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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0xGFEeSoPkqInszrWIzKgbNalRa+CcUszbIlwS/ls4HFZSzOgV3whJKCcAuFlZ6 cp9n04LM8Vuc71WvyMcBDA== 0000950123-06-013694.txt : 20061108 0000950123-06-013694.hdr.sgml : 20061108 20061108103242 ACCESSION NUMBER: 0000950123-06-013694 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061108 DATE AS OF CHANGE: 20061108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARTHA STEWART LIVING OMNIMEDIA INC CENTRAL INDEX KEY: 0001091801 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 522187059 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15395 FILM NUMBER: 061195862 BUSINESS ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2128278000 MAIL ADDRESS: STREET 1: 20 WEST 43RD STREET CITY: NEW YORK STATE: NY ZIP: 10036 10-Q 1 y26835e10vq.htm FORM 10-Q FORM 10-Q

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, 2006


o		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 005-15395

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.)

11 West 42^nd Street, New York, NY		10036

(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code) (212) 827-8000

(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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

(check one):


Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ


Class	Outstanding as of November 7, 2006

Class A, $0.01 par value		25,429,924
Class B, $0.01 par value		26,791,206

Total		52,221,130

Martha Stewart Living Omnimedia, Inc.

Index to Form 10-Q


	Page
Part I. Financial information

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		32

Item 4. Controls and Procedures		32

Part II. Other Information

Item 1. Legal Proceedings		33

Item 1A. Risk Factors		33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 3. Defaults Upon Senior Securities		34

Item 4. Submission of Matters to a Vote of Security Holders		35

Item 5. Other Information		35

Item 6. Exhibits		35

Signatures		36
EX-4.1: WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK
EX-4.2: WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK
EX-10.3: WARRANT REGISTRATION RIGHTS AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)


	September 30,			December 31,
	2006			2005
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	31,482		$	20,249
Short-term investments		52,503			83,788
Accounts receivable, net		36,906			55,381
Inventories, net		5,908			3,910
Deferred television production costs		4,454			6,507
Income taxes receivable		509			519
Other current assets		4,887			4,366


Total current assets		136,649			174,720


PROPERTY, PLANT AND EQUIPMENT, net		19,138			19,797

INTANGIBLE ASSETS, net		53,605			53,680

OTHER NONCURRENT ASSETS		6,740			5,631

Total assets	$	216,132		$	253,828


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	41,264		$	28,545
Accrued payroll and related costs		13,234			7,488
Income taxes payable		734			476
Current portion of deferred subscription revenue		26,699			31,060
Current portion of deferred revenue		5,230			6,578

Total current liabilities		87,161			74,147

DEFERRED SUBSCRIPTION REVENUE		9,299			8,688
DEFERRED REVENUE		7,573			7,321
OTHER NONCURRENT LIABILITIES		2,558			3,041


Total liabilities		106,591			93,197


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Class A common stock, $.01 par value, 350,000 shares authorized; 25,355 and 24,882 shares outstanding in 2006 and 2005, respectively		254			249
Class B common stock, $.01 par value, 150,000 shares authorized; 26,791 and 26,873 outstanding in 2006 and 2005, respectively		268			269
Capital in excess of par value		251,821			242,770
Accumulated deficit		(142,027	)		(81,882	)

		110,316			161,406

Less: Class A treasury stock - 59 shares at cost		(775	)		(775	)

Total shareholders’ equity		109,541			160,631

Total liabilities and shareholders’ equity	$	216,132		$	253,828

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

MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
REVENUES
Publishing	$	36,258		$	27,564		$	113,433		$	84,626
Broadcasting		10,070			2,924			33,148			5,569
Merchandising		11,895			9,281			34,313			30,689
Internet		2,827			1,555			10,409			6,912

Total revenues		61,050			41,324			191,303			127,796


OPERATING COSTS AND EXPENSES
Production, distribution and editorial		32,328			23,736			100,575			73,853
Selling and promotion		16,498			14,520			48,279			49,632
General and administrative		17,879			27,847			53,140			79,675
Depreciation and amortization		2,272			2,075			6,716			5,482

Total operating costs and expenses		68,977			68,178			208,710			208,642


OPERATING LOSS		(7,927	)		(26,854	)		(17,407	)		(80,846	)
Interest income, net		1,192			1,033			3,594			2,692
Litigation reserve		(18,200	)		—			(18,200	)		—


LOSS BEFORE INCOME TAXES		(24,935	)		(25,821	)		(32,013	)		(78,154	)

Income tax provision		(155	)		(125	)		(451	)		(207	)


LOSS FROM CONTINUING OPERATIONS		(25,090	)		(25,946	)		(32,464	)		(78,361	)
Loss from discontinued operations		(123	)		(122	)		(745	)		(374	)


NET LOSS	$	(25,213	)	$	(26,068	)	$	(33,209	)	$	(78,735	)


LOSS PER SHARE – BASIC AND DILUTED

Loss from continuing operations	$	(0.49	)	$	(0.51	)	$	(0.63	)	$	(1.54	)

Loss from discontinued operations		(0.00	)		(0.00	)		(0.01	)		(0.01	)


Net loss	$	(0.49	)	$	(0.51	)	$	(0.65	)	$	(1.55	)


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and Diluted		51,220			50,849			51,201			50,959

DIVIDENDS PER COMMON SHARE	$	0.50			n/a		$	0.50			n/a

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

MARTHA STEWART LIVING OMNIMEDIA, INC.
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2006
(unaudited, in thousands)


	Class A				Class B											Class A
	common stock				common stock											Treasury Stock
											Capital in
											excess of par		Accumulated
	Shares		Amount		Shares			Amount			value		Deficit			Shares			Amount			Total
Balance at January 1, 2006		24,882	$	249		26,873		$	269		$	242,770	$	(81,882	)		(59	)	$	(775	)	$	160,631

Net loss		—		—		—			—			—		(33,209	)		—			—			(33,209	)

Issuance of shares in conjunction with stock options exercises		103		1		—			—			545		—			—			—			546

Issuance of shares of stock and restricted stock, net of cancellations and tax liabilities		370		4		—			—			7		—			—			—			11

Non-cash equity compensation		—		—		—			—			8,199		—			—			—			8,199

Expense associated with common stock warrant		—		—		—			—			299		—			—			—			299

Common stock dividends		—		—		—			—			—		(26,936	)		—			—			(26,936	)

Shares returned on a net treasury basis		—		—		(82	)		(1	)		1		—			—			—			—


Balance at September 30, 2006		25,355	$	254		26,791		$	268		$	251,821	$	(142,027	)		(59	)	$	(775	)	$	109,541

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

MARTHA STEWART LIVING OMNIMEDIA, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)


	Nine Months Ended
	September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(33,209	)	$	(78,735	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		6,716			5,482
Non-cash equity compensation		8,735			37,770
Litigation reserve		18,200			—
Changes in operating assets and liabilities		11,035			15,640


Net cash provided by (used in) operating activities		11,477			(19,843	)


CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(5,982	)		(6,225	)
Purchases of short-term investments		(133,802	)		(125,229	)
Sales of short-term investments		165,087			69,740


Net cash provided by (used in) investing activities		25,303			(61,714	)


CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid		(26,104	)		—
Proceeds received from stock option exercises		546			8,210
Issuance of stock and restricted stock, net of cancellations and tax liabilities		11			(56	)


Net cash provided by (used in) financing activities		(25,547	)		8,154


Net increase (decrease) in cash		11,233			(73,403	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		20,249			104,647


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	31,482		$	31,244

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

Martha Stewart Living Omnimedia, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Accounting policies

a. General

Martha Stewart Living Omnimedia, Inc., together with its subsidiaries, is herein referred to as the “Company.”

The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods do not necessarily indicate the results to be expected for the entire year. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to its fiscal year ended December 31, 2005.

b. Use of estimates

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.

c. Recent Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R). This statement supersedes SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure – an amendment of FASB Statement No. 123,” and Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” The statement is effective for interim or annual periods beginning after January 1, 2006. Accordingly, effective January 1, 2006, we adopted the fair-value recognition provisions of SFAS No. 123R. See Note 1(f) for further information on the adoption of SFAS No. 123R.

In June 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes – an interpretation of SFAS 109” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold which a tax position is required to meet before being recognized in the financial statements. It further provides guidance on derecognition and measurement of tax positions. Disclosure requirements under this guidance will include a rollforward of the beginning and ending unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within a year. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are still evaluating the impact of this standard on our consolidated financial statements.

d. Television production costs

Television production costs are capitalized and amortized based upon estimates of future revenues to be received and future costs to be incurred for the applicable television product. The Company bases its estimates on existing contracts for programs, historical advertising rates and ratings as well as market conditions. Estimated future revenues and costs are adjusted regularly based upon actual results and changes in market and other conditions.

e. Income taxes

The Company follows Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs

and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS No. 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year taxable income/loss than it places on estimates of future taxable income. Therefore, the Company has added $5.5 million to its valuation allowance in the first nine months of 2006, resulting in a cumulative balance of $77.1 million as of September 30, 2006. 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 (“DTA”) could be realized. On a gross basis (before valuation allowances) the Company has Federal net operating loss (“NOL”) carry forwards totaling $92.5 million as of December 31, 2005. Such loss carry forwards have remaining lives ranging from 4 to 20 years. The DTA balance as of September 30, 2006, primarily consists of the federal NOL, and also includes amounts for state NOLs, accrued compensation, and other DTAs which are not included in the federal NOL. The Company is currently the subject of various ongoing federal, state and local audits. MSLO has filed a protest in response to an IRS assessment of the 2000 tax year. Upon audit, $2.2 million of deductions for location rental expenditures was disallowed. MSLO requested an appeal. MSLO believes the $2.2 million was an ordinary and necessary business expense, deductible pursuant to I.R.C. §162. As part of the 2001 through 2003 tax year audits, the IRS has identified similar concerns regarding the location rental expenditure deductions taken by the Company. The Company believes the deductions taken were ordinary and necessary business expense, deductible pursuant to I.R.C. §162. Additionally, the Company has sufficient NOLs to offset any potential settlement related to the location fee deduction taken in 2002 and 2003, and the amount of the deduction in 2001 was $2.0 million. Although the outcome of each of the audits cannot be predicted with certainty, or in certain cases an estimate can not reasonably be made as of September 30, 2006, the Company has made accounting estimates as required under U.S. GAAP. Accordingly, the Company currently has recorded an accrual of $0.7 million for all ongoing audits. Management believes the ultimate outcome of all audits will not have a material effect on the financial position of the Company. The Company has also recorded a receivable in the amount of $0.5 million which represents refundable federal and state income taxes.

f. Equity Compensation

We currently have several stock incentive plans that permit us to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under these plans are stock options and restricted shares of common stock. The Compensation Committee of the Board of Directors (the “Committee”) may grant up to a maximum of 10,000,000 underlying shares of common stock under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan (the “1999 Option Plan”), and up to a maximum of 600,000 underlying shares of common stock under the Non-Employee Director Stock and Option Compensation Plan (the “Non-Employee Director Plan”). In November 1997, the Company established the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (the “1997 Option Plan”). The Company has an agreement with Martha Stewart whereby she will periodically return to the Company shares of Class B common stock owned by her or her affiliates in amounts corresponding on a net treasury basis to the number of options exercised under the 1997 Option Plan during the relevant period. Accordingly, options outstanding under this plan are not dilutive. No further awards will be made from this plan.

Prior to January 1, 2006, we accounted for these plans under SFAS No. 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB No. 25. Effective January 1, 2006, we adopted the fair-value recognition provisions of SFAS No. 123R and Securities and Exchange Commission Staff Accounting Bulletin No. 107 using the modified prospective transition method; therefore prior periods have not been restated. Compensation cost recognized in the three and nine month periods ended September 30, 2006 includes the relevant portion (the amount vesting in the respective periods) of share based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

Stock Options

Stock options are granted with exercise prices not less than the fair market value of our common stock at the time of the grant, and with an exercise term not to exceed 10 years. The Committee determines the vesting period for our

stock options. Generally, employee stock options vest ratably on each of either the first three or four anniversaries of the grant date. Non-employee director options are subject to various vesting schedules ranging from one to three years. The vesting of certain option awards to non-employees are contingent upon the satisfaction of various milestones. Employee option awards usually provide for accelerated vesting upon retirement, death, or disability. Severance of a participant in the Martha Stewart Living Omnimedia, Inc. Executive Severance Plan also triggers accelerated vesting of all participant equity awards. During the three month period ended September 30, 2006 we granted 60,000 non-employee options pursuant to an agreement with an agency with a strike price of $18.31, the closing price on the date of the agreement. The agency will provide the Company with marketing communications and consulting services. 30,000 of these options vested in the quarter. This agreement replaced a prior agreement which contemplated the granting of 100,000 options, none of which were approved or issued. During the nine months ended September 30, 2006, we granted 137,500 options comprised of 77,500 options granted to our Board of Directors for a new director grant as well as continuing service grants, and the 60,000 non-employee options pursuant to the agreement previously discussed. During the three and nine month periods ended September 30, 2005, we granted an insignificant amount of options.

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s loss before taxes and net loss for the three month period ended September 30, 2006, are $0.5 million higher than if we continued to account for stock-based compensation under APB No. 25. For the nine month period ended September 30, 2006, our loss before taxes and net loss are $1.8 million higher. This resulted in a $0.01 and $0.04 increase in our reported loss per share for the three and nine month periods ended September 30, 2006. Compensation expense is recognized in the production, distribution and editorial, the selling and promotion, and the general and administrative expense lines of our condensed consolidated statements of operations. As of September 30, 2006, there was $2.2 million of total unrecognized compensation cost related to nonvested stock options to be recognized over a weighted average period of 1 year.

The intrinsic values of options exercised during the nine months ended September 30, 2006 and 2005 were not significant. The total cash received from the exercise of stock options for the nine months ended September 30, 2006 and 2005 was $0.5 million and $8.2 million respectively, and is classified as financing cash flows.

No employee options were granted during the nine months ended September 30, 2006. The fair value of the non-employee options granted during the nine months ended September 30, 2006 was estimated on the date of their grant using the Black-Scholes option-pricing model on the basis of the following weighted average assumptions:


	2006
risk-free interest rates		4.87	%
dividend yields	zero
expected volatility		64.93	%
expected option life	4.2 years
Average fair market value per option granted	$	9.34

Changes in outstanding options under the Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan during the nine month period ending September 30, 2006 are as follows:


				Weighted
	Number of			average
	options			exercise price
Outstanding as of December 31, 2005		114,581		$	0.60

Exercised		(33,243	)		0.60


Outstanding as of September 30, 2006		81,338		$	0.60



Options exercisable at September 30, 2006		81,338		$	0.60

Options available for grant at September 30, 2006	zero

Changes in outstanding options under the Martha Stewart Living Omnimedia, Inc. Amended and Restated 1999 Stock Incentive Plan and the Non-Employee Director Stock and Option Compensation Plan during the nine month period ending September 30, 2006 are as follows:


				Weighted
	Number of			average
	options			exercise price
Outstanding as of December 31, 2005		1,686,208		$	18.13

Granted		137,500			17.68

Exercised		(71,308	)		7.70

Cancelled		(3,450	)		9.61


Outstanding as of September 30, 2006		1,748,950		$	18.25



Options exercisable at September 30, 2006		1,049,779		$	17.93

Options available for grant at September 30, 2006		5,495,007

The following table summarizes information about the stock options outstanding under the Company’s option plans as of September 30, 2006:


			Options Outstanding				Options Exercisable
	Weighted
	Average
	Remaining				Weighted				Weighted
	Contractual				Average				Average
Range of Exercise Price	Life in		Number		Exercise		Number		Exercise
Per Share	Years		Outstanding		Price		Exercisable		Price
$0.60		1.4		81,338	$	0.60		81,338	$	0.60
$6.78-$10.61		3.4		316,092		8.04		261,088		7.79
$14.90-$15.75		4.6		19,425		15.39		19,425		15.39
$15.90		5.6		150,000		15.90		150,000		15.90
$16.45-$18.90		7.3		671,133		18.45		266,966		18.72
$19.92-$26.25		8.1		240,500		21.04		100,500		22.00
$26.56-$33.75		6.5		351,800		27.72		251,800		27.39

$0.60-$33.75		6.1		1,830,288	$	17.74		1,131,117	$	16.69

The table below presents the pro forma effect on net loss and basic and diluted loss per share for the three and nine months ended September 30, 2005 if we had applied the fair value recognition provisions of SFAS No. 123 to options granted under our stock option plans. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option pricing model.


	Three months ended			Nine months ended
	September 30, 2005			September 30, 2005
Net loss, as reported	$	(26,068	)	$	(78,735	)
Add back: Total stock option based employee compensation expense included in net loss		939			3,183
Deduct: Total stock option based employee compensation expense determined under fair value based method for all awards		(1,465	)		(4,246	)


Pro forma net loss	$	(26,594	)	$	(79,798	)


Loss per share:
Basic and diluted – as reported	$	(0.51	)	$	(1.55	)
Basic and diluted – pro forma	$	(0.52	)	$	(1.57	)

Restricted stock

Restricted stock represents shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. In 2005, the market value of restricted stock awards on the date of grant was recorded as a reduction of capital stock. In connection with the adoption of SFAS No. 123R in 2006, we reclassified the unamortized restricted stock to additional paid-in capital. Restricted stock is expensed ratably over the restriction period, ranging from three to four years. Restricted stock expense for the three months ended September 30, 2006 and 2005 was $1.9 million and $13.0 million, respectively. Restricted stock expense for the nine months ended September 30, 2006 and 2005 was $5.7 million and $36.5 million, respectively.

