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 March 31, 2009


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 001-15395

MARTHA STEWART LIVING OMNIMEDIA, INC.

(Exact name of registrant as specified in its charter)


Delaware		52-2187059

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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


Class	Outstanding as of May 07, 2009
Class A, $0.01 par value		28,038,722
Class B, $0.01 par value		26,690,125

Total		54,728,847

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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


	March 31,			December 31,
	2009			2008
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	49,744		$	50,204
Short-term investments		9,855			9,915
Accounts receivable, net		37,205			52,500
Inventory		6,483			6,053
Deferred television production costs		4,597			4,076
Income taxes receivable		41			40
Other current assets		6,608			3,712


Total current assets		114,533			126,500

PROPERTY, PLANT AND EQUIPMENT, net		13,088			14,422
GOODWILL AND OTHER INTANGIBLE ASSETS, net		93,309			93,312
OTHER NONCURRENT ASSETS, net		17,621			27,051


Total assets	$	238,551		$	261,285


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	19,920		$	27,877
Accrued payroll and related costs		6,181			7,525
Income taxes payable		97			142
Current portion of deferred subscription revenue		22,686			22,597
Current portion of other deferred revenue		19,554			7,582


Total current liabilities		68,438			65,723

DEFERRED SUBSCRIPTION REVENUE		6,374			6,874
OTHER DEFERRED REVENUE		4,752			13,334
LOAN PAYABLE		18,000			19,500
DEFERRED INCOME TAX LIABILITY		2,197			1,854
OTHER NONCURRENT LIABILITIES		3,179			3,005


Total liabilities		102,940			110,290


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Class A Common Stock, $0.01 par value, 350,000 shares authorized; 28,151 and 28,204 shares outstanding in 2009 and 2008, respectively		282			282
Class B Common Stock, $0.01 par value, 150,000 shares authorized; 26,690 shares outstanding in 2009 and 2008		267			267
Capital in excess of par value		284,641			283,248
Accumulated deficit		(148,871	)		(132,027	)
Accumulated other comprehensive income		67			—

		136,386			151,770
Less: Class A Treasury Stock - 59 shares at cost		(775	)		(775	)

Total shareholders’ equity		135,611			150,995


Total liabilities and shareholders’ equity	$	238,551		$	261,285

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
	March 31,
	2009			2008
REVENUES
Publishing	$	28,361		$	40,792
Broadcasting		10,514			10,562
Internet		2,622			3,414
Merchandising		8,933			13,066

Total revenues		50,430			67,834


OPERATING COSTS AND EXPENSES
Production, distribution and editorial		28,170			36,037
Selling and promotion		14,781			18,714
General and administrative		14,113			16,262
Depreciation and amortization		1,751			1,356
Impairment charge		7,100			—

Total operating costs and expenses		65,915			72,369


OPERATING LOSS		(15,485	)		(4,535	)
OTHER (EXPENSE) / INCOME
Interest (expense) / income, net		(8	)		483
Loss on equity securities		(757	)		—
Loss in equity interest		(236	)		—

Total other (expense) / income		(1,001	)		483

LOSS BEFORE INCOME TAXES		(16,486	)		(4,052	)
Income tax provision		(358	)		(182	)


NET LOSS	$	(16,844	)	$	(4,234	)


LOSS PER SHARE — BASIC AND DILUTED
Net Loss	$	(0.31	)	$	(0.08	)


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and Diluted		53,766			52,722

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 Three Months Ended March 31, 2009
(unaudited, in thousands)


																Accumulated
	Class A					Class B										other		Class A
	Common Stock					Common Stock				Capital in excess			Accumulated			comprehensive		Treasury Stock
	Shares			Amount		Shares		Amount		of par value			deficit			income		Shares			Amount			Total
Balance at January 1, 2009		28,204		$	282		26,690	$	267	$	283,248		$	(132,027	)	$	—		(59	)	$	(775	)	$	150,995

Comprehensive loss:
Net loss		—			—		—		—		—			(16,844	)		—		—			—			(16,844	)

Other comprehensive income:

Unrealized gain on investment		—			—		—		—		—			—			67		—			—			67


Total comprehensive loss		—			—		—		—		—			—			—		—			—			(16,777	)


