derived from the licensing of talent services. Broadcasting segment
revenues are generated from our limited television production operations and
television content library licensing. Our expenses across all of our segments
primarily consist of compensation and related charges, as well as general
overhead costs, including facilities and related expenses. In our Publishing
segment, we incur expenses related to the production, distribution, selling and
marketing of Martha Stewart Weddings. We also incur editorial costs associated
with creating content for Martha Stewart Living, Martha Stewart Weddings and our
digital operations, as well as the costs associated with producing our video
programming.
Detailed segment operating results for the three and six months ended June 30,
2015 and 2014 are summarized below:
                                          Three months ended June 30,       

Six months ended June 30,

                                            2015               2014               2015               2014
(in thousands)                          (unaudited)         (unaudited)        (unaudited)       (unaudited)
Segment Revenues:
Publishing                            $       6,141       $      22,229      $     11,853       $     41,735
Merchandising                                12,008              14,719            22,981             27,803
Broadcasting                                     95                 672               462              1,350
TOTAL REVENUES                               18,244              37,620            35,296             70,888
Segment Operating Costs and Expenses:
Publishing                                   (7,769 )           (23,979 )         (15,609 )          (46,235 )
Merchandising                                (3,355 )            (3,724 )          (6,846 )           (7,508 )
Broadcasting                                   (202 )              (803 )            (581 )           (1,288 )
TOTAL OPERATING COSTS AND EXPENSES
BEFORE CORPORATE EXPENSES                   (11,326 )           (28,506 )         (23,036 )          (55,031 )
Segment Operating (Loss) / Income:
Publishing                                   (1,628 )            (1,750 )          (3,756 )           (4,500 )
Merchandising                                 8,653              10,995            16,135             20,295
Broadcasting                                   (107 )              (131 )            (119 )               62
Total Segment Operating Income Before
Corporate Expenses                            6,918               9,114            12,260             15,857
Corporate Expenses *                         (9,366 )            (6,870 )         (17,061 )          (15,803 )
TOTAL OPERATING (LOSS) / INCOME       $      (2,448 )     $       2,244     

$ (4,801 ) $ 54



* 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. In addition, for the three and six months ended June 30, 2015,
Corporate expenses also included merger transaction costs, principally for legal
and financial advisory services related to the Merger and prior strategic
negotiations with other third parties.

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Operating Results for the Three Months ended June 30, 2015 Compared to Three
Months ended June 30, 2014
For the three months ended June 30, 2015, total revenues decreased 52%, compared
to the three months ended June 30, 2014, primarily due to our partnership with
Meredith, which impacted print advertising and circulation revenue, as well as
digital advertising revenue. In addition, Merchandising segment royalty and
other revenues were lower primarily due to the impact of certain expired
partnerships and lower sales at The Home Depot.
During the three months ended June 30, 2015, our operating costs and expenses
before Corporate expenses decreased $17.2 million or 60% from the prior-year
period, primarily due to our partnership with Meredith, which allowed us to
eliminate almost all of our non-editorial related expenses for Martha Stewart
Living and our digital assets, including our website. Publishing segment
expenses included a non-recurring charge of $0.7 million related to the buyout
of a legacy contract.
Corporate expenses increased 36% for the three months ended June 30, 2015, as
compared to the prior-year period, primarily due to merger transaction costs of
$2.1 million, principally for legal and financial advisory services related to
our potential merger with Sequential.
Operating Results for the Six Months ended June 30, 2015 Compared to Six Months
ended June 30, 2014
For the six months ended June 30, 2015, total revenues decreased 50%, compared
to the six months ended June 30, 2014, primarily due to our partnership with
Meredith, which impacted print advertising and circulation revenue, as well as
digital advertising revenue. In addition, Merchandising segment royalty and
other revenues were lower primarily due to the impact of certain expired
partnerships and lower sales at The Home Depot.
During the six months ended June 30, 2015, our operating costs and expenses
before Corporate expenses decreased $32.0 million or 58% from the prior-year
period, primarily due to our partnership with Meredith, which eliminated almost
all of our non-editorial related expenses for Martha Stewart Living and our
digital assets, including our website.
Corporate expenses increased 8% for the six months ended June 30, 2015, as
compared to the prior-year period, primarily due to merger transaction costs of
$3.1 million, principally for legal and financial advisory services related to
the Merger and prior strategic negotiations with other third parties. The
increase was partially offset by the non-recurring accelerated amortization of
leasehold improvements during the six months ended June 30, 2014, with no
comparable charge in the current-year period.
Liquidity
During the six months ended June 30, 2015, our overall cash, cash equivalents
and short-term investments increased $0.9 million from December 31, 2014. The
increase was primarily due to the collection of receivables from royalties and
advertising. Cash, cash equivalents and short-term investments were $49.2
million and $48.3 million as of June 30, 2015 and December 31, 2014,
respectively.