A summary of our nonvested restricted stock shares as of September 30, 2006 and changes during the nine month period ended September 30, 2006 is as follows:


				Weighted
				Average Grant
	Shares			Date Value

Nonvested at December 31, 2005		708,943		$	16,997
Granted		438,782			7,640
Vested (1)		(100,782	)		(2,696	)
Forfeitures		(78,768	)		(1,827	)

Nonvested at September 30, 2006		968,175		$	20,114


(1)		The shares vested during the period ended September 30, 2006 include 20,448 shares of our common stock surrendered by recipients in order to fulfill their tax withholding obligations.

The fair value of nonvested shares is determined based on the closing stock price of our common stock on the grant date. The weighted-average grant date fair values of nonvested shares granted during the periods ended September 30, 2006 and 2005 were $7.6 million and $14.7 million respectively. As of September 30, 2006 there was $20.1

million of total unrecognized compensation cost related to nonvested restricted stock arrangements to be recognized over a weighted-average period of 1.7 years.

Additional outstanding equity grants

In consideration of the execution of a consulting agreement under which Mark Burnett has agreed to act as an advisor and consultant to the Company with respect to various television matters, in September 2004, the Company issued to Mr. Burnett a warrant to purchase 2,500,000 shares of the Company’s Class A Common Stock at an exercise price of $12.59 per share. Under the initial agreement, the shares covered by the warrant would vest and become exercisable in three tranches, subject to the achievement of various milestones achieved with respect to certain television programs. The first two tranches representing a total of 1,666,666 shares vested in 2005. However, under the terms of this warrant, the third tranche ( i.e. , 833,333 shares) will not vest. The warrant will expire on March 17, 2012.

On August 11, 2006, in connection with Mr. Burnett’s continued services as executive producer of the syndicated daytime television show The Martha Stewart Show, the Company issued an additional warrant to Mr. Burnett to purchase up to 833,333 shares at an exercise price of $12.59 per share, subject to vesting pursuant to certain performance criteria. This warrant may vest and become exercisable in two equal tranches subject to the achievement of various milestones relating to the production and distribution of The Martha Stewart Show. This warrant will also expire on March 17, 2012. For the three and nine month periods ended September 30, 2006, the Company recognized approximately $0.3 million in non-cash equity compensation related to this warrant. The non-cash equity compensation expense related to the warrants was valued using the following assumptions: risk free interest rate- 5.16%; dividend yield- zero; expected volatility- 64%; contractual life- 5.47 years; average fair market value per option granted- $12.04. The Company expects to account for the cost of the first tranche of this warrant ratably over the course of the current television season.

Both of Mr. Burnett’s warrants were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The warrants issued to Mr. Burnett are not covered by the Company’s existing equity plans. In addition to the new warrant, the Company also entered into a registration rights agreement with Mr. Burnett. Mr. Burnett has exercised his right to obligate the Company to effect a registration under the Securities Act of 1933, as amended, of the shares of common stock issuable upon the exercise of either warrant. The Company currently expects to register the shares covered under the warrant agreement pursuant to a registration statement on Form S-3 filed with the Securities and Exchange Commission.

In January 2005, the Company entered into a new consulting agreement with Charles Koppelman who was then Vice Chairman and a Director of the Company. Pursuant to the terms of the agreement, Mr. Koppelman was paid a fee of $0.5 million per annum, payable monthly, and was issued 50,000 shares of restricted stock under our 1999 option plan, which would vest upon the Company entering into a merchandising licensing agreement. The vesting provisions of the restricted stock were met in May 2005 at which point the shares had an aggregate value of $1.3 million. Because the shares were issued as a result of the execution of a licensing agreement, the value of the shares is amortized over the four year term of the agreement, which began in November 2005. Non-cash compensation expense recognized in connection with these shares was $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2006, respectively. In addition, Mr. Koppelman received 200,000 options under our 1999 Option Plan to purchase shares of the Company’s Class A common stock with an exercise price equal to the stock’s fair market value on the date of grant. The options vest 50% on the first and second anniversary and have a 10 year term. The options had an aggregate value of $3.3 million on the date of issuance, based upon the Black- Scholes option pricing model. The expense associated with these options is recognized over the two year vesting period based upon their fair value at the end of each period. For the three and nine month periods ended September 30, 2006, the Company recognized $0.3 million and $0.8 million, respectively, in non-cash equity compensation expense under this consulting agreement. The non-cash equity compensation expense related to the options was valued using the Black-Scholes option pricing model using the following assumptions: risk free interest rate- 5.04%; dividend yield- zero; expected volatility-64%; contractual life-8.3 years; average fair market value per option granted — $11.21.

In October 2005, the Company entered into a two-year consulting agreement with CAK Entertainment, Inc. an entity for which Mr. Charles Koppelman serves as Chairman and Chief Executive Officer. Mr. Koppelman was Chairman of the Board and Director of the Company at the time of the agreement and thereafter. The agreement extends for a third year unless terminated by either party. Pursuant to the terms of the consulting arrangement, CAK Entertainment will make the consulting services of Mr. Koppelman available on a non-exclusive basis to assist the

Company’s President and Chief Executive Officer in identifying and addressing strategic opportunities for the Company, including, without limitation, helping to identify, develop, design, structure and negotiate transactions or other business collaborations involving merchandising (through catalogs, direct marketing, internet commerce, and/or retail stores); book publishing; magazine, radio and television ventures; and other areas in which the Company may seek to do business.

In consideration for Mr. Koppelman’s services, the Company agreed to pay CAK Entertainment $0.7 million per annum, payable in equal monthly installments. This annual amount supersedes the annual compensation payable to Mr. Koppelman pursuant to the January 2005 consulting agreement between the Company and Mr. Koppelman. In addition, the Company agreed to grant Mr. Koppelman (i) options to purchase 200,000 shares of the Company’s Class A common stock under our 1999 Option Plan, with an exercise price equal to the stock’s fair market value on date of grant, and (ii) 75,000 shares of restricted stock, also under our 1999 Option Plan. Mr. Koppelman also will be eligible to receive a performance fee of up to $3.0 million conditioned upon the achievement of certain performance milestones. The options, shares of restricted stock and earn-out of the performance fee are all subject to performance-based vesting conditions. The vesting conditions relating to the issuance of a portion of both the restricted stock and the options, and the payment of a portion of the performance fee were met in April 2006. Accordingly, the risk of forfeiture lapsed with respect to 3,750 shares, which had an aggregate value of $0.1 million on the date of vesting. Mr. Koppelman vested in 10,000 options which had an aggregate value of $0.1 million on the date of vesting, based upon the Black- Scholes option pricing model and Mr. Koppelman received $0.1 million of his performance fee. Because the shares and options were issued as a result of the execution of a merchandising agreement, the value of the shares and options will be amortized over the remaining five year term of the agreement, which is expected to begin during the first quarter of 2007. Accordingly, the Company has not begun to recognize non-cash compensation expense related to this merchandising agreement.

For the three and nine months ended September 30, 2006, the Company recognized $0.2 million and $0.5 million, respectively, as a consulting expense under this consulting agreement.

In March 2006, the Company entered into an agreement with an agency which will provide the Company with marketing communications and consulting services. In September 2006, the Company entered into a new agreement with this agency which superseded in its entirety the March agreement. Pursuant to the new agreement, the Company granted the agency an option to purchase 60,000 shares of the Company’s Class A Common Stock under the Company’s 1999 Option Plan with an exercise price equal to $18.31 per share, the closing price on the date of the agreement. 30,000 of the shares subject to the option vested immediately. The remaining 30,000 shares subject to the option will vest on December 31, 2006, contingent upon the Company receiving certain specified deliverables from the agency. The non-cash equity compensation expense related to the options was valued using the Black-Scholes option pricing model using the following assumptions: risk free interest rate- 5.07%; dividend yield- zero; expected volatility-64%; contractual life-5.0 years; average fair market value per option granted — $10.58.

Other

In late July, 2006 our Board of Directors declared a one-time special dividend of $0.50 per share for a total value of $26.9 million. During September 2006, the Company paid $26.1 million in dividends.

g. Reclassifications

Certain prior year financial information has been reclassified to conform to fiscal 2006 financial statement presentation.

2. Newsstand Adjustment

The Company has historically paid newsstand-related fees based in part on certain estimates provided by our distribution partner. We recently questioned amounts related to a portion of these bills. As a result of our negotiations with our distributor, we reached a settlement agreement pursuant to which we received a one-time refund in the amount of $3.2 million. The refund was recorded in the second quarter of 2006 as a reduction to the Publishing segment’s selling and promotion costs line on our condensed consolidated statements of operations, and accordingly is included in our results for the nine months ended September 30, 2006. We also recorded interest income of $0.3 million related to the settlement in the second quarter of 2006.

3. Inventories

Inventory is comprised of paper stock. The inventory balance at September 30, 2006 and December 31, 2005 was $5.9 million and $3.9 million respectively.

4. Loss per share

Loss per share is computed in accordance with SFAS No. 128, “Earnings Per Share” and SFAS 123(R) “Share-Based Payment”. Basic loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during each period. Diluted loss per share reflects the potential dilution that would occur from the exercise of stock options and warrants and the vesting of restricted stock.

As of September 30, 2006 and 2005, antidilutive options, warrants, and restricted stock that were excluded from the computation of diluted earnings per share because the effect would have been antidilutive were 5,191,975 and 5,209,273 respectively.

5. Industry segments

The Company is a leading creator of original “how to” content and related products for homemakers and other consumers. The Company’s business segments are Publishing, Broadcasting, Merchandising and Internet. The Publishing segment primarily consists of the Company’s magazine operations, and also those related to its book operations. The Broadcasting segment primarily consists of the Company’s television production operations which produce television programming that airs in syndication and on cable, and also those related to its radio operations. The Merchandising segment consists of the Company’s operations related to the design of merchandise and related promotional and packaging materials that are distributed by its retail and manufacturing partners in exchange for royalty income. The Internet segment comprises the Company’s operations relating to its website marthastewart.com, its collaboration with Kodak regarding digital photo products, its direct-to-consumer floral business, and its catalog, Martha Stewart: The Catalog For Living, which was discontinued in early 2005.

Non-GAAP Financial Information

In addition to using net income to assess the organization’s overall financial health, Company management uses net income before interest, taxes, depreciation, amortization, and non-cash equity compensation (“Adjusted EBITDA”), a non-GAAP financial measure, to evaluate the performance of our businesses on a real-time basis. Adjusted EBITDA is considered an important indicator of operational strength, is a direct component of the Company’s annual compensation program, and is a significant factor in helping our management determine how to allocate resources and capital. Adjusted EBITDA is used in addition to and in conjunction with results presented in accordance with GAAP. Management considers Adjusted EBITDA to be a critical measure of operational health because it captures all of the revenue and ongoing operating expenses of our businesses without the influence of (i) interest charges, which result from our capital structure, not our ongoing business efforts, (ii) taxes, which relate to the overall organizational financial return, not that of any one business, (iii) the capital expenditure costs associated with depreciation and amortization, which are a function of historical decisions on infrastructure and capacity, (iv) the cost of non-cash equity compensation which, as a function of our stock price, can be highly variable, is not necessarily an indicator of current operating performance for any individual business unit, and is amortized over the appropriate period, and, in this period, (v) the one-time charge taken as a reserve for our anticipated litigation expense.

Adjusted EBITDA provides a means to directly evaluate the ability of our business operations to generate returns on a real-time basis. We provide disclosure of Adjusted EBITDA because we believe it is useful for investors to have means to assess our performance as we do. While Adjusted EBITDA is a customized non-GAAP measure, it also provides a means to analyze, value and compare our operating capabilities to those of companies with whom we compete, many of which have different compensation plans, depreciation and amortization costs, capital structures and tax burdens. But please note that our non-GAAP results may differ from similar measures used by other companies, even if similar terms are used to identify such measures.

A limitation of Adjusted EBITDA is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues for our overall organization. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures. Management also evaluates the cost of capitalized tangible and intangible assets by analyzing returns provided on the capital dollars

deployed. A further limitation of Adjusted EBITDA is that it does not include stock compensation expense related to our workforce. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income or other measures of financial performance reported in accordance with GAAP.

Revenues for each segment are presented in the condensed consolidated income statements. Income (loss) from operations for each segment is as follows:

(in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)						(unaudited)
	2006			2005			2006			2005
ADJUSTED EBITDA
Publishing	$	2,940		$	(1,566	)	$	10,686		$	(11,852	)
Broadcasting		(546	)		(3,360	)		1,339			(8,185	)
Merchandising		6,093			4,343			18,428			16,719
Internet		(634	)		(721	)		(475	)		(2,868	)

Adjusted EBITDA before Corporate Expenses		7,853			(1,304	)		29,978			(6,186	)
Corporate Expenses		(10,481	)		(10,200	)		(31,935	)		(31,408	)

ADJUSTED EBITDA		(2,628	)		(11,504	)		(1,957	)		(37,594	)


NON-CASH EQUITY COMPENSATION
Publishing		582			453			2,000			1,696
Broadcasting		465			66			744			17,432
Merchandising		169			218			684			425
Internet		46			9			99			28
Corporate Expenses		1,765			12,529			5,207			18,189

Total Non-Cash Equity Compensation		3,027			13,275			8,734			37,770


DEPRECIATION AND AMORTIZATION
Publishing		139			247			458			742
Broadcasting		758			462			2,257			609
Merchandising		256			211			764			629
Internet		73			231			176			722
Corporate Expenses		1,046			924			3,061			2,780

Total Depreciation and Amortization		2,272			2,075			6,716			5,482


OPERATING INCOME/(LOSS)
Publishing		2,219			(2,266	)		8,228			(14,290	)
Broadcasting		(1,769	)		(3,888	)		(1,662	)		(26,226	)
Merchandising		5,668			3,914			16,980			15,665
Internet		(753	)		(961	)		(750	)		(3,618	)

Operating Income/(Loss) before Corporate Expenses		5,365			(3,201	)		22,796			(28,469	)
Corporate Expenses		(13,292	)		(23,653	)		(40,203	)		(52,377	)

Total Operating Loss		(7,927	)		(26,854	)		(17,407	)		(80,846	)
Interest income, net		1,192			1,033			3,594			2,692
Litigation reserve		(18,200	)		—			(18,200	)		—

LOSS BEFORE INCOME TAXES		(24,935	)		(25,821	)		(32,013	)		(78,154	)
Income tax provision		155			125			451			207


LOSS FROM CONTINUING OPERATIONS		(25,090	)		(25,946	)		(32,464	)		(78,361	)
Loss from discontinued operations		(123	)		(122	)		(745	)		(374	)

NET LOSS	$	(25,213	)	$	(26,068	)	$	(33,209	)	$	(78,735	)

6. Related Party Transactions

In 2004, Martha Stewart submitted a claim, pursuant to the Company’s By-laws, for reimbursement of certain expenses relating to her defense of the count of the federal criminal indictment against her alleging she made false and misleading statements intended to influence the price of the Company’s stock. Ms. Stewart’s defense of this count was successful and a judgment of acquittal was entered in her favor. The Company reimbursed Ms. Stewart $2.8 million for this claim. The Company expects that the amount reimbursed to Ms. Stewart is reimbursable to the Company under its Directors’ & Officers’ insurance policy and, accordingly, does not believe that the payment will result in an expense to the Company. As of September 30, 2006, certain payments have already been reimbursed under the Directors’ & Officers’ insurance policy and have been applied to the total claim, and the Company expects to receive the balance of this claim – approximately $2.1 million – from its insurers in connection with the anticipated settlement of the class action litigation disclosed in Part II, Item 1 hereof (the “Class Action”).

In addition to the matter described in the preceding paragraph relating to the now-concluded criminal proceeding, pursuant to the provisions of Delaware law, the Company’s By-laws, and indemnification agreements, legal fees and other expenses incurred in connection with the civil Class Action have been and are being advanced on behalf of Ms. Stewart by the Company. Accordingly, from the beginning of fiscal 2006 through September 30, 2006, the Company advanced approximately $0.6 million, and for the years 2002 – 2005, the Company advanced approximately $0.7 million, for legal fees and other expenses relating to the defense Class Action on behalf of Ms. Stewart. Since the Class Action was commenced in 2002, the Company also has advanced legal fees and expenses to other defendants in the case entitled to advancement of such costs under the Company’s By-Laws and Delaware law by reason of their status as a current or former officer or director. The Company has been reimbursed by the Company’s insurers for a majority of such advances. The Company has submitted or will submit to the insurers demands for reimbursement for the remaining amounts that have been advanced, and expects to be fully reimbursed for these amounts in connection with the anticipated settlement of the Class Action. The advancement of these expenses will be an on-going obligation through the settlement or resolution of the Class Action.

The Company currently has a consulting agreement with CAK Entertainment, Inc. an entity for which Mr. Charles Koppelman serves as Chairman and Chief Executive Officer. Mr. Koppelman was Chairman of the Board and a Director of the Company at the time of the agreement and thereafter. This agreement superseded a previous consulting agreement with him, which was entered into while Mr. Koppelman was Vice Chairman and a Director. The details of the agreements are included under note 1.f.

7. Discontinued Operations

In June 2002, the Company decided to exit The Wedding List, a wedding registry and gift business that was reported within the Internet business segment. In the second quarter of 2006, a review of the accrual of future lease commitments, net of anticipated sublease rental income, resulted in a charge of $0.4 million. The anticipated sublease income was determined by estimating future cash flows based upon current market conditions. The loss from operations, which is generated primarily from facility related expenses, was as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Loss from operations	$	(123	)	$	(122	)	$	(745	)	$	(374	)

In the third quarter of 2006, the Company signed a sublease. As a result, there will be no further loss reported from discontinued operations. The additional reserve taken in the second quarter of 2006 is sufficient to cover any future charges.