Issuance of shares of stock and restricted stock, net of cancellations and tax withholdings		(53	)		—		—		—		(149	)		—			—		—			—			(149	)

Non-cash equity compensation		—			—		—		—		1,542			—			—		—			—			1,542


Balance at March 31, 2009		28,151		$	282		26,690	$	267		284,641		$	(148,871	)	$	67		(59	)	$	(775	)	$	135,611

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)


	Three Months Ended
	March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(16,844	)	$	(4,234	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash revenue		(926	)		(23	)
Depreciation and amortization		1,751			1,356
Amortization of deferred television production costs		5,078			4,563
Impairment on cost-based investment		7,100			—
Non-cash equity compensation		1,632			1,935
Deferred income tax expense		343			—
Loss in equity interest		236			—
Loss on equity securities		757			—
Other non-cash charges, net		239			185
Changes in operating assets and liabilities		3,280			35,708


Net cash provided by operating activities		2,646			39,490


CASH FLOWS FROM INVESTING ACTIVITIES
Investment in other noncurrent assets		—			(5,000	)
Capital expenditures		(1,516	)		(263	)
Purchases of short-term investments		(10,233	)		(50	)
Sales of short-term investments		10,292			26,305


Net cash (used in) / provided by investing activities		(1,457	)		20,992


CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt		(1,500	)		—
Issuance of stock and restricted stock, net of cancellations and tax liabilities		(149	)		(1,411	)


Net cash used in financing activities		(1,649	)		(1,411	)


Net (decrease) / increase in cash		(460	)		59,071

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		50,204			30,536


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	49,744		$	89,607

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. General

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

The information included in the foregoing interim condensed consolidated financial statements is unaudited. In the opinion of management, all adjustments, all of which are of a normal recurring nature and necessary for a fair presentation of the results of operations for the interim periods presented, have been reflected therein. The results of operations for interim periods do not necessarily indicate the results to be expected for the entire year. These 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 (the “SEC”) with respect to the Company’s fiscal year ended December 31, 2008 (the “2008 10-K”) which may be accessed through the SEC’s World Wide Web site at http://www.sec.gov.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management does not expect such differences to have a material effect on the Company’s consolidated financial statements.

The Company’s “Significant Accounting Policies” are discussed in more detail in the 2008 10-K, especially under the heading “Note 2. Summary of Significant Accounting Policies.”

2. Recent accounting standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, on February 12, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2 which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially deferred the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The Company adopted SFAS 157 as of January 1, 2008 for financial assets and liabilities, and January 1, 2009 for nonfinancial assets and nonfinancial liabilities. The adoption of SFAS 157 for financial assets and liabilities and for nonfinancial assets and nonfinancial liabilities did not have a material impact on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (Revised) (“SFAS 141(R)”). SFAS 141(R) significantly changed the accounting for and reporting of business combinations in consolidated financial statements previously required under SFAS 141. SFAS 141(R) requires an entity to measure the business acquired at fair value and to recognize goodwill attributable to any noncontrolling interests (previously referred to as minority interests) rather than just the portion attributable to the acquirer. SFAS 141(R) also results in fewer exceptions to the principle of measuring assets acquired and liabilities assumed in a business combination at fair value. In addition, SFAS 141(R) requires payments to third parties for consulting, legal, audit, and similar services associated with an acquisition to be recognized as expenses when incurred rather than capitalized as part of the business combination. Also in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that accounting and reporting for minority interests be recharacterized as noncontrolling interests and classified as a component of equity. The Company has simultaneously adopted SFAS 141(R) and SFAS 160 as of January 1, 2009, as required. These standards will have no impact on the previous acquisitions recorded by the Company in the financial statements.

3. Other

Production, distribution and editorial expenses; selling and promotion expenses; and general and administrative expenses are all presented exclusive of depreciation and amortization, which is shown separately within “Operating Costs and Expenses.”

Certain prior year financial information has been reclassified to conform with fiscal 2009 financial statement presentation.

4. Inventories

Inventory is comprised of paper stock. The inventory balances at March 31, 2009 and December 31, 2008 were $6.5 million and $6.1 million, respectively.