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Comparison of the three months ended June 30, 2015 to the three months ended
June 30, 2014
PUBLISHING SEGMENT
                                           Three months ended June 30,
                                             2015               2014          Better /
(in thousands)                           (unaudited)         (unaudited)      (Worse)
Publishing Segment Revenues
Print advertising                      $       1,610       $       9,259     $ (7,649 )
Digital advertising                            2,160               5,879       (3,719 )
Circulation                                      473               6,336       (5,863 )
Books                                            151                 416         (265 )
Licensing and other                            1,747                 339        1,408
Total Publishing Segment Revenues              6,141              22,229    

(16,088 )


Production, distribution and editorial        (5,233 )           (12,863 )      7,630
Selling and promotion                           (687 )            (9,621 )      8,934
General and administrative                    (1,787 )            (1,342 )       (445 )
Depreciation and amortization                    (62 )              (153 )         91

Publishing Segment Operating Loss $ (1,628 ) $ (1,750 )

$ 122



Our Publishing segment results for the three months ended June 30, 2015 were
impacted by our partnership with Meredith. Specifically, as a result of the MS
Living Agreement, during the three months ended June 30, 2015: (i) print
advertising and circulation revenues associated with Martha Stewart Living,
along with related paper, printing and distribution costs, were eliminated; (ii)
digital advertising revenue included only our share of total digital advertising
revenue, net of commissions and certain third-party expenses; (iii) other
revenue included licensing revenue associated with the delivery of print and
digital editorial content to Meredith; and (iv) selling and promotion expenses
benefited from the elimination of most of our advertising sales and marketing
costs, as well as certain subscriber acquisition and fulfillment costs and
newsstand expenses. The MS Weddings Agreement had no impact on the recognition
of revenues and expenses associated with Martha Stewart Weddings and related
special interest publications. See the Notes to Consolidated Financial
Statements in our 2014 Form 10-K, specifically Note 2, Summary of Significant
Accounting Policies, for further discussion of our revenue recognition policies
with respect to our partnership with Meredith.
Publishing segment revenues decreased $16.1 million for the three months ended
June 30, 2015, compared to the three months ended June 30, 2014, primarily due
to the impact of our partnership with Meredith, as discussed above. Print
advertising revenue decreased $7.6 million due to the recognition of $7.2
million of revenue from Martha Stewart Living in the prior-year period, with no
comparable revenue during the three months ended June 30, 2015. Print
advertising revenue from Martha Stewart Weddings decreased $0.4 million due to
fewer advertising pages sold at lower rates. Digital advertising revenue
decreased $3.7 million primarily due to our digital revenue share arrangement
with Meredith. Before the revenue share and allowable deductions, digital
advertising revenue declined $1.2 million compared to the prior-year period.
Circulation revenue decreased $5.9 million due to the recognition of $5.8
million of revenue from Martha Stewart Living in the prior-year period, with no
comparable revenue during the three months ended June 30, 2015. Circulation
revenue from Martha Stewart Weddings decreased $0.2 million due to lower
newsstand sales. Revenue from books royalties decreased due to a non-recurring
benefit of $0.4 million during the prior-year period, with no comparable revenue
during the three months ended June 30, 2015. Licensing and other revenue in our
Publishing segment increased $1.4 million primarily due to the recognition of
licensing revenue in connection with the delivery of print and digital editorial
content to Meredith.
Production, distribution and editorial expenses decreased $7.6 million primarily
due to the impact of our partnership with Meredith, specifically due to the
elimination of: i) $5.8 million in non-editorial costs associated with Martha
Stewart Living in the prior-year period, including paper, printing and
distribution costs; and ii) $1.5 million in production, distribution and
editorial expenses associated with our digital assets, including our websites.
Selling and promotion expenses decreased $8.9 million due to the elimination of
most of our advertising sales and marketing costs for Martha Stewart Living and
our digital properties, as well as certain subscriber acquisition and
fulfillment costs and newsstand expenses. General and administrative expenses
increased $0.4 million during the three months ended June 30, 2015 primarily due
to a non-recurring charge of $0.7 million related to the buyout of a legacy
Publishing segment contract. This charge was partially offset by lower allocated
facilities costs.