8. Subsequent Events

In late October 2006, the parties began negotiating an agreement to settle the Class Action for $30 million, approximately $15 million of which is expected to be paid by the Company, approximately $10 million of which is expected to be paid by the Company’s insurers, and approximately $5 million of which is expected to be paid by Ms. Stewart. The settlement is subject to the negotiation and execution of definitive settlement documents and to Court approval. The Company anticipates that a hearing to consider approval of the settlement will be held in late 2006 or early 2007. Accordingly, the Company has recorded a litigation reserve of approximately $18.2 million against third quarter 2006 earnings. The Company expects that the final settlement amount will be paid either in cash or in a mix of cash and Company stock.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this report, the terms “we,” “us,” “our” and “MSO” refer to Martha Stewart Living Omnimedia, Inc., and its subsidiaries.

EXECUTIVE SUMMARY

We believe that our third quarter results demonstrate the continued improvement in the performance of the Company. While the events of 2002 are relevant to our year-over-year comparisons, we believe that they do not solely account for the many areas of growth that are evident today. These include an increase in advertising pages and rates and improved newsstand results across our magazines; the growth in advertising at our Internet segment; the launch of our new syndicated television program, The Martha Stewart Show in September 2005; and the launch of the Martha Stewart Living Radio channel on SIRIUS satellite radio in November 2005. In 2006, we are re-investing a portion of our earnings to accelerate the development of Blueprint magazine, re-launch our website to take further advantage of the growth in online media, and support the roll-out of our new merchandising initiatives.

As previously reported, beginning in August 2002, complaints were first filed and later consolidated in what we refer to as the Class Action, which involves claims relating to Ms. Stewart’s sale of shares of stock of another company in late 2001. In late October 2006, the parties began negotiating an agreement to settle the Class Action for $30 million, approximately $15 million of which is expected to be paid by the Company, approximately $10 million of which is expected to be paid by the Company’s insurers, and approximately $5 million of which is expected to be paid by Ms. Stewart. The settlement is subject to the negotiation and execution of definitive settlement documents and to Court approval. The Company anticipates that a hearing to consider approval of the settlement will be held in late 2006 or early 2007. The Company expects that the final settlement amount will be paid either in cash or in a mix of cash and Company stock. If a definitive settlement agreement is not signed or approved by the court on terms consistent with our assumptions, the change in settlement terms or costs, or resulting continued litigation, could have a material adverse impact on our finances and results of operations as reported herein.

Recent Broadcasting Developments. On October 31, 2006, we announced that our Broadcasting segment successfully concluded negotiations with NBC’s owned and operated stations and other key stations for a third season of The Martha Stewart Show. The Company and NBC Universal Television Distribution will continue to sell the show to additional stations.

Overall, we believe that The Martha Stewart Show has great promotional value for the Company’s businesses and products. One example of this was the recently completed KB Home Giveaway, where the show received 24 million entries in less than a month. Though it has great promotional value, our show is not currently profitable. Earlier this year, our cable distribution partner chose not to renew our agreement. As a result, we expect that the show in season two will show a modest loss.

Recent Internet Developments. On October 31, 2006, we announced a new content relationship with Yahoo! within the Lifestyles property in the Yahoo! Media Group as part of our strategy to extend and expand our content on the internet, and to drive traffic, ad revenue and magazine subscriptions.

On June 27, 2006, we announced a multiyear agreement with Kodak Imaging Network to develop a line of branded Martha Stewart personalized photo products. The new line includes a large selection of holiday offerings such as cards and photo books. Other products and new categories are expected to be introduced at the end of the year and throughout 2007. In October 2006, our new line of digital photo products debuted at www.kodakgallery.com and at www.marthastewart.com.

Recent Merchandising Developments. On September 20, 2006, we announced an agreement to offer a new Martha Stewart-branded interior and exterior paint color program called Martha Stewart Colors. The complete palette is expected to be introduced in the second quarter of 2007 and will be available exclusively at Lowe’s stores nationwide.

On July 25, 2006, we announced a multiyear agreement with FLOR, Inc., an eco-friendly manufacturer of residential, high-style modular floor coverings, to manufacture a new line of Martha Stewart-branded carpet tiles. The products will be available through the FLOR catalog and online at www.florcatalog.com beginning in mid 2007.

On June 20, 2006, we announced an agreement with Quality Home Brands, LLC, a manufacturer of leading brands of lighting, to manufacture a new line of Martha Stewart-branded lighting and ceiling fans. Initial products are expected to be introduced in the second half of 2007.

On April 6, 2006 we announced that we signed a licensing agreement with Macy’s and that we expect to launch a line of Martha Stewart Collection products in the third quarter of 2007, to be sold in approximately 800 Macy’s home stores nationwide. The Martha Stewart Collection line will encompass a broad range of home goods of approximately 1,400 SKU’s – including bed and bath textiles, housewares, casual dinnerware, flatware and glassware, cookware, holiday decorating and trim-a-tree items. We expect to record the revenue related to this licensing arrangement in our Merchandising segment.

On March 12, 2006 the first community of Martha Stewart-branded homes created pursuant to our initial agreement with KB Home opened in Cary, North Carolina, and was well received by consumers. We also announced an expanded agreement with KB Home, pursuant to which we anticipate KB Home will build Martha Stewart-branded homes throughout the U.S.

In March 2006, we entered into a licensing agreement with Safavieh, a leading manufacturer and importer of fine rugs, to create a line of Martha Stewart-branded area rugs, to be sold in independent furniture stores and independent rug stores beginning in mid 2007.

Mark Burnett Agreement. As previously reported, on September 17, 2004, the Company issued a warrant to Mark Burnett to purchase 2.5 million shares of the Company’s Class A Common Stock at a price of $12.59 per share in connection with a consulting agreement. That warrant has vested with respect to 1,666,667 shares and will not vest with respect to the remaining 833,333 shares. The warrant will expire on March 17, 2012.

In connection with Mr. Burnett’s continued services as executive producer of the syndicated daytime television show The Martha Stewart Show, on August 11, 2006 the Company issued a new warrant to Mr. Burnett to purchase up to 833,333 shares at an exercise price of $12.59, subject to vesting pursuant to certain performance criteria. The new warrant may vest and become exercisable in two tranches subject to the achievement of various milestones relating to the production and distribution of The Martha Stewart Show. The new warrant will also expire on March 17, 2012. The warrant was issued pursuant to the exemption from registration provided by section 4(2) of the Securities Act of 1933, as amended. The warrants issued to Mr. Burnett are not covered by the Company’s existing equity plans.

In addition to the new warrant, the Company has entered into a registration rights agreement with Mr. Burnett. Mr. Burnett has exercised his right to obligate the Company to effect a registration under the Securities Act of 1933, as amended, of the shares of common stock issuable upon the exercise of either warrant.

Kmart Agreement. The Company’s current agreement with Kmart provides for certain minimum guaranteed royalty payments. Due principally to store closures (since the signing of the agreement in June 2001, Kmart has closed approximately 30% of its stores) and lower same-store sales, we expect the minimum guarantees will

significantly exceed the royalties that otherwise would be earned from actual retail sales through 2007. For the contract years ending January 31, 2009 and 2010 (the extension years), the minimum guarantees will be substantially lower than in prior years. The specific computation is discussed in the paragraph below. The following are the minimum guaranteed royalty payments (in millions) over the term of the agreement:


	1/31/02		1/31/03		1/31/04		1/31/05		1/31/06		1/31/07		1/31/08
Minimum Royalty Amounts	$	15.3	$	40.4	$	47.5	$	49.0	$	54.0	$	59.0	$	65.0

For the year ending January 31, 2009, the minimum royalty amount is the greater of $20 million or 50% of the earned royalty for the year ending January 31, 2008. For the year ending January 31, 2010 the minimum royalty amount is the greater of $15 million or 50% of the earned royalty for the year ending January 31, 2009. Furthermore, up to $3.8 million of the January 31, 2005 and January 31, 2006 minimum royalty payments and $2.5 million of the January 31, 2007 and January 31, 2008 minimum royalty payments, but not more than $10.0 million in the aggregate over the term of the agreement, will be deferred and subject to recoupment in the periods ending January 31, 2009 and January 31, 2010.

Results of Operations

Comparison of Three Months Ended September 30, 2006 to Three Months Ended September 30, 2005

PUBLISHING SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Publishing Revenue
Advertising	$	18,910	$	10,806		$	8,104
Circulation		15,827		16,074			(247	)
Other		1,521		684			837

Total Publishing Segment Revenue		36,258		27,564			8,694


Publishing Operating Costs and Expenses
Production, distribution and editorial		19,252		17,141			(2,111	)
Selling and promotion		13,437		11,400			(2,037	)
General and administrative		629		589			(40	)
Non-cash compensation expense		582		453			(129	)
Depreciation and amortization		139		247			108

Total Publishing Operating Costs and Expenses		34,039		29,830			(4,209	)


Operating Income/(Loss)	$	2,219	$	(2,266	)	$	4,485

Publishing revenues increased $8.7 million, or 32%, to $36.3 million for the three months ended September 30, 2006, from $27.6 million for the three months ended September 30, 2005. Advertising revenue increased $8.1 million, primarily due to an increase in both advertising pages and rate in Martha Stewart Living magazine, as well as increases in both pages and rates at Everyday Food and Body + Soul. Circulation revenue decreased $0.2 million primarily due to lower revenue from our Special Interest Publications, as the 2005 period contained an additional issue (see chart below); this is partially offset by revenue from the launch of Blueprint magazine. Other revenue increased $0.8 million primarily due to revenue generated from our September 30th Good Things event celebrating the 15th anniversary of Martha Stewart Living.

Magazine Publication Schedule


	Third Quarter 2006	Third Quarter 2005

Martha Stewart Living	Three Issues	Three Issues
Martha Stewart Weddings	No issue	No Issue
Everyday Food	Two Issues	Two Issues
Body + Soul	Two Issues	Two Issues
Special Interest Publications	One Issue	Two Issues
Blueprint	One Issue	n/a

Production, distribution and editorial expenses increased $2.1 million, primarily reflecting the additional costs associated with the increase in advertising pages in Martha Stewart Living, which results in higher physical costs, as well as the costs associated with Blueprint, a magazine we are currently testing. Selling and promotion expenses increased $2.0 million, primarily due to expenses associated with our 15thanniversary event along with higher compensation costs. Included within the Publishing segment is a $1.2 million loss in Blueprint compared to a loss $0.4 million in the prior year quarter.

BROADCASTING SEGMENT


	2006			2005
	(unaudited)			(unaudited)			Variance
Broadcasting Revenue
Advertising	$	3,677		$	1,233		$	2,444
Radio		1,877			—			1,877
Licensing and other		4,516			1,691			2,825

Total Broadcasting Segment Revenue		10,070			2,924			7,146


Broadcasting Operating Costs and Expenses
Production, distribution and editorial		7,366			1,856			(5,510	)
Selling and promotion		1,441			1,591			150
General and administrative		1,809			2,837			1,028
Non-cash equity compensation		465			66			(399	)
Depreciation and amortization		758			462			(296	)

Total Broadcasting Operating Costs and Expenses		11,839			6,812			(5,027	)


Operating Loss	$	(1,769	)	$	(3,888	)	$	2,119

Broadcasting revenues increased $7.1 million, to $10.1 million for the quarter ended September 30, 2006, from $2.9 million for the quarter ended September 30, 2005. Both advertising and licensing revenue increased primarily due to the inclusion of a full quarter of revenue related to our nationally syndicated program which launched on September 12, 2005. Revenue from Martha Stewart Living Radio was $1.9 million; the radio channel did not exist in the quarter ended September 30, 2005, but was launched in the fourth quarter of 2005.

Production, distribution and editorial expenses increased $5.5 million due principally to the launch of our syndicated program; a portion of the production-related expenses are deferred for matching against future revenue. As of September 30, 2006 our deferred production cost balance was $4.5 million. General and administrative expense decreased $1.0 million, primarily due to lower professional fees. Depreciation and amortization expenses increased due to leasehold improvements and fixed asset additions related to our new television studio.

MERCHANDISING SEGMENT


	2006		2005
	(unaudited)		(unaudited)		Variance
Merchandising Revenue
Kmart earned royalty	$	6,062	$	6,654	$	(592	)
Other		5,833		2,627		3,206

Total Merchandising Segment Revenue		11,895		9,281		2,614


Merchandising Operating Costs and Expenses
Production, distribution and editorial		3,092		2,551		(541	)
Selling and promotion		815		1,106		291
General and administrative		1,895		1,281		(614	)
Non-cash compensation expense		169		218		49
Depreciation and amortization		256		211		(45	)

Total Merchandising Operating Costs and Expenses		6,227		5,367		(860	)


Operating Income	$	5,668	$	3,914	$	1,754

Merchandising revenues increased $2.6 million, or 28%, to $11.9 million for the quarter ended September 30, 2006 compared to $9.3 million for the quarter ended September 30, 2005. Revenue related to our earned royalty at Kmart declined slightly due to store closures and lower same store-sales offset by a higher royalty rate. Actual retail sales of our product at Kmart declined 7.2% on a comparable store basis and 9.7% on a total store basis. The royalty rate under our agreement with Kmart increased approximately 3.1% on February 1, 2006. We expect the minimum guarantees will exceed actual royalties earned from retail sales through 2007 primarily due to store closings and lower same-store sales trends. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than prior years. Other revenue included revenue related to a favorable dispute resolution with a former merchandising licensee of $3.0 million. Other revenue also increased due to revenue related to our new program with KB Home.

Production, distribution and editorial expenses increased $0.5 million, and general and administrative expenses $0.6 million, both due largely to investment in personnel to support the growing number of merchandising initiatives we have forged in recent months. Selling and promotion expenses declined $0.3 million as a result of a decline in marketing and photography costs, related primarily to the Kmart and Bernhardt businesses.

INTERNET


	2006			2005
	(unaudited)			(unaudited)			Variance
Internet
Product	$	1,333		$	1,109		$	224
Advertising and Other		1,494			446			1,048

Total Internet Segment Revenue		2,827			1,555			1,272


Internet Operating Costs and Expenses
Production, distribution and editorial		2,214			1,682			(532	)
Selling and promotion		579			296			(283	)
General and administrative		668			298			(370	)
Non-cash compensation expense		46			9			(37	)
Depreciation and amortization		73			231			158

Total Internet Operating Costs and Expenses		3,580			2,516			(1,064	)


Operating Loss	$	(753	)	$	(961	)	$	208

Internet revenues increased $1.3 million, to $2.8 million for the three months ended September 30, 2006, from $1.6 million for the three months ended September 30, 2005. Advertising and other revenue increased due to an increase in web traffic and sell-through. Page views on our site increased 48% year-over-year to a monthly average of 34 million page views from 23 million in the three months ended September 30, 2005. The increase in product revenue was due to the recognition of a portion of a guaranteed payment associated with our Kodak agreement.

Production, distribution and editorial costs increased $0.5 million, and general and administrative costs increased $0.4 million, both due to investment in personnel related to our focus on developing our Internet segment. Selling and promotion expense increased $0.3 million related to higher compensation expenses associated with developing an internet advertising sales force.

CORPORATE


	2006			2005
	(unaudited)			(unaudited)			Variance
Corporate Operating Costs and Expenses
General and administrative and other		10,481			10,201			(280	)
Non-cash compensation expense		1,765			12,528			10,763
Depreciation and amortization		1,046			924			(122	)

Total Corporate Operating Costs and Expenses		13,292			23,653			10,361


Operating Loss	$	(13,292	)	$	(23,653	)	$	10,361

Corporate operating costs and expenses decreased $10.4 million, to $13.3 million for the three months ended September 30, 2006, from $23.7 million for the three months ended September 30, 2005, primarily due to a reduction from the previously higher levels of non-cash equity compensation which had been principally caused by the vesting of certain warrants granted in connection with the airing of “The Apprentice: Martha Stewart”. General and administrative expenses decreased $0.4 million, largely due to lower professional fees and employee-related costs.

OTHER ITEMS

Interest income, net. Interest income, net, was $1.2 million for the quarter ended September 30, 2006 compared to $1.0 million for the prior year quarter. The increase was primarily attributable to higher interest rates.

Litigation reserve. The Company believes that it is probable that the class action lawsuit known as In re Martha Stewart Living Omnimedia, Inc. Securities Litigation will be settled for $30 million. Accordingly, the Company has recorded a litigation reserve of approximately $18.2 million against third quarter 2006 earnings. This one-time charge includes incurred and anticipated legal fees, is net of insurance reimbursement, and does not include that portion of the anticipated settlement expected to be paid by Ms. Stewart. The Company expects that the final settlement amount will be paid either in cash or in a mix of cash and Company stock.

Income tax expense. Income tax expense for the quarter ended September 30, 2006 was $0.2 million, compared to an income tax expense of $0.1 million for the quarter ended September 30, 2005. The current period provision includes a valuation allowance of $2.6 million against certain deferred tax assets.

Loss from discontinued operations. Loss from discontinued operations was $0.1 million for the quarter ended September 30, 2006, compared to loss of $0.1 million for the quarter ended September 30, 2005. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are related primarily to facilities.

Net loss. Net loss was $(25.2) million for the quarter ended September 30, 2006, compared to a net loss of $(26.1) million for the quarter ended September 30, 2005, as a result of the factors mentioned above.

Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2005

PUBLISHING SEGMENT


	2006		2005
	(unaudited)		(unaudited)			Variance
Publishing Revenue
Advertising	$	59,370	$	33,101		$	26,269
Circulation		51,267		49,847			1,420
Other		2,796		1,678			1,118

Total Publishing Segment Revenue		113,433		84,626			28,807


Publishing Operating Costs and Expenses
Production, distribution and editorial		60,322		52,121			(8,201	)
Selling and promotion		40,455		42,495			2,040
General and administrative		1,970		1,862			(108	)
Non-cash compensation expense		2,000		1,696			(304	)
Depreciation and amortization		458		742			284

Total Publishing Operating Costs and Expenses		105,205		98,916			(6,289	)


Operating Income/(Loss)	$	8,228	$	(14,290	)	$	22,518

Publishing revenues increased $28.8 million, or 34%, to $113.4 million for the nine months ended September 30, 2006, from $84.6 million for the nine months ended September 30, 2005. Advertising revenue increased $26.3 million, primarily due to an increase in both advertising pages and rate in Martha Stewart Living magazine which accounted for $20.3 million of the increase. Circulation revenue increased $1.4 million primarily due to an increase in rate from the Dr. Andrew Weil’s Self Healing newsletter along with higher circulation revenue from Martha Stewart Living magazine, and the inclusion of circulation revenue from the launch of Blueprint magazine; this is partially offset by lower Weddings and Special Interest Publication circulation revenue, as the 2005 period contained an extra issue of Weddings and two additional Special Interest Publication issues. The increase in revenue per subscriber from the Dr. Andrew Weil’s Self Healing newsletter is due to the prior year accounting treatment of subscribers acquired in a purchase transaction. In accordance with purchase accounting rules, revenue per subscriber was reduced in the year of acquisition. Current year results are recorded on an actual basis.

Magazine Publication Schedule


	Nine months ended September 2006	Nine months ended September 2005

Martha Stewart Living	Nine issues	Nine issues
Martha Stewart Weddings	Two issues	Three issues
Everyday Food	Eight issues	Eight issues
Body + Soul	Six issues	Six issues
Special Interest Publications	Three issues	Five issues
Blueprint	Two issues	n/a

Production, distribution and editorial expenses increased $8.2 million, primarily reflecting the additional costs associated with the increase in advertising pages in Martha Stewart Living, which results in higher physical costs, as well as the costs associated with Blueprint, a magazine we are currently testing. Selling and promotion expenses decreased $2.0 million, primarily due to a one-time newsstand expense reduction adjustment of $3.2 million related to the settlement of certain newsstand-related fees, which was offset by expenses associated with our Good Things event in September celebrating the 15th anniversary of Martha Stewart Living. Included within the Publishing segment is a $4.0 million investment in Blueprint compared to an investment of $1.0 million for the first nine months ended September 30, 2005.

BROADCASTING SEGMENT


	2006			2005
	(unaudited)			(unaudited)			Variance
Broadcasting Revenue
Advertising	$	11,984		$	2,011		$	9,973
Radio		5,629			—			5,629
Licensing and other		15,535			3,558			11,977

Total Broadcasting Segment Revenue		33,148			5,569			27,579


Broadcasting Operating Costs and Expenses
Production, distribution and editorial		22,514			4,588			(17,926	)
Selling and promotion		3,094			2,633			(461	)
General and administrative		6,201			6,533			332
Non-cash compensation expense		744			17,432			16,688
Depreciation and amortization		2,257			609			(1,648	)

Total Broadcasting Operating Costs and Expenses		34,810			31,795			(3,015	)


Operating Loss	$	(1,662	)	$	(26,226	)	$	24,564

Broadcasting revenues increased $27.6 million, to $33.1 million for the nine months ended September 30, 2006, from $5.6 million for the nine months ended September 30, 2005. Both advertising and licensing revenue increased primarily due to the inclusion of revenue related to our nationally syndicated program which launched on September 12, 2005. Revenue from Martha Stewart Living Radio was $5.6 million; the radio channel did not exist in the prior year period.

Production, distribution and editorial expenses increased $17.9 million due principally to the launch of our syndicated program; a portion of the production related expenses are deferred for matching against future revenue. As of September 30, 2006 our deferred production cost balance was $4.5 million. Selling and promotion expense increased $0.5 million primarily due to higher compensation costs associated with our new television show. Results from the prior year period include a non-cash charge of $16.8 million associated with the vesting of a portion of a warrant granted in connection with the production of the syndicated TV program. Depreciation and amortization expenses increased due to leasehold improvements and fixed asset additions related to our new television studio.

MERCHANDISING SEGMENT


	2006		2005
	(unaudited)		(unaudited)		Variance
Merchandising Revenue
Kmart earned royalty	$	21,132	$	21,772	$	(640	)
Kmart minimum true-up		2,193		2,078		115
Other		10,988		6,839		4,149

Total Merchandising Segment Revenue		34,313		30,689		3,624


Merchandising Operating Costs and Expenses
Production, distribution and editorial		8,975		7,713		(1,262	)
Selling and promotion		1,963		2,880		917
General and administrative		4,947		3,377		(1,570	)
Non-cash equity compensation		684		425		(259	)
Depreciation and amortization		764		629		(135	)

Total Merchandising Operating Costs and Expenses		17,333		15,024		(2,309	)


Operating Income	$	16,980	$	15,665	$	1,315

Merchandising revenues increased $3.6 million, or 12%, to $34.3 million for the nine months ended September 30, 2006, from $30.7 million for the nine months ended September 30, 2005. Revenue related to our earned royalty at Kmart declined slightly due to store closures and lower same store-sales offset by a higher royalty rate. Actual retail sales of our product at Kmart declined 2.7% on a comparable store basis and 6.3% on a total store basis. The royalty rate under our agreement with Kmart increased approximately 3.1% on February 1, 2006. Sales of our product were down on a year-over-year basis. The pro-rata portion of revenue related to the contractual minimum amounts covering the current period, net of amounts subject to recoupment, is listed separately above. We expect the minimum guarantees will exceed actual royalties earned from retail sales through 2007 primarily due to store closings and lower same-store sales trends. For the contract years ending January 31, 2009 and 2010, the minimum guarantees will be substantially lower than prior years. Other revenue included revenue related to a favorable dispute resolution with a former merchandising licensee of $3.0 million. Other revenue also increased due to revenue related to our new program with KB Home.

Production, distribution and editorial expenses increased $1.3 million, and general and administrative expenses $1.6 million, both due largely to investment in personnel to support the growing number of merchandising initiatives we have forged in recent months. Selling and promotion expenses decreased $0.9 million as a result of a decline in marketing and photography costs, related primarily to the Kmart and Bernhardt businesses.

INTERNET SEGMENT


	2006			2005
	(unaudited)			(unaudited)			Variance
Internet
Product	$	5,514		$	6,081		$	(569	)
Advertising and other		4,895			831			4,066

Total Internet Segment Revenue		10,409			6,912			3,497


Internet Operating Costs and Expenses
Production, distribution and editorial		7,240			7,941			701
Selling and promotion		2,156			912			(1,244	)
General and administrative		1,488			927			(561	)
Non-cash compensation expense		99			28			(71	)
Depreciation and amortization		176			722			546

Total Internet Operating Costs and Expenses		11,159			10,530			(629	)


Operating Loss	$	(750	)	$	(3,618	)	$	2,868

Internet revenues increased $3.5 million, to $10.4 million for the nine months ended September 30, 2006 from $6.9 million for the nine months ended September 30, 2005. Advertising and other revenue increased due to an increase in web traffic and sell-through. Page views on our site for the nine months ended September 30, 2006 increased 71% year-over-year to a monthly average of 36 million page views from 21 million for the same period in 2005. In the nine months ended September 30, 2005, online advertising was not a focus of the segment. The decline in commerce sales related to our catalog offerings was largely attributable to the early 2005 discontinuance of “Martha Stewart: The Catalog for Living”, and was partially offset by increased sales at our direct-to-consumer floral business and the recognition of a portion of a guaranteed payment associated with our Kodak agreement.

Production, distribution and editorial costs decreased $0.7 million due primarily to lower product sales as we exited the online commerce business. This resulted in lower cost of goods sold as well as lower fulfillment expenses. Selling and promotion expense increased $1.2 million due to higher compensation expenses associated with developing an internet advertising sales force. General and administrative expenses increased $0.6 million due to increases in personnel.

CORPORATE


	2006			2005
	(unaudited)			(unaudited)			Variance
Corporate Operating Costs and Expenses
Production, distribution and editorial	$	0		$	293		$	293
Selling and promotion		0			65			65
General and administrative		31,935			31,050			(885	)
Non-cash compensation expense		5,207			18,189			12,982
Depreciation and amortization		3,061			2,780			(281	)

Total Corporate Operating Costs and Expenses		40,203			52,377			12,174


Operating Loss	$	(40,203	)	$	(52,377	)	$	12,174

Corporate operating costs and expenses decreased $12.2 million, to $40.2 million for the nine months ended September 30, 2006, from $52.4 million for the nine months ended September 30, 2005 primarily due to the absence of higher levels of non-cash equity compensation principally related to the vesting of certain warrants granted in connection with the airing of The Apprentice: Martha Stewart. General and administrative expenses decreased $13.0 million, largely due to lower professional fees and employee-related costs.

OTHER ITEMS

Interest Income, net. Interest income, net, was $3.6 million for the nine months ended September 30, 2006 compared to $2.7 million for the prior year quarter. The increase was attributable to interest received from a settlement of newsstand fees along with higher interest rates.

Litigation Reserve. The Company believes that it is probable that the class action lawsuit known as In re MSO Securities Litigation will be settled for $30 million. Accordingly, the Company has recorded a litigation reserve of approximately $18.2 million against third quarter 2006 earnings. This one-time charge includes incurred and anticipated legal fees, is net of insurance reimbursement, and does not include that portion of the anticipated settlement expected to be paid by Ms. Stewart. The Company expects that the final settlement amount will be paid either in cash or in a mix of cash and Company stock.

Income tax expense. Income tax expense for the nine months ended September 30, 2006 was $0.5 million, compared to income tax expense of $0.2 million for the nine months ended September 30, 2005. The current period provision includes a valuation allowance of $5.5 million taken against certain deferred tax assets.

Loss from discontinued operations. Loss from discontinued operations was $0.7 million for the nine months ended September 30, 2006, compared to loss of $0.4 million for the nine months ended September 30, 2005. Discontinued operations represent the operations of the Wedding List, which the Company decided to discontinue in 2002. The current year expenses are related primarily to facilities.

Net Loss. Net loss was ($33.2) million for the nine months ended September 30, 2006, compared to a net loss of ($78.7) million for the nine months ended September 30, 2005, as a result of the above mentioned factors.

Liquidity and Capital Resources

Cash and cash equivalents were $31.5 million and $20.2 million and short-term investments were $52.5 million and $83.8 million at September 30, 2006 and December 31, 2005, respectively. In total, cash and cash equivalents along with short-term investments, were $84.0 million and $104.0 million at September 30, 2006 and December 31, 2005, respectively.

Cash flows provided by operating activities were $11.5 million during the nine months ended September 30, 2006, compared to cash flows used in operating activities of $19.8 million during the nine months ended September 30, 2005. Cash flows provided by operating activities during the nine months ended September 30, 2006 were primarily due to a reduction in the net loss for the period to $33.2 million due to an improvement in operating trends primarily

in our publishing and broadcasting segments and changes in our operating assets and liabilities, including a litigation reserve of $18.2 million. The change operating assets and liabilities was aided by the collection of a royalty receivable due from Kmart related to our minimum royalty payment. Cash used by operating activities during the nine months ended September 30, 2005 were primarily due to a net loss for the period of $78.7 million, partially offset by changes in operating assets and liabilities of $15.6 million, non-cash equity compensation of $37.8 million and depreciation and amortization of $5.5 million. Included in non-cash equity compensation were charges totaling $27.6 million relating to a warrant granted to Mark Burnett discussed in note 1.f.

Cash flows provided by investing activities were $25.3 million during the nine months ended September 30, 2006, compared to cash flows used in investing activities of $61.7 million during the nine months ended September 30, 2005. Cash flows provided by investing activities in 2006 resulted from the net sale of short-term investments of $31.3 million, partially offset by capital expenditures of $6.0 million. Cash flows used in investing activities in 2005 resulted from the net purchase of short-term investments of $55.5 million and capital expenditures of $6.2 million.

Cash flows used in financing activities for the nine month periods ended September 30, 2006 were $25.5 million, compared to cash flow provided by financing activities of $8.2 million for nine months ended September 30, 2005, which principally represented proceeds received from the exercise of employee stock options. Cash flows used in financing activities in 2006 resulted principally from the payment of a special one-time dividend of $26.1 million.

As described above under “Other Items — Litigation Reserve.” the Company has recorded a litigation reserve of approximately $18.2 million against third quarter 2006 earnings. This one-time charge includes incurred and anticipated legal fees, is net of insurance reimbursement, and does not include that portion of the anticipated settlement expected to be paid by Ms. Stewart. The Company expects that the final settlement amount will be paid either in cash or in a mix of cash and Company stock. The Company anticipates that a hearing to consider approval of the settlement will be held in late 2006 or early 2007.

We have a line of credit with Bank of America in the amount of $5 million, which is generally used to secure outstanding letters of credit. As of September 30, 2006, we had no outstanding borrowings under this facility. Of a total line of $5.0 million, we currently have letters of credit drawn on $2.1 million.

We believe that our available cash balances and short-term investments together with any funds available under existing credit facilities will be sufficient to meet our operating and recurring cash needs for foreseeable periods. In late July, our Board of Directors declared a special one-time dividend of $0.50 per share. The special dividend was paid on September 14, 2006, to stockholders of record on August 31, 2006. The value of these dividends are $26.9 million.

Related Party Transactions

In 2004, Martha Stewart submitted a claim, pursuant to the Company’s By-laws, for reimbursement of certain expenses relating to her defense of the count of the federal criminal indictment against her alleging she made false and misleading statements intended to influence the price of the Company’s stock. Ms. Stewart’s defense of this count was successful and a judgment of acquittal was entered in her favor. The Company reimbursed Ms. Stewart $2.8 million for this claim. The Corporation expects that the amount reimbursed to Ms. Stewart is reimbursable to the Company under its Directors’ & Officers’ insurance policy and, accordingly, does not believe that the payment will result in an expense to the Company. As of September 30, 2006, certain payments have already been reimbursed under the Directors’ & Officers’ insurance policy and have been applied to the total claim, and the Company expects to receive the balance of this claim – approximately $2.1 million – from its insurers in connection with the anticipated settlement of the class action litigation disclosed in Part II, Item 1 hereof (the “Class Action”).

The Company currently has a consulting agreement with CAK Entertainment, Inc., an entity for which Mr. Charles Koppelman serves as Chairman and Chief Executive Officer. Mr. Koppelman was Chairman of the Board and a

Director of the Company at the time of the agreement and thereafter. This agreement superseded a previous consulting agreement with him, which was entered into while Mr. Koppelman was Vice Chairman and a Director. The details of the agreements are included under note 1.f.

Seasonality and Quarterly Fluctuations

Several of our businesses can experience fluctuations in quarterly performance. For example, our Publishing segment results can vary from quarter to quarter due to publication schedules. Revenues from the Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality of certain product lines. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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 U.S. generally accepted accounting principles. 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 bad debts, inventories, long-lived assets and accrued losses. We base our estimates on historical experience 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 are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that, of our significant accounting policies, the following may involve the highest degree of judgment and complexity.

Revenue Recognition

We recognize revenues when realized or realizable and earned. Revenues and associated accounts receivable are recorded net of provisions for estimated future returns, doubtful accounts and other allowances. Newsstand revenues in our Publishing segment and product sales in our Internet segment are recognized based upon assumptions with respect to future returns. We base our estimates on our historical experience and current market conditions. Reserves are adjusted regularly based upon actual results. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Revenues for royalties in our Merchandising segment are accrued on a monthly basis based on sales volume provided to us by our partners and payment is generally made by our partners on a quarterly basis. In addition, we recognize a substantial portion of the revenue resulting from the difference between the minimum royalty amount under the Kmart contract and royalties paid on actual sales in the fourth quarter of each year, when the amount can be determined. Some of our other merchandising agreements also contain minimum guarantee provisions. The pro rata portion of these minimum guarantees will be recorded when such amounts are both determinable and deemed collectible. Television advertising revenues are recorded when the related commercial is aired and is recorded net of estimated reserves for television audience underdelivery and bad debts. Television royalties are recorded as earned in accordance with specific terms of each agreement. Internet advertising revenues based on the sale of impression-based advertisements are recorded in the period in which the advertisements are delivered.

Income taxes

The Company follows the Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS 109, deferred assets and liabilities are recognized for the future costs and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company periodically reviews the requirements for a valuation

allowance and makes adjustments to such allowances when changes in circumstances result in changes in management’s judgment about the future realization of deferred tax assets. SFAS No. 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year taxable income/loss than it places on estimates of future taxable income.

Television production costs

Intangible assets

A substantial portion of our intangible assets is goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. All of the Company’s goodwill is attributable to certain magazines in its Publishing segment. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. Our impairment review process compares the fair value of the reporting unit (magazines) in which the goodwill resides to its carrying value.

In 2005 and 2003, the Company estimated future cash flows based upon individual magazine historical results, current trends and operating cash flows to access the fair value. In 2004, the Company engaged an external valuation services firm to report on the fair value of the Company’s goodwill. No impairment charges were recorded in 2005, 2004 and 2003.

Long-Lived Assets

We review the carrying values of our long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates of future cash flows could negatively affect the fair value of our assets and result in an impairment charge.