5. Investment in Other Non-Current Assets

During the second quarter of 2008, the Company entered into a three-year agreement with TurboChef Technologies, Inc. (“TurboChef”) to provide intellectual property and promotional services in exchange for $10.0 million. TurboChef provided compensation in the form of shares of TurboChef stock and a warrant to purchase shares of TurboChef stock for an aggregate value of $5.0 million in the first agreement year, and was to provide another $2.5 million in each of year two and three of the agreement in the form of stock or cash, at its option, for a total contract value of $10.0 million. In lieu of cash consideration, TurboChef provided initial compensation in 2008 in the form of 381,049 shares of TurboChef stock and a warrant to purchase 454,000 shares of TurboChef stock for an aggregate fair value of approximately $5 million.

On January 5, 2009, the Middleby Corporation (“Middleby”) completed its acquisition of TurboChef in a cash and stock transaction. Under the terms of the merger agreement, holders of TurboChef’s common shares received a combination of $3.67 in cash and 0.0486 shares of Middleby common stock per TurboChef share. In addition, the Company now has a warrant to purchase 22,064 shares of Middleby. The consideration upon the merger equated to $2.0 million, which represented $1.4 million in cash and 18,518 shares of Middleby common stock worth $0.5 million on January 5, 2009, as well as $0.1 million related to the warrant. In the first quarter of 2009, Middleby paid to the Company $2.5 million in cash consideration, fulfilling the second year obligation under the agreement. In the third year of the agreement, the Company expects to receive another $2.5 million of Middleby stock or cash consideration. Total consideration of $10.0 million for this agreement is being recognized on a straightline basis over the three-year term.

Any changes to the market value of the Middleby common stock require an adjustment to both the shares held as well as the warrant. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Middleby shares are considered available-for-sale-securities and are recorded at fair value each quarter, with temporary adjustments recorded in other comprehensive income. The warrant meets the definition of a derivative in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and is marked to market each quarter with the adjustment recorded in other income or other expense.

Non-cash amounts related to these agreements have been appropriately adjusted in the cash flows from operating activities in the statement of cash flows.

In the first quarter of 2009, the Company recorded an impairment charge of $7.1 million to reduce the carrying value of a certain cost-method investment that experienced an other-than-temporary loss in value. The Company also recorded $0.8 million of losses to reflect market fluctuations in an equity derivative instrument.

While the Company has recognized all declines in investments that are believed to be other-than-temporary as of March 31, 2009, it is reasonably possible that individual investments in the Company’s portfolio may experience an other-than-temporary decline in value in the future if the underlying issuer experiences poor operating results or the U.S. or certain foreign equity markets experience further declines in value.

6. Income taxes

The Company follows SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). 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 109 places more emphasis on historical information, such as the Company’s cumulative operating results and its current year results than it places on estimates of future taxable income. Therefore, the Company has added $7.7 million to its valuation allowance in the first three months of 2009, resulting in a cumulative balance of $75.7 million as of March 31, 2009. In addition, the Company has recorded $0.3 million of tax expense which is attributable to differences between the financial statement carrying amounts of current and prior year acquisitions of certain indefinite-lived intangible assets and their respective tax bases which resulted in a net deferred tax liability of $2.2 million. 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 could be realized.

In accordance with the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), the Company had a FIN 48 liability balance of $0.2 million as of March 31, 2009, of which $0.1 million represented unrecognized tax benefits, which if recognized at some point in the future would favorably impact the effective tax rate, and $0.1 million was interest. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for the years before 2005 and state examinations for the years before 2003. The Company anticipates that as a result of audit settlements and statute closures over the next twelve months, the liability will be reduced through cash payments of approximately $0.05 million.

7. Equity compensation

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

In April 2008, the Company’s Board of Directors adopted the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (the “New Stock Plan”), which was approved by the Company’s stockholders at the Company’s 2008 annual meeting. The New Stock Plan has 10,000,000 shares available for issuance. The New Stock Plan replaced the 1999 Option Plan and Non-Employee Director Plan (together, the “Prior Plans”), which together had an aggregate of approximately 1,850,000 shares still available for issuance. Therefore, the total net effect of the replacement of the Prior Plans and adoption of the New Stock Plan was an increase of approximately 8,150,000 shares of Class A Common Stock available for issuance under the Company’s stock plans.