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MERCHANDISING SEGMENT
                                           Three months ended June 30,
                                             2015               2014          Better /
(in thousands)                           (unaudited)         (unaudited)      (Worse)
Merchandising Segment Revenues
Royalty and other                      $      12,008       $      14,719     $ (2,711 )
Total Merchandising Segment Revenues          12,008              14,719    

(2,711 )


Production, distribution and editorial        (1,611 )            (1,721 )        110
Selling and promotion                           (366 )              (466 )        100
General and administrative                    (1,374 )            (1,527 )        153
Depreciation and amortization                     (4 )               (10 )          6

Merchandising Segment Operating Income $ 8,653 $ 10,995

$ (2,342 )



Merchandising segment revenues decreased 18% for the three months ended June 30,
2015, compared to the three months ended June 30, 2014, due to the impact of
certain expired partnerships and lower sales at The Home Depot. In addition, the
prior-year period included revenues of approximately $0.7 million related to the
licensing of talent services to third parties for television commercials
featuring Martha Stewart, with no comparable revenues during the three months
ended June 30, 2015. These revenue declines were partially offset by an increase
in royalties from our direct license relationship with PetSmart. Merchandising
segment revenues for both the three months ended June 30, 2015 and 2014 included
$1.7 million from 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.
Merchandising segment expenses decreased due to lower compensation expenses and
lower allocated facilities expenses.



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BROADCASTING SEGMENT
                                            Three months ended June 30,
                                             2015                 2014          Better /
(in thousands)                            (unaudited)          (unaudited)       (Worse)
Broadcasting Segment Revenues
Advertising                            $           -         $         547     $    (547 )
Licensing and other                               95                   125           (30 )
Total Broadcasting Segment Revenues               95                   672  

(577 )


Production, distribution and editorial          (202 )                (712 )         510
Selling and promotion                              -                   (78 )          78
General and administrative                         -                   (12 )          12
Depreciation and amortization                      -                    (1 )           1

Broadcasting Segment Operating Loss $ (107 ) $ (131 ) $ 24



Broadcasting segment revenues decreased $0.6 million for the three months ended
June 30, 2015, compared to the three months ended June 30, 2014. The prior-year
period included $0.5 million of advertising revenue generated from sponsorships
related to the third season of Martha Bakes on PBS, with no comparable
programming and associated revenue during the three months ended June 30, 2015.
Broadcasting segment expenses decreased due to lower production costs, as well
as reduced selling and promotion headcount.

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CORPORATE
                                           Three months ended June 30,
                                             2015               2014          Better /
(in thousands)                           (unaudited)         (unaudited)      (Worse)
General and administrative             $      (6,889 )     $      (6,205 )   $   (684 )
Depreciation and amortization                   (388 )              (665 )  

277

Merger transaction costs                      (2,089 )                 -       (2,089 )
Corporate Operating Costs and Expenses $      (9,366 )     $      (6,870 )  

$ (2,496 )



Corporate operating costs and expenses increased 36% for the three months ended
June 30, 2015, compared to the three months ended June 30, 2014. General and
administrative expenses increased $0.7 million due to higher legal fees and
higher allocated facilities expenses. Legal fees for the three months ended June
30, 2015 and 2014 included $0.9 million and $0.5 million, respectively, in
expenses related to litigation with a former licensing partner (Age Group, Ltd.
v. Martha Stewart Living Omnimedia, Inc. filed October 2, 2013 in the Supreme
Court of New York County, New York). We also incurred $2.1 million in merger
transaction costs, principally for legal and financial advisory services,
related to our potential merger with Sequential.