Advertising Cost

Advertising costs, consisting primarily of direct-response advertising, are expensed in the period in which the advertising effort takes place.

Non-cash Equity Compensation

Forward-looking Statements and Risk Factors

This Quarterly Report includes certain “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our current beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. These statements can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “potential” or “continue” or the negative of these terms or other comparable terminology. The Company’s actual results may differ materially from those projected in these statements, and factors that could cause such differences include the following among others:

	o		adverse reactions to publicity relating to Martha Stewart by consumers, advertisers and business partners;

	o		adverse resolution of some or all of the Company’s ongoing litigation, including without limitation any

			resolution of In re Martha Stewart Living Omnimedia, Inc. Securities Litigation that is inconsistent with the charge taken in this quarter;

	o		a loss of the services of Ms. Stewart;

	o		a loss of the services of other key personnel;

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

	o		loss or failure of merchandising and licensing programs;

	o		failure to protect our intellectual property;

	o		a softening of the domestic advertising market;

	o		changes in consumer reading, purchasing, Internet and/or television viewing patterns;

	o		unanticipated increases in paper, postage or printing costs;

	o		operational or financial problems at any of our contractual business partners;

	o		the receptivity of consumers to our new product introductions; and

	o		changes in government regulations affecting the Company’s industries.

Certain of these and other factors are discussed in more detail in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2006, especially under the heading “Item 1A. Risk Factors”, which may be accessed through the SEC’s World Wide Web site at http://www.sec.gov. The Company cautions you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we record, process, summarize and report the information we must disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC’s rules and forms.

Evaluation of Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have determined that, during the third quarter of fiscal 2006, 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As previously reported, beginning in August 2002 a number of complaints asserting claims under the federal securities laws against the Company were filed in the U.S. District Court for the Southern District of New York. On February 3, 2003, those actions were consolidated under the caption In re Martha Stewart Living Omnimedia, Inc. Securities Litigation, 02-CV-6273 (JES) (the “Class Action”). The Class Action also names Martha Stewart and seven of the Company’s other present or former officers (Gregory R. Blatt, Sharon L. Patrick, and five other Company officers) as defendants. All such individuals other than Martha Stewart are collectively referred to herein as the “Individual Defendants.” The claims in the Class Action relate to Ms. Stewart’s sale of 3,928 shares of ImClone Systems stock on December 27, 2001. The plaintiffs allege that the Company, Ms. Stewart, and the Individual Defendants violated Sections 10(b) (and related rules), 20(a) and 20A of the Securities Exchange Act of 1934, by omitting material information and making materially false and misleading statements about Ms. Stewart’s sale. The plaintiffs allege that, as a result of these false and misleading statements, the market price of the Company’s stock was inflated during the period from January 8, 2002 to October 2, 2002 and dropped after the alleged falsity of the statements became public. The plaintiffs further alleged that the Individual Defendants traded MSO stock while in possession of material non-public information, but as explained below, all such allegations have been dismissed. The Class Action seeks certification as a class action, damages, attorneys’ fees and costs, and further relief as determined by the court. On May 19, 2003, the Company’s motion to dismiss the Class Action was denied. By stipulation of the parties, and an order of the court entered November 10, 2003, all claims asserted in the Class Action pursuant to Section 20A (Insider Trading) of the Securities Exchange Act against the Individual Defendants, and all remaining claims against the Individual Defendants, other than Mr. Blatt and Ms. Patrick, were dismissed without prejudice.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, except for the following:

The Company believes that the class action lawsuit known as In re Martha Stewart Living Omnimedia, Inc. Securities Litigation will be settled for $30 million. Accordingly, the Company has recorded a litigation reserve of approximately $18.2 million against third quarter 2006 earnings, a one-time charge that includes incurred and anticipated legal fees, is net of insurance reimbursement, and does not include that portion of the anticipated settlement expected to be paid by Ms. Stewart. If a definitive settlement agreement is not signed or approved by the court on terms consistent with our assumptions, the change in settlement terms or costs, or resulting continued litigation, could have a material adverse impact on our finances and results of operations as reported herein.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

As previously discussed in this report, on September 21, 2006, the Company granted to a consultant an option to purchase 60,000 shares of the Company’s Class A Common Stock under the Company’s 1999 Option Plan with an exercise price equal to $18.31 per share, the closing price on the date of the agreement. The option was granted pursuant to a letter of agreement under which the option recipient agreed to provide the Company with marketing communications and consulting services in exchange for cash compensation and the option. 30,000 of the shares subject to the option vested immediately. The remaining 30,000 shares subject to the option will vest on December 31, 2006, contingent upon the Company receiving certain specified deliverables from the option recipient. The grant of the option was effected in reliance on the exemption from the registration requirements of the Securities Act of 1933 afforded by Section 4(2) thereof. The Company did not receive any proceeds from the issuance of the option.

The following table provides information about the Company’s purchases of its common stock during each month of the six-month period ended June 30, 2006, and during each month of the quarter ended September 30, 2006:

(a)

(b)

(c)

(d)

Maximum Number (or

Total Number of

Approximate Dollar

Shares (or Units)

Value) of Shares (or

Total Number of

Purchased as Part of

Units) that may yet be

Shares (or Units)

Average Price Paid

Publicly Announced

Purchased under the

Period

Purchased

per Share (or Unit)

Plans or Programs

January 2006⁽¹⁾

1,650

18.38

Not applicable

February 2006⁽¹⁾

—

Not applicable

March 2006⁽¹⁾

5,570

16.92

Not applicable

April 2006⁽¹⁾

—

Not applicable

May 2006⁽¹⁾

—

Not applicable

June 2006⁽¹⁾

6,504

17.61

Not applicable

Total for six-months ended June 30, 2006

13,724

17.14

Not applicable

Quarter ended September 30, 2006:

July 2006⁽¹⁾

1,650

17.10

Not applicable

August 2006⁽¹⁾

1,867

17.15

Not applicable

September 2006⁽¹⁾

3,207

18.44

Not applicable

Total for quarter ended Sept 30, 2006

6,724

17.46

Not applicable

Total for nine-months ended Sept 30, 2006

20,448

17.23

Not applicable


(1)		Represents shares withheld by, or delivered to, the Company pursuant to provisions in agreements with recipients of restricted stock granted under the Company’s stock incentive plan allowing the Company to withhold, or the recipient to deliver to the Company, the number of shares having the fair value equal to tax withholding due.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the third quarter of 2006, no matters were submitted to a vote of security holders.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

(a) Exhibits

The following exhibits are filed as part of this report:


Exhibit
Number		Exhibit Title

4.1		Warrant to purchase shares of Class A Common stock, dated September 17, 2004.*

4.2		Warrant to purchase shares of Class A Common stock, dated August 11, 2006. *

10.1		Employment Agreement dated as July 25, 2006, between Martha Stewart Living Omnimedia, Inc. and Holly Brown (incorporated by reference to our Current Report on Form 8-K filed on July 26, 2006).

10.2		Employment Agreement dated as of July 25, 2006, between Martha Stewart Living Omnimedia, Inc. and Howard Hochhauser (incorporated by reference to our Current Report on Form 8-K filed on July 26, 2006).

10.3		Warrant Registration Rights Agreement between Martha Stewart Living Omnimedia, Inc. and Mark Burnett, dated August 11, 2006. *

10.4		Letter Agreement dated as of October 24, 2006, between Martha Stewart Living Omnimedia, Inc. and Robin Marino (incorporated by reference to our Current Report on Form 8-K filed on October 25, 2006).

31.1		Certification of Chief Executive Officer*

31.2		Certification of Chief Financial Officer*

32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) *


*		filed herewith

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:	November 8, 2006

		/s/ Howard Hochhauser

	Name:	Howard Hochhauser
	Title:	Chief Financial Officer

EX-4.1 2 y26835exv4w1.htm EX-4.1: WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK EX-4.1

EXHIBIT 4.1

[THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT.]

No. of Shares of Class A Common Stock: 2,500,000

WARRANT

To Purchase Shares of Class A Common Stock of

MARTHA STEWART LIVING OMNIMEDIA, INC.

THIS IS TO CERTIFY THAT MARK BURNETT is entitled, at any time prior to the Expiration Date (as hereinafter defined), to purchase from MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation (the “Company”), up to 2,500,000 shares of Class A Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, at the Current Warrant Price (as defined herein), all on the terms and conditions and pursuant to the provisions hereinafter set forth.

DEFINITIONS

As used in this Warrant, the following terms have the respective meanings set forth below:

“Business Day” shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York.

“Commission” shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws.

“Class A Common Stock” shall mean (except where the context otherwise indicates) the Class A Common Stock, $.01 par value, of the Company as constituted on the Issue Date, and any capital stock into which such Class A Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Class A Common Stock upon any reclassification thereof which is not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.2) received by or distributed to the holders of Class A Common Stock of the Company in the circumstances contemplated by Section 4.2.

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“Current Market Price” shall mean, in respect of any share of Class A Common Stock on any date herein specified, the closing price per share of Class A Common Stock on such date. If the Class A Common Stock is listed or admitted to trading on a national securities exchange, the closing price shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Class A Common Stock is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Class A Common Stock is listed or admitted to trading. If Class A Common Stock is not listed or admitted to trading on any national securities exchange, the closing price for each day shall be the closing last sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc., Automated Quotation System or such other system then in use, or, if on any such date the Class A Common Stock or such other securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Class A Common Stock selected by the Board of Directors of the Company. In connection with an exercise (or partial exercise) of this Warrant through the surrender of all or a portion of a Warrant, the “Current Market Price” shall be increased by the fair market value of any property, cash or securities that would be received by Holder pursuant to Section 4.3 in connection with the exercise of this Warrant for one share of Class A Common Stock.

“Current Warrant Price” as of any date shall mean, in respect of a share of Class A Common Stock at any date herein specified, $ , as such price shall have been adjusted in accordance with Section 4 hereof.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. Reference to a particular section of the Exchange Act shall include reference to the comparable section, if any, of such successor federal statute.

“Expiration Date” shall mean March 17, 2012.

“Holder” shall mean the Person in whose name this Warrant is registered on the books of the Company maintained for such purpose or, collectively, each Holder of a Warrant, in the event of any division of this Warrant.

“Issue Date” shall mean September 17, 2004.

“Majority Holders” shall mean the holders of Warrants exercisable for in excess of 50% of the aggregate number of shares of Warrant Stock then purchasable upon exercise of all Warrants.

“MBP” shall mean Mark Burnett Productions.

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“New Series” shall mean a new production of the television series currently entitled “Martha Stewart Living” or any successor or replacement to such series.

“Person” shall mean any individual, firm, corporation, partnership or other entity, and shall include any successor by merger or otherwise of such entity.

“Restricted Common Stock” shall mean shares of Class A Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 7.1 (a).

“Securities Act” shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

“Transfer” shall mean any disposition of any Warrant Stock, which would constitute a sale thereof within the meaning of the Securities Act.

“Transfer Notice” shall have the meaning set forth in Section 7.2.

“Vesting Date” shall mean, provided that Mark Burnett, MBP or any of their affiliated or related entities (collectively, a “Burnett Entity”) have not breached in any material respect any agreement between the Company and any Burnett Entity, with respect to the applicable tranche of shares of Class A Common Stock below, as to

(A) eight hundred thirty-three thousand three hundred thirty-three (833,333) shares of Class A Common Stock (I) 50% upon first broadcast of the first episode of a United States network prime time television program consisting of at least thirteen (13) episodes of such program and produced by a Burnett Entity and/or the Company with the participation of a Burnett Entity which program features the Company and certain of its employees (a “Network Program”); and (II) 50% upon first broadcast of the 13^th episode of the Network Program, if any;

(B) eight hundred thirty-three thousand three hundred thirty-three (833,333) shares of Class A Common Stock (I) 50% upon first broadcast of a second cycle of the Network Program, if any, and/or an additional United States network prime time television program produced by a Burnett Entity with the participation of Company and/or the Company with the participation of a Burnett Entity (an “Additional Network Program”); and (II) 50% upon first broadcast of the 13^th episode of the second cycle of the Network Program or the Additional Network Program, as applicable; and

(C) eight hundred thirty-three thousand three hundred thirty-four (833,334) shares of Class A Common Stock, upon the earlier of the date of execution by the Company of an agreement with a third party distributor or broadcaster for the production, syndication or other television distribution of the New Series procured by a Burnett Entity or commencement of production of the New Series with the active participation and involvement of a Burnett Entity as executive producer.

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“Warrants” shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Class A Common Stock for which they may be exercised.

“Warrant Stock” shall mean the shares of Class A Common Stock purchased by the holder of this Warrant upon the exercise thereof.

EXERCISE OF WARRANT

2.1. Manner of Exercise. At any time or from time to time from and after the Vesting Date of the shares of Warrant Stock as to which Holder desires to exercise this Warrant and until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Class A Common Stock purchasable hereunder.

In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 11 West 42nd Street, New York, New York 10036 (i) a written notice of Holder’s election to exercise this Warrant, which notice shall specify the number of shares of Class A Common Stock to be purchased, (ii) payment of the Current Warrant Price and (iii) this Warrant. Such notice shall be substantially in the form appearing at the end of this Warrant as Exhibit A, duly executed by Holder. Upon receipt of the items specified in the second preceding sentence, the Company shall execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Class A Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the Current Warrant Price and this Warrant, are received by the Company as described above. If this Warrant shall have been exercised in part, appropriate notation may be made on this Warrant and the same returned to Holder.

Payment of the Current Warrant Price shall be made at the option of Holder (i) by certified or official bank check, (ii) by the surrender of shares of Warrant Stock, (ii) by delivering to the Company certificates representing the number of shares of Warrant Stock to be surrendered, duly endorsed by or accompanied by appropriate instruments of transfer duly executed by Holder, (iii) cancellation as of the date of exercise of a portion of this Warrant with respect to shares of Class A Common Stock the right to purchase which has previously vested hereunder or (iv) any combination of the foregoing. For the purposes of making payment of the Warrant Price, shares of Class A Common Stock being surrendered shall have a value equal to the Current Market Price as of the date of surrender of the shares of Class A Common Stock. If a portion of this Warrant is cancelled in payment of the Current Warrant Price, the value of the portion of this Warrant so cancelled shall be equal to the product of (x) the number of shares of Class A Common Stock purchasable under this Warrant as to which this Warrant is being

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cancelled, multiplied by (y) the excess of the Current Market Price as of the date of cancellation over the Current Warrant Price as adjusted at the date of surrender. If Holder surrenders shares of Class A Common Stock in payment of the Current Warrant Price and less than all of the shares of Class A Common Stock represented by any certificate are being surrendered, the Company shall deliver to Holder a new certificate or certificates representing the shares of Class A Common Stock not applied to payment of the Current Warrant Price; provided, however, that in lieu of any fractional share of Class A Common Stock which such Holder would otherwise be entitled to receive, the Company shall pay to Holder an amount of cash equal to such fraction multiplied by the Current Market Price as of the date of surrender of the shares of Class A Common Stock.

2.2. Payment of Taxes. All shares of Class A Common Stock issuable upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable and without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, other than income taxes payable by Holder or any of its affiliates.

2.3. Fractional Shares. The Company shall not be required to issue a fractional share of Class A Common Stock upon exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Current Market Price per share of Class A Common Stock on the date of exercise.

TRANSFER, DIVISION AND COMBINATION

3.1. No Transfer. Subject to Section 7, neither this Warrant nor any of the rights of Holder hereunder shall be transferable or assignable in any manner, other than (i) transfers to majority owned affiliates of Holder or to immediate family members of Holder (provided that the number of all such transferees shall not exceed 8), (ii) as to rights under this Warrant with respect to 10% of the shares of Warrant Stock covered hereby, to Conrad Riggs or to any majority-owned affiliate of Conrad Riggs or (iii) pursuant to the laws of descent and distribution. In addition, Holder shall have the right to effect Transfers of Warrant Stock as provided in Section 7. Any Transfer of this Warrant and of rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company referred to in Section 2.1, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 7, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly assigned in compliance with Section 7, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued.

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3.2. Division and Combination. Subject to Section 7, this Warrant may be divided into multiple Warrants or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder. Subject to compliance with Section 3.1 and with Section 7, as to any Transfer which maybe involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

ADJUSTMENTS

The number of shares of Class A Common Stock for which this Warrant is exercisable and/or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event.

4.1. Stock Dividends, Subdivisions and Combinations. If at any time the Company shall:

(a) take a record of the holders of its Class A Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Class A Common Stock,

(b) subdivide its outstanding shares of Class A Common Stock into a larger number of shares of Class A Common Stock, or

then (i) the number of shares of Class A Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Class A Common Stock which a record holder of the same number of shares of Class A Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Current Warrant Price per share shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Class A Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment.

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reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the holders of Class A Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of this Warrant and payment of the Current Warrant Price, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Class A Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Class A Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.2, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.2 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

4.3. Distributions. Without duplication of any adjustment pursuant to Section 4.1 or 4.2 hereof, if while this Warrant, or any portion hereof, remains outstanding and unexpired, the holders of shares of Class A Common Stock shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (including cash) of the Company by way of dividend or distribution, then and in each case, this Warrant shall represent the right to acquire upon exercise hereof, but solely with respect to the portion of this Warrant that remains unexercised and unexpired as of the record date of any such dividend or distribution, in addition to the number of shares of Class A Common Stock then receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (including cash) that Holder would hold on the date of such exercise had it been the holder of record of the shares of Class A Common Stock receivable as of such record date upon exercise of this Warrant and all other dividends and distributions receivable with respect to such additional stock or other securities or property after such record date and prior to the date of such exercise of this Warrant, giving effect to all adjustments called for during such period by the provisions of this Section 4.