On March 2, 2009, the Company made equity awards to certain employees pursuant to the New Stock Plan. The awards consisted, in the aggregate, of 2,719,750 options priced at $1.96 per share (the closing price on the date of issuance), which options vest over a four-year period, and 311,625 performance-based restricted stock units, each of which represents the right to a share of the Company’s Class A Common Stock if the Company achieves certain earnings targets over a performance period.

8. Acquisition of Business

On April 2, 2008, the Company acquired all of the assets related to the business of Chef Emeril Lagasse other than his restaurant business and Foundation in exchange for approximately $45.0 million in cash and 674,854 shares of the Company’s Class A Common Stock which equaled a value of $5.0 million.. The shares issued in connection

with this acquisition were not covered by the Company’s existing equity plans. The acquisition agreement also includes a potential additional payment of up to $20 million in 2013, based upon the achievement of certain operating metrics in 2011 and 2012, a portion of which may be payable, at the Company’s election, in shares of the Company’s Class A Common Stock.

The Company acquired the assets related to chef Emeril Lagasse to further the Company’s diversification strategy and help grow the Company’s operating results. Consistent with SFAS No. 141, “Business Combinations,” this acquisition was accounted for under purchase accounting. While the primary assets purchased in the transaction were certain trade names valued at $45.2 million, as well as a television content library valued at $5.2 million, $0.9 million of the value, representing the excess purchase price over the fair market value of the assets acquired, was apportioned to goodwill. To the extent that the certain operating metrics are achieved in 2011 and 2012, the potential additional payment will be allocated to the acquisition and will be recognized as goodwill.

Of the intangible assets acquired, only the television content library is subject to amortization over an approximate six-year period, which is expensed based upon future estimated revenues to be received.

The results of operations for the acquisition have been included in the Company’s condensed consolidated financial statements of operations since April 2, 2008, and are recorded in the Merchandising, Broadcasting and Publishing segments in accordance with the nature of the underlying contract. The following unaudited pro forma financial information presents a summary of the results of operations assuming the acquisition occurred at the beginning of the first quarter of 2008:


	Three Months Ended
(unaudited, in thousands, except per share amounts)	March 31, 2008
Net revenues	$	71,052
Net loss		(3,336	)
Net loss per share — basic and diluted	$	(0.06	)

Pro forma adjustments have been made to reflect amortization using asset values recognized after applying purchase accounting adjustments, to record incremental compensation costs and to record amortization of deferred financing costs and interest expense related to the long-term debt incurred to fund a part of the acquisition. No tax adjustment was necessary due to the benefit of the Company’s net operating loss carryforwards. The pro forma loss per share amount is based on the pro forma number of shares outstanding as of the end of the first quarter of 2008 which includes the shares issued by the Company as a portion of the total consideration for the acquisition.

The pro forma condensed consolidated financial information is presented for information purposes only. The pro forma condensed consolidated financial information should not be construed to be indicative of the combined results of operations that might have been achieved had the acquisition been consummated at the beginning of the first quarter of 2008, nor is it necessarily indicative of the future results of the combined company.

9. Industry Segments

The Company is an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. The Company’s business segments are Publishing, Broadcasting, Internet and Merchandising. The Publishing segment primarily consists of the Company’s magazine operations, and also those related to its book operations. The Broadcasting segment consists of the Company’s television production operations which produce television programming and other licensing revenue from programs that air in syndication and on cable, as well as the Company’s radio operations. The Martha Stewart Show airs in syndication seasonally over a 12-month period beginning and ending in the middle of September. The Internet segment primarily consists of the content-driven website marthastewart.com supported by advertising and, until the middle of the first quarter of 2008, the operations relating to the direct-to-consumer floral business. The Merchandising segment primarily 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 licensees in exchange for royalty income. The Merchandising segment also includes the flowers program with 1-800-Flowers.com which began in the second quarter of 2008. The accounting policies for the Company’s business

segments are discussed in more detail in Note 1 above and in the 2008 10-K, especially under the heading “Note 2. Summary of Significant Accounting Policies.”