OTHER ITEMS
Net (loss) / income. Net loss was $(2.7) million for the three months ended June
30, 2015, compared to net income of $1.8 million for the three months ended June
30, 2014, as a result of the factors described above.


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Comparison of the six months ended June 30, 2015 to the six months ended June
30, 2014
PUBLISHING SEGMENT
                                           Six months ended June 30,
                                            2015               2014         Better /
(in thousands)                           (unaudited)       (unaudited)       (Worse)
Publishing Segment Revenues
Print advertising                      $      3,516       $     18,944     $ (15,428 )
Digital advertising                           3,921              9,093        (5,172 )
Circulation                                     715             12,604       (11,889 )
Books                                           215                579          (364 )
Licensing and other                           3,486                515         2,971
Total Publishing Segment Revenues            11,853             41,735      

(29,882 )

Production, distribution and editorial (10,913 ) (26,012 )

  15,099
Selling and promotion                        (1,482 )          (17,268 )      15,786
General and administrative                   (3,096 )           (2,632 )        (464 )
Depreciation and amortization                  (118 )             (323 )         205

Publishing Segment Operating Loss $ (3,756 ) $ (4,500 ) $ 744



Our Publishing segment results for the six months ended June 30, 2015 were
impacted by our partnership with Meredith. Specifically, as a result of the MS
Living Agreement, during the six months ended June 30, 2015: (i) print
advertising and circulation revenues associated with Martha Stewart Living,
along with related paper, printing and distribution costs, were eliminated; (ii)
digital advertising revenue included only our share of total digital advertising
revenue, net of commissions and certain third-party expenses; (iii) other
revenue included licensing revenue associated with the delivery of print and
digital editorial content to Meredith; and (iv) selling and promotion expenses
benefited from the elimination of most of our advertising sales and marketing
costs, as well as certain subscriber acquisition and fulfillment costs and
newsstand expenses. The MS Weddings Agreement had no impact on the recognition
of revenues and expenses associated with Martha Stewart Weddings and related
special interest publications. See the Notes to Consolidated Financial
Statements in our 2014 Form 10-K, specifically Note 2, Summary of Significant
Accounting Policies, for further discussion of our revenue recognition policies
with respect to our partnership with Meredith.
Publishing segment revenues decreased $29.9 million for the six months ended
June 30, 2015, compared to the six months ended June 30, 2014, primarily due to
the impact of our partnership with Meredith, as discussed above. Print
advertising revenue decreased $15.4 million due to the recognition of $14.6
million of revenue from Martha Stewart Living in the prior-year period, with no
comparable revenue during the six months ended June 30, 2015. Print advertising
revenue from Martha Stewart Weddings decreased $0.8 million due to fewer
advertising pages sold at lower rates. Digital advertising revenue decreased
$5.2 million due to our digital revenue share arrangement with Meredith. Before
the revenue share and allowable deductions, digital advertising revenue declined
$1.4 million compared to the prior-year period. Circulation revenue decreased
$11.9 million due to the recognition of $11.6 million of revenue from Martha
Stewart Living in the prior-year period, with no comparable revenue during the
six months ended June 30, 2015. Circulation revenue from Martha Stewart Weddings
decreased $0.4 million due to lower newsstand sales. Revenue from books
royalties decreased due to a non-recurring benefit of $0.4 million during the
prior-year period, with no comparable revenue during the six months ended June
30, 2015. Licensing and other revenue in our Publishing segment increased $3.0
million primarily due to the recognition of licensing revenue in connection with
the delivery of print and digital editorial content to Meredith.
Production, distribution and editorial expenses decreased $15.1 million
primarily due to the impact of our partnership with Meredith, specifically due
to the elimination of: i) $11.9 million in non-editorial costs associated with
Martha Stewart Living in the prior-year period, including paper, printing and
distribution costs; and ii) $2.8 million in production, distribution and
editorial expenses associated with our digital assets, including our websites.
Selling and promotion expenses decreased $15.8 million due to the elimination of
most of our advertising sales and marketing costs for Martha Stewart Living and
our digital properties, as well as certain subscriber acquisition and
fulfillment costs and newsstand expenses. General and administrative expenses
increased $0.5 million during the six months ended June 30, 2015 primarily due
to a non-recurring charge of $0.7 million related to the buyout of a legacy
Publishing segment contract. This charge was partially offset by lower allocated
facilities costs.