RIGHTS OF HOLDER

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5.1 No Impairment. The Company shall not by any action, including, without limitation, amending its Certificate of Incorporation or comparable governing instruments or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment.

Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form reasonably satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder.

RESERVATION AND AUTHORIZATION OF CLASS A COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY

From and after the Closing Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Class A Common Stock as will be sufficient to permit the exercise in full of this Warrant. All shares of Class A Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights.

RESTRICTIONS ON TRANSFERABILITY

The Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 7, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 7.

7.1. Restrictive Legend. Except as otherwise provided in this Section 7, each Warrant and each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form:

“[This Warrant has][The securities represented by this Certificate have] not been registered under the Securities Act of 1933, as amended, and may not be transferred in violation of such Act, the rules and regulations thereunder or the provisions [hereof] [of that certain Warrant dated September _, 2004, a copy of which is on file at the principal office of Martha Stewart Living Omnimedia, Inc.]”

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7.2. Notice of Proposed Transfers; Requests for Registration. Prior to any Transfer or attempted Transfer of any Warrant, in whole or in part, or any shares of Restricted Common Stock, the holder of such Restricted Common Stock shall give ten days’ prior written notice (a “Transfer Notice”) to the Company of such holder’s intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to such holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrant or Restricted Common Stock, as the case may be, may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within five days thereof, notify the holder of such Warrant or Restricted Common Stock, as the case may be, as to whether such opinion is reasonably satisfactory and, if so, such holder shall thereupon be entitled to Transfer such Warrant or Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each Warrant and each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 7.1, unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. The holder of the Restricted Common Stock giving the Transfer Notice shall not be entitled to Transfer such Warrant or Restricted Common Stock until receipt of notice from the Company under this Section 7.2 that such opinion is reasonably satisfactory.

7.3. Registration Rights. (a) If at any time the Company proposes to file a registration statement under the Securities Act with respect to a public offering of securities of the same type as the Warrant Stock pursuant to a firm commitment underwritten offering solely for cash for its own account or for the account of any holder of securities (to the extent that the Company has the right to include Warrant Stock in any registration statement to be filed by the Company on behalf of such holder), then the Company shall give written notice of such proposed filing to Holder at least 15 days before the anticipated filing date. Such notice shall offer Holder the opportunity to register such amount of Warrant Stock as Holder may request (a “Piggyback Registration”). Subject to Section 7.3(b), the Company shall include in each such Piggyback Registration all shares of Warrant Stock with respect to which the Company has received a written request for inclusion therein within 10 days after notice has been given to Holder. Holder shall be permitted to withdraw all or any portion of the Warrant Stock from a Piggyback Registration at any time prior to the effective date of such Piggyback Registration.

(b) The Company shall permit Holder to include all such Registrable Securities on the same terms and conditions as any similar securities, if any, of the Company included therein. Notwithstanding the foregoing, if the Company or the managing underwriter or underwriters participating in such offering advise the Holder in writing that the total amount of securities requested to be included in such Piggyback Registration exceeds the amount which can be sold in (or during the time of) such offering without delaying or jeopardizing the success of the offering (including the price per share of the securities to be sold), then, subject to the preferential rights of any stockholder with respect to any Piggyback Registration, the amount of securities to be offered for the account of Holder and other holders of securities who have piggyback registration rights with respect thereto shall be reduced (to zero if necessary) pro rata on the basis of the number of Class A Common Stock equivalents requested to be registered by each stockholder participating in such offering.

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(c) The Company shall pay all Registration Expenses incurred in connection with the registration statement relating to any Piggyback Registration and any supplements or amendments thereto, whether or not they become effective, and whether all, none or some of the Warrant Stock is sold pursuant to such registration statement. “Registration Expenses” shall mean all costs, fees and expenses incident to the Company’s performance of or compliance with Section 7.3, including (i) the fees, disbursements and expenses of the Company’s counsel and accountants; (ii) all expenses, including filing fees, in connection with the preparation, printing and filing of any registration statement, any prospectus or preliminary prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof; (iii) all expenses in connection with the qualification of the securities to be disposed of for offering and sale under state securities laws; (iv) transfer agents’ and registrars’ fees and expenses; (v) all security engraving and security printing expenses; and (vi) all fees and expenses payable in connection with the listing of the Class A Common Stock on any securities exchange. The Company shall pay the legal fees of one counsel to all Holders in connection with each Piggyback Registration, not to exceed a maximum of $10,000.

(d) Nothing in this Section 7.3 shall create any liability on the part of the Company to Holder if the Company in its sole discretion should decide not to file a registration statement proposed to be filed pursuant to Section 7.3 (a) or to withdraw such registration statement subsequent to its filing, regardless of any action whatsoever that Holder may have taken, whether as a result of the issuance by the Company of any notice hereunder or otherwise.

7.4. Termination of Restrictions. Notwithstanding the foregoing provisions of this Section 7, the restrictions imposed by this Section upon the transferability of the Warrant Stock and the Restricted Common Stock and the legend requirements of Section 7.1 shall terminate as to any share of Warrant Stock or Restricted Common Stock (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act.

SUPPLYING INFORMATION

The Company shall cooperate with Holder and each holder of Restricted Common Stock in supplying such information as may be reasonably necessary for such holder to complete and file any reports or forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Restricted Common Stock.

MISCELLANEOUS

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receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback, addressed as follows:

(a) If to Holder, at his last known address appearing on the books of the Company maintained for such purpose.

(b) If to the Company at

Martha Stewart Living Omnimedia, Inc.
11 West 42^nd Street
New York, New York 10036
Attention: General Counsel
Telecopy Number: (212) 827-8188

or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied and confirmed by telecopy answerback, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the person designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication.

9.2. Remedies. Each holder of Warrant and Warrant Stock, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

9.3. Successors and Assigns. Subject to the provisions of Sections 3.1, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder.

9.4. Amendment. This Warrant may be modified or amended or the provisions hereof waived only with the written consent of the Company and the Majority Holders.

9.5. Severabiliry. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant.

9.6. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

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9.7. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS TO TRIAL BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF OR RELATING TO THIS WARRANT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed.

Dated: September 17, 2004


		MARTHA STEWART LIVING OMNIMEDIA, INC.

		By:		/s/ Sharon Patrick

		Name:		Sharon Patrick
		Title:		President and CEO

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EX-4.2 3 y26835exv4w2.htm EX-4.2: WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK EX-4.2

EXHIBIT 4.2

THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT

No. of Shares of Class A Common Stock: 833,333

WARRANT

To Purchase Shares of Class A Common Stock of

MARTHA STEWART LIVING OMNIMEDIA, INC.

THIS WARRANT (referred to herein as this “Warrant”) IS TO CERTIFY THAT MARK BURNETT is entitled, at any time prior to the Expiration Date (as hereinafter defined), to purchase from MARTHA STEWART LIVING OMNIMEDIA, INC., a Delaware corporation, (the “Company”) up to 833,333 shares of Class A Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, at the Current Warrant Price (as defined herein), all on the terms and conditions and pursuant to the provisions hereinafter set forth.

WHEREAS, the Company issued to Holder a warrant (the “Original Warrant”) on September 17, 2004, pursuant to which Holder had the right to exercise the Original Warrant to purchase up to 2,500,000 shares of Class A Common Stock, if certain vesting terms and other conditions were satisfied;

WHEREAS, Holder has not exercised the Original Warrant as of the date hereof;

WHEREAS, the Company confirms, agrees and acknowledges that (i) Holder’s right to purchase 416,667 shares of Class A Common Stock at an exercise price of $12.59 per share pursuant to the terms of the Original Warrant vested on September 21, 2005; (ii) Holder’s right to purchase an additional 416,666 shares of Class A Common Stock at an exercise price of $12.59 per share pursuant to the terms of the Original Warrant vested on December 21, 2005; (iii) Holder’s right to purchase an additional 833,334 shares of Class A Common Stock at an exercise price of $12.59 per share pursuant to the terms of the Original Warrant vested on June 1, 2005; and (iv) Holder’s rights with respect to the remaining 833,333 shares of Class A Common Stock subject to the Original Warrant have not vested and will not vest;

WHEREAS, the Company and Holder have agreed to terms with respect to their ongoing relationship, which terms include the issuance of this Warrant to purchase up to 833,333 shares pursuant to the vesting criteria set forth herein and the execution of a registration rights agreement of even date herewith covering the shares vested pursuant to the Original Warrant and any shares which may vest pursuant to this Warrant;

NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the Company hereby issues this Warrant on the following terms and conditions:

1. DEFINITIONS

As used in this Warrant, the following terms have the respective meanings set forth below:

“Business Day” shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York.

“Commission” shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws.

would be received by Holder pursuant to Section 4.3 in connection with the exercise of this Warrant for one share of Class A Common Stock.

“Current Warrant Price” as of any date shall mean, in respect of a share of Class A Common Stock at any date herein specified, $12.59, as such price shall have been adjusted in accordance with Section 4 hereof.

“Expiration Date” shall mean March 17, 2012.

“Governmental Authority” means the government of any nation, state, city, locality or other political subdivision of any thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government or any international regulatory body having or asserting jurisdiction over a Person, its business or its properties.

“Issue Date” shall mean August 11, 2006.

“Majority Holders” shall mean the holders of Warrants exercisable for in excess of 50% of the aggregate number of shares of Warrant Stock then purchasable upon exercise of all Warrants.

“MBP” shall mean Mark Burnett Productions.

“New Series” shall mean the first-run syndication daily strip television series currently entitled “MARTHA.”

“Person” shall mean any individual, firm, corporation, partnership or other entity, and shall include any successor by merger or otherwise of such entity.

“Restricted Common Stock” shall mean shares of Class A Common Stock which are, or which upon their issuance on the exercise of this Warrant or the Original Warrant would be, evidenced by a certificate bearing a restrictive legend the same as or substantially similar to the restrictive legend set forth in Section 7.1 (a).

“Second Season” means the 2006/2007 broadcast season of the New Series.

“Side Letter” means, collectively, those certain side letter(s) dated as of March 24, 2005 and April 28, 2005, respectively, between MSLO Productions, Inc. and MBP in connection with each of Rob Dauber’s and Laurie Rich’s services.

“Transfer” shall mean any disposition of any Warrant Stock, which would constitute a sale thereof within the meaning of the Securities Act.

“Transfer Notice” shall have the meaning set forth in Section 7.2.

“Vesting Date” shall mean, provided that Mark Burnett, MBP or any of their affiliated or related entities (collectively, a “Burnett Entity”) have not breached in any material respect any agreement between the Company (or any of its affiliates) and any Burnett Entity (other than breaches which the Company has agreed in writing have been cured, such agreement not to be unreasonably withheld), with respect to the applicable tranche of shares of Class A Common Stock below, as to

(A) four hundred sixteen thousand six hundred sixty seven (416,667) shares of Class A Common Stock, the date on which the third-party distributor of the New Series has achieved at least 75% television station market coverage of the United States for the 2007/2008 broadcast season of the New Series in first-run syndication; and

(B) four hundred sixteen thousand six hundred sixty six (416,666) shares of Class A Common Stock, the date on which the final (but only if such episode is at least the 160^th) episode of the Second Season of the New Series is initially broadcast in first-run syndication in the United States; provided that with respect to this clause (B) only, MBP or another Burnett Entity has provided, pursuant to and to the extent required by the Side Letter, the services of Rob Dauber as a co-executive producer of the New Series and Laurie Rich as an executive in charge of production of the New Series through the end of the Second Season; provided further that the preceding proviso shall not apply if the services of Rob Dauber and/or Laurie Rich are not provided as a result of (x) any request for termination or suspension by the Company pursuant to the Side Letter unless such request arises from the willful and continued failure of either Rob Dauber and/or Laurie Rich to perform substantially his or her duties in connection with the New Series or the willful engaging by Rob Dauber and/or Laurie Rich in gross misconduct which is demonstrably injurious to the Company (in each case, a “Breach”) unless such Breach, if possible, has been cured to the reasonable satisfaction of Company, or (y) any Company Default (as defined in paragraph 12 of the Side Letter).

“Warrant Stock” shall mean the shares of Class A Common Stock purchased by Holder upon the exercise of this Warrant.

2. EXERCISE OF WARRANT

In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 11 West 42nd Street, New York, New York 10036 (i) a written notice of Holder’s election to exercise this Warrant, which notice shall specify the number of shares of Class A Common Stock to be purchased, (ii) payment of the Current Warrant Price and (iii) this Warrant. Such notice shall be substantially in the form appearing at the end of this Warrant as Exhibit A, duly executed by Holder. Upon receipt of the items specified in the second preceding sentence, the Company shall execute or cause to be executed and deliver or cause to be delivered to Holder as soon as practicable a certificate or certificates representing the aggregate number of full shares of Class A Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the Current Warrant Price and this Warrant, are received by the Company as described above. If this Warrant shall have been exercised in part, appropriate notation may be made on this Warrant and the same returned to Holder.

Payment of the Current Warrant Price shall be made at the option of Holder (i) by certified or official bank check, (ii) by delivering to the Company certificates representing the number of shares of Warrant Stock to be surrendered, duly endorsed by or accompanied by appropriate instruments of transfer duly executed by Holder, (iii) cancellation as of the date of exercise of a portion of this Warrant with respect to shares of Class A Common Stock the right to purchase which has previously vested hereunder or (iv) any combination of the foregoing. For the purposes of making payment of the Warrant Price, shares of Class A Common Stock being surrendered shall have a value equal to the Current Market Price as of the last trading day immediately preceding the date of surrender of the shares of Class A Common Stock. If a portion of this Warrant is cancelled in payment of the Current Warrant Price, the value of the portion of this Warrant so cancelled shall be equal to the product of (x) the number of shares of Class A Common Stock purchasable under this Warrant as to which this Warrant is being cancelled, multiplied by (y) the excess of the Current Market Price as of the last trading day immediately preceding the date of cancellation over the Current Warrant Price as adjusted at the date of surrender. If Holder surrenders shares of Class A Common Stock in payment of the Current Warrant Price and less than all of the shares of Class A Common Stock represented by any certificate are being surrendered, the Company shall deliver to Holder a new certificate or

certificates representing the shares of Class A Common Stock not applied to payment of the Current Warrant Price; provided, however, that in lieu of any fractional share of Class A Common Stock which such Holder would otherwise be entitled to receive, the Company shall pay to Holder an amount of cash equal to such fraction multiplied by the Current Market Price as of the date of surrender of the shares of Class A Common Stock.

Unless specified to the contrary in the written notice of exercise, in the case of a partial exercise by Holder of this Warrant, the Warrant shall be deemed to have been exercised with respect to the portions of this Warrant that vested earliest, and then, to the extent the earlier vesting portions of this Warrant have been exercised, with respect to later vesting portions of this Warrant (in increasing chronological order).

2.2. Conditions to Exercise. Notwithstanding anything contained herein to the contrary, if the sale of the Warrant Stock to be received upon exercise of this Warrant has not been registered under the Securities Act, the issuance of such Warrant Stock shall be conditioned upon delivery to the Company of a written certification in substantially the form of the certification attached hereto as Exhibit C, or, at the Holder’s election, the delivery to the Company of an opinion of counsel, which opinion shall be reasonably satisfactory to the Company, that such Warrant Stock may be issued without registration under the Securities Act.

2.3. Payment of Taxes. All shares of Class A Common Stock issuable upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable and without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, other than income taxes payable by Holder or any of its affiliates.

2.4. Fractional Shares. The Company shall not be required to issue a fractional share of Class A Common Stock upon exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Current Market Price per share of Class A Common Stock on the date of exercise.

3. TRANSFER, DIVISION AND COMBINATION

sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 7, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly assigned in compliance with Section 7, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued.

3.2. Division and Combination. Subject to Section 7, this Warrant may be divided into multiple Warrants or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder. Subject to compliance with Section 3.1 and with Section 7, as to any Transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

4. ADJUSTMENTS

4.1. Stock Dividends, Subdivisions and Combinations. If at any time the Company shall:

(a) take a record of the holders of its Class A Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Class A Common Stock,

(b) subdivide its outstanding shares of Class A Common Stock into a larger number of shares of Class A Common Stock, or

exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment.

4.2. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Class A Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the holders of Class A Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of this Warrant and payment of the Current Warrant Price, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Class A Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed in good faith to be reasonably appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Class A Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.2, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.2 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

date of any such dividend or distribution, in addition to the number of shares of Class A Common Stock then receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (including cash) that Holder would have received had it been the holder of record of the shares of Class A Common Stock receivable as of such record date upon exercise of this Warrant and all other dividends and distributions receivable with respect to such additional stock or other securities or property after such record date and prior to the date of such exercise of this Warrant, giving effect to all adjustments called for during such period by the provisions of this Section 4.

5. RIGHTS OF HOLDER

6. RESERVATION AND AUTHORIZATION OF CLASS A COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY

From and after the Issue Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Class A Common Stock as will be sufficient to permit the exercise in full of this Warrant. All shares of Class A Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights.

7. RESTRICTIONS ON TRANSFERABILITY

certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form:

With respect to any Warrant

“This Warrant has not been registered under the
Securities Act of 1933, as amended, and may not be
transferred in violation of such Act, the rules and
regulations thereunder or the provisions hereof.”

With respect to each certificate for Warrant Stock:

“The securities represented by this Certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be transferred in violation of such Act, the rules
and regulations thereunder or the provisions of that certain
Warrant executed August 11, 2006, a copy of which is on file
at the principal office of Martha Stewart Living Omnimedia,
Inc.”