Segment information for the quarter ended March 31, 2009 and 2008 is as follows:


(in thousands)	Publishing			Broadcasting		Internet			Merchandising			Corporate			Consolidated
2009
Revenues	$	28,361		$	10,514	$	2,622		$	8,933		$	—		$	50,430
Non-cash equity compensation		435			128		41			157			871			1,632
Depreciation and amortization		74			69		452			18			1,138			1,751
Operating income/(loss)		(1,872	)		834		(2,032	)		(1,776	)		(10,639	)		(15,485	)
Total assets		73,250			27,689		11,585			68,704			57,323			238,551

2008
Revenues	$	40,792		$	10,562	$	3,414		$	13,066		$	—		$	67,834
Non-cash equity compensation		651			238		59			362			625			1,935
Depreciation and amortization		99			109		378			24			746			1,356
Operating income/(loss)		1,656			175		(2,247	)		6,596			(10,715	)		(4,535	)
Total assets		90,582			23,397		11,233			22,504			96,887			244,603

10. Related Party Transactions

See Note 11, “Subsequent Events”, for discussion of a new employment agreement executed in April 2009 between the Company and Martha Stewart.

11. Subsequent Events

In April 2009, the Company entered into an amended and restated employment agreement with Martha Stewart which replaced the existing agreement between the Company and Ms. Stewart that was scheduled to expire in September 2009. The new agreement extends until March 31, 2012. During the term of the agreement, Ms. Stewart continues to serve as the Founder, and is entitled to talent compensation of $2.0 million per year. In addition, she is entitled to an annual bonus in an amount determined by the Compensation Committee, with a target bonus equal to $1.0 million and a maximum annual bonus of 150% of the target amount. Ms. Stewart received a $3.0 million make whole/retention payment in connection with the execution of the agreement, which amount is subject to pro-rata forfeiture in the event Ms. Stewart terminates the agreement without good reason or the Company terminates the agreement with cause.

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

Forward-looking Statements and Risk Factors

Except for historical information contained in this Quarterly Report, the statements in this Quarterly Report are “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 often 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. Our 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 or Emeril Lagasse by consumers, advertisers and business partners;

	o		a loss of the services of Ms. Stewart or Mr. Lagasse;

	o		a loss of the services of other key personnel;

	o		a further softening of or increased competition in the domestic advertising market;

	o		a continued or further downturn in the economy, including particularly the housing market and other developments that limit consumers’ discretionary spending;

	o		loss or failure of merchandising and licensing programs;

	o		failure in acquiring or developing new brands or realizing the benefits of acquisitions;

	o		failure to replace Kmart revenues in the Merchandising segment;

	o		failure to protect our intellectual property;

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

	o		increases in paper or postage costs;

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

	o		the receptivity of consumers to our new product introductions;

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

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

These and other factors are discussed in this Quarterly Report on Form 10-Q under the heading “Part II. Other Information, Item 1A. Risk Factors.” We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake 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.

EXECUTIVE SUMMARY

We are an integrated media and merchandising company providing consumers with inspiring lifestyle content and programming, and well-designed, high-quality products. Our Company is organized into four business segments with Publishing, Broadcasting and Internet representing our media platforms that are complemented by our Merchandising segment. In the first quarter of 2009, total revenues decreased approximately 26% due primarily to the declines in print advertising revenue, as well as the decrease in minimum royalty guarantees and sales from Kmart as compared with the prior year quarter. These declines were partially offset by revenues from our Emeril Lagasse assets which contributed to both our Broadcasting and Merchandising segments and from the addition of new Merchandising initiatives.

Our operating costs and expenses were lower in the first quarter of 2009 primarily from savings in our Publishing segment which had lower production, distribution and editorial costs and lower selling and promotion expenses. In addition, we also reduced expenses in our Merchandising segment across all expense categories including general and administrative costs. These cost savings were largely due to lower compensation expenses across all segments due to the reduction of our compensation accrual and lower headcount. Partially offsetting the Publishing, Merchandising and other Company-wide cost savings was a non-cash impairment charge in the quarter of $7.1 million related to our cost-based Merchandising equity investment.