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MERCHANDISING SEGMENT
                                           Six months ended June 30,
                                            2015               2014         Better /
(in thousands)                           (unaudited)       (unaudited)      (Worse)
Merchandising Segment Revenues
Royalty and other                      $     22,981       $     27,803     $ (4,822 )
Total Merchandising Segment Revenues         22,981             27,803      

(4,822 )


Production, distribution and editorial       (3,372 )           (3,576 )        204
Selling and promotion                          (749 )             (853 )        104
General and administrative                   (2,712 )           (3,050 )        338
Depreciation and amortization                   (13 )              (29 )         16

Merchandising Segment Operating Income $ 16,135 $ 20,295 $ (4,160 )



Merchandising segment revenues decreased 17% for the six months ended June 30,
2015, compared to the six months ended June 30, 2014, due to the impact of
certain expired partnerships and lower sales at The Home Depot. In addition, the
prior-year period included revenues of approximately $0.7 million related to the
licensing of talent services to third parties for television commercials
featuring Martha Stewart, with no comparable revenues during the six months
ended June 30, 2015. These revenue declines were partially offset by an increase
in royalties from our direct license relationship with PetSmart. Merchandising
segment revenues for both the six months ended June 30, 2015 and 2014 included
$3.3 million from 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.
Merchandising segment expenses decreased due to lower compensation expenses and
lower allocated facilities expenses.



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BROADCASTING SEGMENT
                                                       Six months ended June 30,
                                                      2015                   2014             Better /
(in thousands)                                    (unaudited)            (unaudited)           (Worse)
Broadcasting Segment Revenues
Advertising                                    $          172         $            876     $        (704 )
Licensing and other                                       290                      474              (184 )
Total Broadcasting Segment Revenues                       462                    1,350              (888 )

Production, distribution and editorial                   (548 )                 (1,121 )             573
Selling and promotion                                     (28 )                   (141 )             113
General and administrative                                 (5 )                    (24 )              19
Depreciation and amortization                               -                       (2 )               2

Broadcasting Segment Operating (Loss) / Income $ (119 ) $

62 $ (181 )



Broadcasting segment revenues decreased $0.9 million for the six months ended
June 30, 2015, compared to the six months ended June 30, 2014. Advertising
revenue decreased $0.7 million due to lower fees earned from sponsorship revenue
related to the fourth season of Martha Bakes on PBS, as compared to the third
seasons of both Martha Stewart's Cooking School and Martha Bakes in the
prior-year period. Licensing and other revenue decreased $0.2 million primarily
due to lower radio licensing revenue as a result of the expiration of our
agreement with Sirius XM Radio in February 2015.
Broadcasting segment expenses decreased due to lower production costs and
reduced selling and promotion headcount.

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CORPORATE
                                           Six months ended June 30,
                                             2015               2014         Better /
(in thousands)                           (unaudited)        (unaudited)      (Worse)
General and administrative             $     (13,214 )     $    (12,289 )   $   (925 )
Depreciation and amortization                   (777 )           (3,514 )   

2,737

Merger transaction costs                      (3,070 )                -     

(3,070 ) Corporate Operating Costs and Expenses $ (17,061 ) $ (15,803 ) $ (1,258 )



Corporate operating costs and expenses increased 8% for the six months ended
June 30, 2015, compared to the six months ended June 30, 2014. General and
administrative expenses increased $0.9 million primarily due to higher legal
fees and higher allocated facilities expenses. Our legal fees for the six months
ended June 30, 2015 and 2014 included $1.3 million and $0.5 million,
respectively, in expenses related to litigation with a former licensing partner
(Age Group, Ltd. v. Martha Stewart Living Omnimedia, Inc. filed October 2, 2013
in the Supreme Court of New York County, New York). Depreciation and
amortization decreased $2.7 million primarily due to the non-recurring
accelerated amortization of leasehold improvements during the six months ended
June 30, 2014 related to vacating 21% of our primary office space. We also
incurred $3.1 million in merger transaction costs, principally for legal and
financial advisory services related to the Merger and prior strategic
negotiations with other third parties.