7.2. Notice of Proposed Transfer. Prior to any Transfer or attempted Transfer of the Warrant or the Original Warrant, in whole or in part, or any shares of Restricted Common Stock or any shares of Class A Common Stock issued under the Original Warrant, the holder of such Restricted Common Stock shall give four Business Days’ prior written notice (a “Transfer Notice”) to the Company of such holder’s intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and, in the event of any proposed Transfer pursuant to Rule 144, obtain from counsel to such holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrant, Original Warrant, or Restricted Common Stock, as the case may be, may be effected without registration under the Securities Act. In the case of a proposed Transfer pursuant to Rule 144, after receipt of the Transfer Notice and opinion, the Company shall promptly (but in any event within five Business Days) notify the holder of such Warrant, Original Warrant, or Restricted Common Stock, as the case may be, as to whether such opinion is reasonably satisfactory and, if so, such holder shall thereupon be entitled to Transfer such Warrant, Original Warrant, or Restricted Common Stock in accordance with the terms of the Transfer Notice. Each Warrant, Original Warrant and each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer (other than, for the avoidance of doubt, a transfer pursuant to an effective registration statement under the Securities Act) shall bear the restrictive legend set forth in Section 7.1, unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. The holder of the Restricted Common Stock giving the Transfer Notice shall not be entitled to Transfer such Warrant, Original Warrant, or Restricted Common Stock (other than any transfer pursuant to an effective registration statement under the Securities Act) until receipt of notice from the Company under this Section 7.2 that such opinion is reasonably satisfactory. This section 7.2 supercedes Section 7.2 of the Original Warrant.

7.3. Registration Rights.

The Company and the Holder will enter into a registration rights agreement of even date herewith covering (i) those shares of Class A Common Stock issuable upon exercise of the Original Warrant which have vested pursuant to the terms of the Original Warrant and (ii) the Warrant Stock that may vest pursuant to this Warrant.

8. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934.

With a view to making available to Holder the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit Holder to sell shares of Restricted Common Stock to the public without registration, the Company agrees, at all times when Holder may need to rely on Rule 144 to sell such securities to the public without registration, to furnish to Holder such information as Holder may reasonably request to permit Holder to sell shares of Restricted Common Stock without registration.

9. MISCELLANEOUS

9.1. Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback, addressed as follows:

(a)

If to Holder, at:

Mark Burnett
PMB 208
9899 Santa Monica Boulevard
Beverly Hills, CA 90212

With a copy to:

Conrad Riggs
201 Wilshire Blvd., 2^nd Floor

Santa Monica, CA 90401
Telecopy Number: (310) 471-7647

and to:

Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, CA 90067
Attention: Richard C. Wirthlin, Esq.
Telecopy Number: (310) 203-7199

(b)

If to the Company, at

Martha Stewart Living Omnimedia, Inc.
11 West 42^nd Street
New York, New York 10036
Attention: General Counsel
Telecopy Number: (212) 827-8188

9.2. Remedies. Each holder of a Warrant or Warrant Stock, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under the terms of this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

9.4. Amendment. This Warrant may be modified or amended or the provisions hereof waived only with the written consent of the Company and the Majority Holders.

9.5. Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant.

9.6. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed.

Dated: August 11, 2006

Exhibit A — Exercise Notice

Martha Stewart Living Omnimedia, Inc.
11 West 42^nd Street
New York, New York 10036
Attention: General Counsel
Telecopy Number: (212) 827-8188

Date: , 20

The undersigned hereby elects to exercise his/its Warrant and to purchase shares of Class A Common Stock of Martha Stewart Living Omnimedia, Inc., as provided below.

The undersigned further elects:

	•		to acquire shares through the payment of $ (by certified or bank cashier’s check tendered herewith)

	•		to acquire shares through the delivery of shares of Class A Common Stock (valued at $ pursuant to the third paragraph of Section 2.1 of the Warrant)

	•		to acquire shares through the cancellation of a portion of the Warrant (which portion is valued at $ pursuant to the third paragraph of Section 2.1 of the Warrant)

Please issue the shares as to which this Warrant is exercised in accordance with the instructions given below.



		Signature

INSTRUCTIONS FOR REGISTRATION OF SECURITIES


Name:
		(Print in block letters)
Address:


Breakdown of Certificates:

Exhibit B — Notice of Transfer

Martha Stewart Living Omnimedia, Inc.
11 West 42^nd Street
New York, New York 10036
Attention: General Counsel
Telecopy Number: (212) 827-8188

Date: , 20

The undersigned hereby notifies Martha Stewart Living Omnimedia, Inc. (the “Company”) that it intends to transfer [ shares of the Company’s Class A Common Stock] [the portion of the Holder’s Warrant representing the right to purchase [ shares of the Company’s Class A Common Stock] as provided below.

Identity of Transferee: [Name]/[Broker’s Sale]

Address of Transferee:

Date of Proposed Transfer:

Securities Act Exemption for Proposed Transfer: [Rule 144]/[Rule 144(k)]/[Other]

[The undersigned has attached an opinion of the law firm of that the above transfer of [Class A Common Stock] [the Warrant] does not require registration under the Securities Act]


		Signature

Exhibit C — Certification Form

The undersigned hereby certifies to Martha Stewart Living Omnimedia, Inc., that he/it:

	a.		is an “accredited investor” within the meaning of that term as defined in Rule 501 (a) promulgated under the Securities Act, and is aware that the Warrant (and the Warrant Stock) are being, or will be, issued in reliance upon its representations herein.

	b.		has a financial condition such that he/it is able to bear the risk of holding the Warrant or the Warrant Stock for an indefinite period of time and can bear the loss of its entire investment in the Warrant or the Warrant Stock.

	c.		has such knowledge and experience in financial and business matters and in making investments of this type that he/it is capable of evaluating the merits and risks of any investment in the Company and has the capacity to protect his/its own interests.

	d.		will acquire the Warrant (and the Warrant Stock) for investment for his/its own account and not with a view to any unlawful distribution of any part thereof and does not have any contract, undertaking, agreement or arrangement with any Person to sell, transfer, or grant participations to such Person or to any third person, with respect to the Warrant or the Warrant Stock, except for such contract, undertakings, agreements or arrangements which would not require registration under the Securities Act.

	e.		understands that the Warrant and the Warrant Stock may not be sold, transferred, or otherwise disposed of without registration under the Securities Act, or an exemption therefrom, and that in the absence of an effective registration statement covering the Warrant or the Warrant Stock or an available exemption from registration under the Securities Act, the Warrant and the Warrant Stock must be held indefinitely. In the absence of an effective registration statement covering the Warrant or Warrant Stock, he/it will sell, transfer, or otherwise dispose of the Warrant or the Warrant Stock only in a manner consistent with its representations and agreements set forth herein. He/it has been advised or is aware of the provisions of Rule 144 promulgated under Securities Act as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three month period not exceeding specified limitations.

	f.		has been furnished access to the business records of the Company and such additional information and documents as he/it has requested and has been

afforded an opportunity to ask questions of and receive answers from representatives of the Company concerning the terms and conditions of this Warrant, the Company’s business, operations, market potential, capitalization, financial condition and prospects, and all other matters he/it deemed relevant.

IN WITNESS WHEROF, the undersigned has executed this CERTIFICATION this day of , .


	Signature



		(Print Name)


		(Street Address)


		(City) (State) (Zip Code)

Signed in the Presence of:

EX-10.3 4 y26835exv10w3.htm EX-10.3: WARRANT REGISTRATION RIGHTS AGREEMENT EX-10.3

EXHIBIT 10.3

WARRANT REGISTRATION RIGHTS AGREEMENT

THIS WARRANT REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of August 11, 2006, by and between Martha Stewart Living Omnimedia, Inc., a Delaware Corporation (the “Company”), and Mark Burnett (the “Holder”).

WHEREAS, the Company issued to Holder the original warrant (the “Original Warrant”) on September 17, 2004, pursuant to which Holder had the right to exercise the Original Warrant to purchase up to 2,500,000 shares of Class A Common Stock, par value $.01 per share of the Company (the “Class A Common Stock”), if certain vesting terms and other conditions were satisfied;

WHEREAS, pursuant to the terms of the Original Warrant, Holder’s right to purchase 1,666,667 shares of Class A Common Stock has vested, but Holder’s rights with respect to 833,333 shares have not vested and will not vest;

WHEREAS, the Company and Holder have agreed to terms with respect to their ongoing relationship, which terms include the issuance of a new warrant to purchase up to 833,333 shares (the “Warrant”) and this grant to Holder of the registration rights described herein with respect to Warrant Shares issuable in respect of the Original Warrant or the Warrant.

NOW, THEREFORE, the parties hereto, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, hereby agree, intending to be legally bound hereby, as follows:

1. Certain Definitions.

In addition to the other terms defined in this Agreement, the following terms shall have the following meanings:

“Commission” means the United States Securities and Exchange Commission, or such other federal agency at the time having the principal responsibility for administering the Securities Act.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time.

“Koppelman Rights Agreement” means the Registration Rights Agreement between Charles A. Koppelman and the Company dated January 24, 2005.

“NASD” means National Association of Securities Dealers, Inc.

“Person” means an individual, a partnership (general or limited), corporation, limited liability company, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust

(inter vivos or testamentary), an estate, a quasi-governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity.

“Registrable Securities” means (i) any Warrant Shares issued or issuable by the Company to Holder upon exercise of the Original Warrant and/or the Warrant, and (ii) any additional shares of Class A Common Stock or other equity securities of the Company issued by the Company in respect of Warrant Shares described in subclause (i) after the issuance of such Warrant Shares, in connection with a stock dividend, stock split, combination, exchange, reorganization, recapitalization or similar reclassification of the Company’s securities; provided that, as to any particular Registrable Securities, such securities shall cease to constitute Registrable Securities when: (w) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of thereunder; (x) such securities shall have been sold in satisfaction of all applicable conditions to the resale provisions of Rule 144 under the Securities Act (or any similar provision then in force); (y) such securities are eligible to be publicly sold without limitation as to amount or manner of sale pursuant to Rule 144(k) under the Securities Act (or any successor provision to such Rule); or (z) such securities shall have ceased to be issued and outstanding.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time.

“Warrant Shares” means shares of Class A Common Stock issuable pursuant to the terms of the Original Warrant or the Warrant.

2. Shelf Registration.

(a) At any time during which Holder owns Registrable Securities, Holder may request in writing that the Company effect a shelf registration under the Securities Act registering for resale by Holder of all of the Registrable Securities eligible for registration pursuant to a shelf registration statement on Form S-3 (or any similar short-form registration statement that is a successor to Form S-3) or, in the Company’s sole discretion, any other appropriate form. Subject to Section 2(b) of this Agreement, the Company shall use its reasonable best efforts to prepare and file a shelf registration statement under the Securities Act as soon as practicable after receipt by the Company of such request from Holder. The Company shall use its reasonable best efforts to cause such shelf registration statement to be declared effective by the Commission as promptly as shall be reasonably practicable after it has been filed. The Company shall not be required to effect more than one shelf registration pursuant to this Section 2. Subject to Sections 2(c) and 2(e) of this Agreement, the Company shall use its reasonable best efforts to keep such shelf registration statement effective until all securities included in such registration statement have ceased to constitute Registrable Securities.

(b) Notwithstanding Section 2(a) above, the Company may defer the filing of or effectiveness of any shelf registration statement required by this Section 2 if the Company is, at such time, in the process of pursuing an underwritten public offering of equity securities and is advised by its managing underwriter(s) that such offering would in its or their opinion be adversely affected by such filing or (ii) the Board of Directors of the Company in its good faith

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judgment, determines that any such filing or the offering of any Registrable Securities would materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, corporate reorganization or other transaction involving the Company or any of its subsidiaries (a “Valid Business Reason”). The Company may defer filing a shelf registration statement until such Valid Business Reason no longer exists, provided that notwithstanding anything to the contrary herein, in no event shall the Company defer the filing or effectiveness of any such registration statement more than 180 days.

(c) At any time when a shelf registration statement effected pursuant to this Section 2 is effective, upon written notice from the Company to Holder that the Board of Directors of the Company has determined in good faith that the sale of Registrable Securities pursuant to such shelf registration statement would require disclosure of non-public material information not otherwise required to be disclosed under applicable law having a material adverse effect on the Company (an “Information Blackout”), Holder shall suspend sales of Registrable Securities pursuant to such shelf registration statement until such time as the Company notifies Holder that such material information has been disclosed to the public or has ceased to be material or that sales pursuant to such shelf registration statement may otherwise be resumed (the number of days from such suspension of sales by Holder until the day when such sale may be resumed hereunder is hereinafter called a “Sales Blackout Period”).

(d) Notwithstanding the provisions of Section 2(c): (i) there shall be no more than two (2) Information Blackouts during any fiscal year of the Company and (ii) in no event shall the aggregate Sales Blackout Periods during any 365 day period exceed 180 days in the aggregate.

(e) The Company shall bear all Registration Expenses in connection with any shelf registration pursuant to this Section 2, whether or not such shelf registration becomes effective; provided, however, that if Holder requests a shelf registration and subsequently withdraws his request, then such Holder either shall pay all Registration Expenses reasonably incurred in connection with such shelf registration or forfeit the right to request another shelf registration unless the withdrawal of such request is the result of facts or circumstances relating to the Company that arise after the date on which such request was made and would have a material adverse effect on the offering of the Registrable Securities.

(f) Inclusion of Additional Securities. If the Holder elects to request a Shelf Registration, the Company may include in such registration any additional securities of the Company, including without limitation, shares of Class A Common Stock requested and permitted to be included pursuant to the terms of the Koppelman Rights Agreement.

3. Incidental or “Piggy-Back” Registration.

(a) If, at any time Holder owns Registrable Securities, the Company proposes to file a Registration Statement under the Securities Act covering an underwritten offering by the Company for its own account (other than a Registration Statement on Form S-4 or S-8 or any successor thereto), then the Company shall promptly give written notice of such proposed filing to Holder. Upon the written request of Holder received by the Company within 10 days after the delivery of such notice by the Company (but in any event prior to 10 days following the

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expiration of the Registration Rights Period), the Company shall use commercially reasonable efforts to cause a registration statement covering those Registrable Securities that Holder has requested to be registered to become effective under the Securities Act.

(b) The Company shall not be required under this Section 3 to include any of the Holder’s securities in an underwriting unless he accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by the Company. If the managing underwriter for the offering shall advise the Company that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise Holder and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated in accordance with Section 3(c) below.

(c) If the managing underwriters of an underwritten offering notify the Company or such other parties that in their opinion the number of shares of securities requested to be including in such offering exceeds the number which can be sold in such offering in an orderly manner within a price range acceptable to the Company, the Company will include in such offering (i) first, the greatest number of shares of Common Stock requested to be included by the Company or by any party to the Koppelman Rights Agreement and permitted to be included pursuant to the terms thereof and (ii) second, other shares of Class A Common Stock, including the Warrant Shares as requested by the Holder, in each case up to the greatest number of shares of Class A Common Stock which, in the opinion of such managing underwriters, can be sold in an orderly manner in the price range of such offering.

(d) The Company shall bear all Registration Expenses in connection with any incidental registration pursuant to this Section 3, whether or not such incidental registration statement becomes effective.

4. Restrictions on Public Sale; Rule 144

(a) In the event the Company is issuing equity securities to the public in an underwritten offering, and, if requested by the managing underwriter or underwriters for such underwritten offering, the Holder shall not effect any public sale or distribution of Registrable Securities or any securities convertible into or exchangeable or exercisable for such Registrable Securities, including a sale pursuant to Rule 144 (or any similar provision then in force) under the Securities Act, for a period commencing on the tenth (10th) day prior to the date such underwritten offering commences (such offering being deemed to commence for this purpose on the later of the effective date for the registration statement for such offering or, if applicable, the date of the prospectus supplement for such offering) and ending 90 days after the closing of such underwritten offering, or such other period as the managing underwriters may require;

(b) The Holder shall not, during any period in which any of his Registrable Securities are included in any effective registration statement: (i) effect any stabilization transactions or engage in any stabilization activity in connection with the Warrant Shares or other equity securities of the Company in contravention of Rule 104 of Regulation M under the Exchange Act; or (ii) permit any Affiliated Purchaser (as that term is defined in Rule 101 of Regulation M under the Exchange Act) to bid for or purchase for any account in which Holder

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has a beneficial interest, or attempt to induce any other person to purchase, any Warrant Shares in contravention of Rule 102 of Regulation M under the Exchange Act.

(c) The Company shall make and keep information publicly available relating to the Company so as to satisfy the requirements of Rule 144 under the Securities Act (or any successor or corresponding rule) and file with the SEC all reports and other documents required of the Company under the Securities Act and the Exchange Act in a timely manner. If requested by the Holder, the Company shall provide the Holder certificates or other reasonable assurances of its compliance with the foregoing requirements.