We ended the quarter with approximately $60 million in cash, cash equivalents and short-term investments and $18 million of debt. Our overall liquidity remained essentially flat from December 31, 2008 as cash provided by operations was offset by capital expenditures and prepayment on our long-term debt.

Media Update. In the first quarter, revenues from our media platforms declined due primarily to decreased advertising revenues in our Publishing segment as the result of fewer pages sold and in our Broadcasting segment as the result of lower ratings. In addition, prior year revenues in our Internet segment included our flowers program which transitioned to our Merchandising segment in the second quarter of 2008. These declines were partially offset by Emeril Lagasse’s contributions to our Broadcasting segment and advertising gains in the Internet segment. Based on our current outlook, we expect to experience continued declines in our Publishing segment advertising revenues for the second quarter, although we have limited visibility beyond the second quarter.

Publishing

Advertising revenues declined due to a decrease in pages partially offset by higher rates per page driven in part by higher circulation rate bases for each title. Circulation revenues also declined as subscription revenues decreased due to lower rates and higher agent commission expense, partially offset by higher volume of copies served. Additionally, circulation revenues decreased from lower volume of newsstand sales and the timing of special issues. The decline in revenues was partially offset by decreases in all expense categories including production, editorial, circulation marketing, and advertising costs. These cost savings included lower compensation costs from staff reductions and a lower compensation accrual, as well as cost savings from lower page volume and from reduced discretionary spending. As we enter the second quarter, print advertising revenue is currently trending lower, similar to the declines that we experience in the first quarter of 2009 as compared to the prior year period.

Broadcasting

Broadcasting segment revenues were essentially flat in the first quarter of 2009 as compared to the prior year period. Decreased advertising revenue from lower ratings was largely offset by programming revenue from Emeril Lagasse’s original series on Planet Green. The Martha Stewart Show continues to maintain a core audience.

Internet

In the first quarter of 2009, while revenues were down due to the inclusion of Martha Stewart Flowers revenue in the prior year first quarter, we continued to experience growth in our online audience. Our page views increased, on average, almost 50% from the prior year period and advertising revenue increased 13%. For the second quarter, we expect continued year-over-year growth in online advertising revenue, although we have limited visibility beyond the second quarter.

Merchandising Update. In the first quarter, Merchandising segment revenues decreased due to the decline in our minimum royalty guarantees and sales from Kmart as compared with the prior year quarter. Partially offsetting the decrease in revenues was the continued benefit from Emeril Lagasse’s licensing business. In addition, Merchandising segment revenues benefited from our program with 1-800-Flowers.com, which was a new agreement as compared with the prior year period. For the remainder of the year, we expect to experience lower retail sales from Kmart as compared with the prior year period, as the result of the continued impact of the wind down of our relationship. We also expect royalty revenues, excluding Kmart, to be down meaningfully in the second quarter as compared with the prior year period primarily due to the absence of certain one-time benefits in the prior year.

Our agreement with Kmart includes royalty payments based on sales, as well as minimum guarantees. The minimum guarantees have exceeded actual royalties earned from retail sales from 2003 through 2008 primarily due to store closings and historic lower same-store sales trends. The following are the minimum guaranteed royalty payments (in millions) over the term of the agreement for the respective years ending on the indicated dates:


	1/31/02	1/31/03	1/31/04	1/31/05	1/31/06	1/31/07	1/31/08	1/31/09	1/31/10
Minimum Royalty Amounts	$15.3	$40.4	$47.5	$49.0	$54.0	$59.0	$65.0	$20.0	$15.0

For the contract year ended January 31, 2009, our earned royalty based on actual retail sales at Kmart was $17.9 million. Furthermore, $10.0 million of royalties previously paid have been deferred and were subject to recoupment in the period ending January 31, 2009. No royalties were recouped in 2008 for the contract year ended January 31, 2009. The $10.0 million of deferred royalties remain subject to recoupment for the period ending January 31, 2010. However, given the current trends in Kmart retail sales, we expect to reverse the entire reserve into non-cash revenue in the fourth quarter of 2009.