OTHER ITEMS
Interest income / (expense) and other, net. Interest income / (expense) and
other, net, for the six months ended June 30, 2014 was the result of net
realized losses on certain of our short-term investments, inclusive of
reclassification adjustments for previous net unrealized losses on
available-for-sale securities, of $(0.5) million, with no comparable loss during
the six months ended June 30, 2015.
Income tax provision. The income tax provision was $0.6 million and $0.3 million
for the six months ended June 30, 2015 and 2014, respectively. The prior-year
period included a non-recurring tax benefit reflecting the impact of the 2014
New York corporate tax reform on our effective tax rate used to value deferred
tax liabilities.
Net loss. Net loss was $5.3 million and $0.8 million for the six months ended
June 30, 2015 and 2014, respectively, as a result of the factors described
above.

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Liquidity and Capital Resources
Overview
During the six months ended June 30, 2015, our overall cash, cash equivalents
and short-term investments increased $0.9 million from December 31, 2014. The
increase was primarily due to the collection of receivables from royalties and
advertising. Cash, cash equivalents and short-term investments were $49.2
million and $48.3 million as of June 30, 2015 and December 31, 2014,
respectively.
On June 30, 2015, 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 reduced our line of credit with
Bank of America, N.A. from $5.0 million to $2.5 million. Borrowings under this
line of credit are available for investment opportunities, working capital, and
the issuance of letters of credit. As of June 30, 2015, 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 above, which include cash from licensing
partners, as well as net cash from Meredith, pursuant to the MS Living and MS
Weddings Agreements related to the delivery of our content and digital
advertising revenue. Operating cash outflows generally include: employee and
related costs; editorial costs associated with creating content across our media
platforms; costs associated with producing our video programming; and costs of
facilities.
Cash provided by operating activities was $2.5 million and $15.7 million for the
six months ended June 30, 2015 and 2014, respectively. During the six months
ended June 30, 2015, we collected $16.6 million in cash from receivables related
to royalties and advertising. Cash provided by operating activities was
partially offset by $5.4 million of cash used to satisfy certain current
accounts payable and accrued liabilities outstanding as of December 31, 2014, as
well as $3.1 million of cash used to pay certain payroll and related
liabilities, including bonus and severance payments, which were expensed during
2014. In addition, our operating loss was $4.8 million for the six months ended
June 30, 2015.
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 investing activities was $9.2 million and $24.8 million for the six
months ended June 30, 2015 and 2014, respectively, primarily from the net
purchases of short-term investments. We used $0.5 million in cash during the six
months ended June 30, 2015 for incremental capital improvements to our
information technology infrastructure and to our corporate office space.
Cash Flows from Financing Activities
Cash (used in) / provided by financing activities was $(0.9) million and $1.3
million for the six months ended June 30, 2015 and 2014, respectively. During
the six months ended June 30, 2015, cash was used in financing activities to pay
employee tax obligations in connection with vesting of employee restricted stock
unit awards, partially offset by proceeds from the exercise of stock options for
our Class A Common Stock issued under our equity incentive plans.
Debt
Any borrowings under our $2.5 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%. The Amended Credit
Agreement expires on June 30, 2016, at which time outstanding amounts borrowed
under the agreement, if any, become due and payable. As of June 30, 2015 and
December 31, 2014, we had no outstanding borrowings against our line of credit,
but had outstanding letters of credit of $1.0 million on both dates.

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Seasonality and Quarterly Fluctuations
Our businesses can experience fluctuations in quarterly performance. Our
Publishing segment results can vary from quarter to quarter, and year over year,
due to publication schedules 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. Given our
revenue sharing arrangements with Meredith, specifically with respect to digital
advertising revenues, the quarterly performance of our Publishing segment will
continue to be affected by seasonal fluctuations. Certain newsstand costs for
Martha Stewart Weddings vary from quarter to quarter, particularly newsstand
marketing costs associated with the distribution of our magazines. 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.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, allowances for doubtful accounts and sales
returns, 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 the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that cannot readily be determined from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. We believe that, of our significant accounting policies described in
Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated
Financial Statements in our 2014 Form 10-K, the policies that may involve the
highest degree of judgment and complexity are described in Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, also in our 2014 Form 10-K.

© Edgar Online, source Glimpses

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