5. Registration Procedures.

(a) In connection with any registration contemplated by Sections 2 or 3 the Company shall:

(i) prepare and file with the Commission, a registration statement, which registration statement shall (x) be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution by Holder, and (y) comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith; provided that, before filing a registration statement, the Company shall upon request furnish to Holder copies of such registration statement as proposed to be filed and thereafter such number of copies of such registration statement (including all exhibits thereto), and any documents incorporated by reference after the initial filing of any registration statement as Holder may reasonably request on a case by case basis after each such filing to the extent such documents are not otherwise publicly available in order to facilitate the disposition of the Registrable Securities owned by Holder, and shall revise the registration statement as it specifically relates to Holder based on information received by Holder as determined by the Company;

(ii) prepare and file with the Commission such amendments, post-effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for such period of time as is necessary to allow the distribution of the Registrable Securities contemplated therein and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during the period during which any such registration statement is required to be effective; provided that, before filing any amendments or supplements to such registration statement or the prospectus, the Company shall upon request furnish to Holder copies of such amendments and supplements (in each case including all exhibits thereto) and the prospectus (including each preliminary prospectus) as proposed to be filed and thereafter such number of copies of such amendments, supplements, prospectuses and any documents incorporated by reference after the initial filing of any registration statement as Holder may reasonably request on a case by case basis after each such filing to the extent such documents are not otherwise publicly available in order to facilitate the disposition of the Registrable Securities owned by Holder, and revise such documents as they specifically relate to Holder based on information received by Holder as determined by the Company;

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(iii) use its reasonable best efforts to cause the Registrable Securities covered by such registration statement to be registered with, or approved by, such other public, governmental or regulatory authorities as may be necessary to facilitate the disposition of such Registrable Securities in accordance with the methods of disposition intended herein;

(iv) notify Holder (A) when a prospectus or any prospectus supplement has been filed with the Commission, and, with respect to such registration statement or any post-effective amendment thereto, when the same has been declared effective by the Commission, (B) of any request by the Commission for amendments or supplements to such registration statement or related prospectus, or for additional information, (C) of the issuance by the Commission of any stop order or the initiation of any proceedings for such or a similar purpose (and the Company shall use commercially reasonable efforts to obtain the withdrawal of any such order at the earliest practicable moment), (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose (and the Company shall use its commercially reasonable efforts to obtain the withdrawal of any such suspension at the earliest practicable moment), (E) of the occurrence of any event that requires the making of any changes to such registration statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and the Company shall promptly prepare and furnish to Holder a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (F) of the Company’s determination that the filing of a post-effective amendment to such registration statement shall be necessary or appropriate. Holder shall be deemed to have agreed by acquisition of Registrable Securities that, upon the receipt of any notice from the Company of the occurrence of any event of the kind described in clause (E) of this Section 5(a)(iv), Holder shall forthwith discontinue his or its offer and disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until the Company notifies the Holder otherwise. In addition, if so directed by the Company, the Holder shall deliver to the Company, at the Company’s expense, all copies (other than permanent file copies) of any defective prospectus as contemplated by clause (E) of this Section 5(a)(iv) covering such Registrable Securities which are then in its possession;

(v) use its reasonable best efforts to cause the Registrable Securities to be listed on the principal exchange or exchanges or qualified for trading on the principal over-the-counter market or listed on the automated quotation market on which securities of the same class and series as the Registrable Securities (or into which such Registrable Securities will be or have been converted) are then listed, traded, or quoted upon the sale of such Registrable Securities pursuant to the registration statement;

(vi) enter into customary agreements (including an underwriting agreement in customary form including customary indemnification provisions) and perform its obligations under any such agreements and shall take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities;

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(vii) make available for inspection by the Holder, any underwriter selected by a Holder participating in any disposition pursuant to such Registration Statement, and any attorney, accountant, or other professional retained by any such Holder or underwriter, all financial and other records, pertinent corporate documents, and properties of the Company as shall be reasonably necessary to enable them to exercise their due diligence responsibility in connection therewith, and cause the Company’s officers, directors, and employees to supply all information reasonably requested by any of such parties in connection with such registration statement;

(viii) furnish, in the case of an underwritten public offering, to Holder and to each underwriter a signed counterpart of (i) an opinion or opinions of counsel to the Company addressed to Holder and underwriters (on which opinion both Holder and each such underwriter shall be entitled to rely) and (ii) a comfort letter or comfort letters from the Company’s independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Holder or the managing underwriter therefor reasonably requests;

(ix) otherwise use commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, as the same may hereafter be amended; and

(x) cooperate with the Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold; and use commercially reasonable efforts to cause the Registrar and Transfer Agent for the Company to issue, upon request of the Holder, certificates for such numbers of Registrable Securities registered in such names as the Holder may reasonably request at least two business days prior to any sale of Registrable Securities.

(b) In connection with any registration contemplated by Sections 2 or 3, Holder shall:

(i) cooperate with the Company in connection with the preparation of the registration statement to be filed by the Company pursuant to this Agreement, and for so long as the Company is obligated to keep such registration statement effective, shall (a) respond within five (5) business days to any request by the Company to provide or verify information regarding such Holder or such Holder’s Registrable Securities (including the proposed manner of sale) that may be required to be included in such registration statement pursuant to the rules and regulations of the Commission, and (b) provide in a timely manner information regarding the proposed distribution by such Holder of the Registrable Securities and such other information as may reasonably be requested by the Company from time to time in connection with the preparation of and for inclusion in a shelf registration statement pursuant to Section 2 and/or any related prospectus or supplement thereto; and

(ii) if requested by the Company, before using any registration statement or any prospectus contained therein or any amendment or supplement thereto, deliver to the Company a certification that he or it has reviewed the information contained therein and representing and warranting to the Company that the information relating to such Holder and his or its plan of distribution is as set forth in the related prospectus, that the prospectus does not, as

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of the time of such sale, contain any untrue statement of a material fact relating to or provided by such Holder or his or its plan of distribution and that the prospectus does not, as of the time of such sale, omit to state any material fact relating to such Holder or his or its plan of distribution required to be stated in the prospectus or necessary to make the statements in such prospectus, in the light of the circumstances under which they were made, not misleading.

6. Registration Expenses.

Whether or not any registration statement prepared and filed pursuant to Sections 2 or 3 of this Agreement is declared effective by the Commission, the Company shall pay all of the following expenses (“Registration Expenses”) arising in connection with any registrations pursuant to this Agreement (except as specified in the following sentence): (a) all Commission and any NASD registration and filing fees and expenses; (b) any and all expenses incident to the Company’s performance of, or compliance with, this Agreement, including, without limitation, any allocation of salaries and expenses of Company personnel or other general overhead expenses of the Company, or other expenses for the preparation of historical and pro forma financial statements or other data prepared by the Company; (c) all listing, NASD, transfer and/or exchange agent and registrar fees; (d) fees and expenses in connection with the qualification of the Registrable Securities under securities or “blue sky” laws; (e) printing and delivery expenses; (f) fees and out-of-pocket expenses of counsel for the Company and its independent certified public accountants and other persons, including special experts, retained by the Company; and (g) all reasonable fees and disbursements of one (1) counsel for the Holder attributable to the distribution of the Registrable Securities of such Holder included in such registration (provided the amounts payable pursuant to this clause (g) shall not exceed $10,000 in the aggregate). Notwithstanding the foregoing, the Company shall not be required to pay any discounts or commissions of selling brokers, dealers and underwriters relating to the distribution of the Registrable Securities.

7. Indemnification; Contribution.

(a) The Company hereby indemnifies and holds harmless, to the fullest extent permitted by law, Holder and each Person, if any, who controls Holder within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act, against all losses, claims, damages, liabilities (or proceedings in respect thereof) and expenses (under the Securities Act, common law and otherwise), joint or several, which arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement contemplated hereby or in any prospectus, preliminary prospectus, free-writing prospectus, any amendment or supplement thereto or any document incorporated by reference relating thereto or in any filing made in connection with the registration or qualification of the offering under “blue sky” or other securities laws of jurisdictions in which the Registrable Securities are offered, or any omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and the Company shall reimburse Holder for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or proceeding, and (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or free-writing prospectus, if used prior to the effective date of such registration statement or contained in the final prospectus (as amended

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or supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) if used within the period during which the Company is required to keep the registration statement to which such prospectus relates current, or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that such indemnification shall not extend to any such losses, claims, damages, liabilities (or proceedings in respect thereof) or expenses that are caused by any untrue statement or alleged untrue statement contained in, or by any omission or alleged omission from, information furnished in writing to the Company by such Holder in such capacity specifically and expressly for use in any such registration statement or prospectus.

(b) The Holder hereby indemnifies and hold harmless, to the fullest extent permitted by law, the Company, its officers, directors, employees, agents and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act, against any losses, claims, damages, liabilities (or proceedings in respect thereof) and expenses resulting from any untrue statement, or alleged untrue statement of a material fact, or any omission or alleged omission of a material fact required to be stated, or necessary to make the statements in the registration statement or prospectus, or any amendment thereof or supplement thereto, not misleading; provided, however, that Holder shall be liable hereunder if and only to the extent that any such loss, claim, damage, liability (or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement, or alleged untrue statement or omission or alleged omission, made in reliance upon and in conformity with information pertaining to Holder which is requested by the Company and furnished in writing to the Company by such Holder specifically and expressly for use in any such registration statement or prospectus.

(c) Any Person seeking indemnification under the provisions of this Section 7 shall, promptly after receipt by such Person of notice of the commencement of any action, suit, claim or proceeding, notify in writing each party against whom indemnification is to be sought of the commencement thereof; provided, however, that the failure so to notify an indemnifying party shall not relieve the indemnifying party from any liability which it or he may have under this Section 7 (except to the extent that it has been prejudiced in any material respect by such failure) or from any liability which the indemnifying party may otherwise have. In case any such action, suit, claim or proceeding is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent it or he may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such suit, action, claim or proceeding, (ii) the indemnifying party shall not have employed counsel (reasonably satisfactory to the indemnified party) to take charge of the defense of such action, suit, claim or proceeding within a reasonable time after notice of commencement of the action, suit, claim or proceeding, or (iii) such indemnified party shall have reasonably concluded, based on the advice of counsel, that there may be defenses available to it which are different from or additional to those available

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to the indemnifying party which, if the indemnifying party and the indemnified party were to be represented by the same counsel, would result in a conflict of interest for such counsel or materially prejudice the prosecution of the defenses available to such indemnified party. If any of the events specified in clauses (i), (ii) or (iii) of the preceding sentence shall have occurred or shall otherwise be applicable, then the fees and expenses of one counsel selected by a majority in interest of the indemnified parties shall be borne by the indemnifying party. If, in any case, the indemnified party employs separate counsel, the indemnifying party shall not have the right to direct the defense of such action, suit, claim or proceeding on behalf of the indemnified party. Anything in this paragraph to the contrary notwithstanding, an indemnifying party shall not be liable for the settlement of any action, suit, claim or proceeding effected without its prior written consent (which consent in the case of an action, suit, claim or proceeding exclusively seeking monetary relief shall not be unreasonably withheld or delayed). Such indemnification shall remain in full force and effect irrespective of any investigation made by or on behalf of an indemnified party.

(d) If the indemnification from the indemnifying party as provided in this Section 7 is unavailable or is otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses. The relative fault of such indemnifying party shall be determined by reference to, among other things, whether any action in question, including any untrue (or alleged untrue) statement of a material fact or omission (or alleged omission) to state a material fact, has been made, or relates to information supplied by such indemnifying party or such indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 7(d) hereof, any legal or other fees or expenses reasonably incurred by such party in connection with any such investigation or proceeding.

The parties hereto acknowledge that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation other than as described above. Notwithstanding the provisions of this Section 7(d), the Holder shall not be required to contribute any aggregate amount in excess of the amount by which the total price at which the Registrable Securities of such Holder were offered to the public exceed the amount of any damages which such Holder otherwise would have been required to pay or become liable to pay by reason of such untrue statement or omission unless such loss, claim, damage, liability (or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement, or alleged untrue statement or omission or alleged omission, made in reliance upon and in conformity with information pertaining to Holder which is requested by the Company and furnished in writing to the Company by such Holder specifically and expressly for use in any such registration statement or prospectus. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

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If, however, indemnification is available under this Section 7, the indemnifying parties shall indemnify each indemnified party to the fullest extent provided in Sections 7(a) through 7(d) hereof without regard to the relative fault of said indemnifying party or indemnified party or any other equitable consideration.

8. Miscellaneous

(a) Notices. Except as otherwise provided below, whenever it is provided in this Agreement that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties hereto, or whenever any of the parties hereto, desires to provide to or serve upon any person any other communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and either shall be delivered in person or sent by telecopy, addressed as follows:

if to the Company:

Martha Stewart Living Omnimedia, Inc.
11 West 42^nd Street
New York, New York 10019
Attention: General Counsel
Telecopy: (864) 987-9903

with a copy to:

Hogan & Hartson L.L.P.
Columbia Square
555 13th Street, N.W.
Washington, D.C. 20004-1109
Attention: Stuart A. Barr, Esq.
Telecopy: (202) 637-5910

if to the Holder:

Mark Burnett
PMB 208
9899 Santa Monica Boulevard
Beverly Hills, CA 90212

with a copy to:

Conrad Riggs
201 Wilshire Boulevard
2nd Floor
Santa Monica, CA 90401
Telecopy: (301) 471-7647

and:

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Irell & Manella LLP
1800 Avenue of the Stars
Sutie 900
Los Angeles, CA 90067
Attention: Richard C. Wirthlin, Esq.
Telecopy: (310) 203-7199

(b) Entire Agreement. This Agreement represents the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes any and all prior oral and written agreements, arrangements and understandings among the parties hereto with respect to such subject matter. This Agreement can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the Company on the one hand, and Holder on the other hand.

(c) Assignment; Successors and Assigns. Except as set forth in the next sentence, this Agreement and the rights granted hereunder may not be assigned by Holder without the prior written consent of the Company, which may be granted or withheld by the Company in its sole and absolute discretion. Notwithstanding the foregoing, this Agreement and Holder’s rights hereunder may be assigned to any party to which Holder’s rights under the Warrant or Original Warrant are assigned in whole or in part.

(d) Headings. Section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

(e) Applicable Law. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the internal laws of the State of New York.

(f) Severability. If fulfillment of any provision of this Agreement, at the time such fulfillment shall be due, shall transcend the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provision contained in this Agreement operates or would operate to invalidate this Agreement, in whole or in part, then such clause or provision only shall be held ineffective, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect.

(g) Equitable Remedies. The parties hereto agree that irreparable harm would occur in the event that any of the agreements and provisions of this Agreement were not performed fully by the parties hereto in accordance with their specific terms or conditions or were otherwise breached, and that money damages are an inadequate remedy for breach of this Agreement because of the difficulty of ascertaining and quantifying the amount of damage that will be suffered by the parties hereto in the event that this Agreement is not performed in accordance with its terms or conditions or is otherwise breached. It is accordingly hereby agreed that the parties hereto shall be entitled to an injunction or injunctions to restrain, enjoin and

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prevent breaches of this Agreement by the other parties and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, such remedy being in addition to and not in lieu of, any other rights and remedies to which the other parties are entitled to at law or in equity.

(h) No Waiver. No waiver by a party hereto shall be effective unless made in a written instrument duly executed by the party against whom such waiver is sought to be enforced, and only to the extent set forth in such instrument. Neither the waiver by any of the parties hereto of a breach or a default under any of the provisions of this Agreement, nor the failure of any of the parties, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right or privilege hereunder shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights or privileges hereunder.

(i) Counterparts. To facilitate execution, this Agreement may be executed in as many counterparts as may be required. It shall not be necessary that the signature of or on behalf of each party appear on each counterpart, but it shall be sufficient that the signature of or on behalf of each party appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of or on behalf of all of the parties.

(j) Company Assets. The Holder acknowledges that no officer, director or shareholder of the Company is liable to such Holder in respect of this Agreement and that such Holder shall look only to the income and assets of the Company in respect of any payments or claims related to this Agreement.

(k) Pronouns. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity may require.

(SIGNATURES APPEAR ON FOLLOWING PAGE)

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IN WITNESS WHEREOF, each of the parties hereto has duly executed and delivered this Warrant Registration Rights Agreement, or has caused this Warrant Registration Rights Agreement to be duly executed and delivered in their names and on their behalf, as of the date first written above.


Martha Stewart Living Omnimedia, Inc.

By:		/s/ John R. Cuti
		Name: John R. Cuti
		Title: Secretary and General Counsel

Mark Burnett

	/s/ Mark Burnett

EX-31.1 5 y26835exv31w1.htm EX-31.1: CERTIFICATION EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Susan Lyne, certify that:

1.		I have reviewed this Quarterly Report on Form 10-Q of Martha Stewart Living Omnimedia, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2006


		/s/ Susan Lyne
		Susan Lyne
		President & Chief Executive Officer

EX-31.2 6 y26835exv31w2.htm EX-31.2: CERTIFICATION EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Howard Hochhauser, certify that:

1.		I have reviewed this Quarterly Report on Form 10-Q of Martha Stewart Living Omnimedia, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d.		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2006


		/s/ Howard Hochhauser
		Howard Hochhauser
		Chief Financial Officer

EX-32 7 y26835exv32.htm EX-32: CERTIFICATION EX-32

EXHIBIT 32

CERTIFICATION
PURSUANT TO 18 U.S.C. Section 1350

In connection with the Quarterly Report of Martha Stewart Living Omnimedia, Inc. (the “registrant”) on Form 10-Q for the period ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “report”), we, Susan Lyne and Howard Hochhauser, Chief Executive Officer and Chief Financial Officer, respectively, of the registrant, certify, pursuant to 18 U.S.C. § 1350, that:

	(1)		The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)		The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


Dated: November 8, 2006		/s/ Susan Lyne Susan Lyne
		President & Chief Executive Officer

Dated: November 8, 2006		/s/ Howard Hochhauser Howard Hochhauser
		Chief Financial Officer

-----END PRIVACY-ENHANCED MESSAGE-----

MARTHA STEWART LIVING OMNIMEDIA, INC.

/s/ John R. Cuti

John R. Cuti

General Counsel & Secretary