Comparison of Three Months Ended March 31, 2009 to Three Months Ended March 31, 2008

PUBLISHING SEGMENT


	2009			2008		Better/
(in thousands)	(unaudited)			(unaudited)		(Worse)
Publishing Segment Revenues
Advertising	$	15,549		$	22,096	$	(6,547	)
Circulation		12,609			16,550		(3,941	)
Books		48			1,767		(1,719	)
Other		155			379		(224	)

Total Publishing Segment Revenues		28,361			40,792		(12,431	)


Publishing Segment Operating Costs and Expenses
Production, distribution and editorial		16,448			22,233		5,785
Selling and promotion		11,890			15,175		3,285
General and administrative		1,821			1,629		(192	)
Depreciation and amortization		74			99		25

Total Publishing Segment Operating Costs and Expenses		30,233			39,136		8,903


Operating (Loss) / Income	$	(1,872	)	$	1,656	$	(3,528	)

Publishing revenues decreased 30% for the three months ended March 31, 2009 from the prior year period. Advertising revenue decreased $6.5 million due to the decrease in pages in Martha Stewart Living, Everyday Food and Body + Soul. The decrease in advertising pages was partially offset by slightly higher advertising rates across all titles driven in part by a higher circulation rate base. Circulation revenue decreased $3.9 million due to higher agency commissions and lower subscription rate per copy in the first quarter of 2009 for Martha Stewart Living, Everyday Food and Body + Soul as compared with the prior year period. Circulation revenue also decreased from lower newsstand unit volume across all of our titles, as well as the prior year contribution of two special interest publications as compared to no special interest publications in the first quarter of 2009. These decreases were partially offset by higher volume of subscription sales for Martha Stewart Living, Everyday Food and Body + Soul. Revenue related to our books business decreased $1.7 million primarily due to the timing of delivery and acceptance of manuscripts related to our multi-book agreement with Clarkson Potter/Publishers.

Magazine Publication Schedule


	Three months ended March 31,	Three Months ended March 31,
	2009	2008

Martha Stewart Living	Three Issues	Three Issues
Everyday Food	Three Issues	Three Issues
Body + Soul	Two Issues	Two Issues
Special Interest Publications	Zero	Two Issues

Production, distribution and editorial expenses decreased $5.8 million, primarily due to savings related to lower volume of pages, partially offset by higher rates related to physical costs to distribute the magazines. There was also a decrease in art and editorial story and staff costs including a lower compensation accrual. Selling and promotion expenses decreased $3.3 million due to lower circulation marketing costs, lower fulfillment rates associated with Martha Stewart Living and lower marketing program and advertising staff costs including a lower compensation accrual. General and administrative expenses increased $0.2 million primarily due to higher allocation of facilities costs partially offset by a lower compensation accrual.

BROADCASTING SEGMENT


	Three Months Ended March 31,
	2009		2008		Better/
(in thousands)	(unaudited)		(unaudited)		(Worse)
Broadcasting Segment Revenues
Advertising	$	6,024	$	7,094	$	(1,070	)
Radio		1,875		1,875		—
Licensing and other		2,615		1,593		1,022

Total Broadcasting Segment Revenues		10,514		10,562		(48	)


Broadcasting Segment Operating Costs and Expenses
Production, distribution and editorial		7,630		7,647		17
Selling and promotion		622		903		281
General and administrative		1,359		1,728		369
Depreciation and amortization		69		109		40


Total Broadcasting Segment Operating Costs and Expenses		9,680		10,387		707


Operating Income	$	834	$	175	$	659

Broadcasting revenues remained essentially flat for the three months ended March 31, 2009 from the prior year period. Advertising revenue decreased $1.1 million primarily due to the decline in household ratings. Other revenue increased $1.0 million primarily due to Emeril Lagasse’s talent fee from his original series on Planet Green, as well as a marketing agreement with TurboChef that began in the second quarter of 2008.

Selling and promotion expenses decreased $0.3 million primarily due to lower headcount and compensation costs as well as reduced spending for the February 2009 sweeps as compared to the prior year period. General and administrative expenses decreased $0.4 million due to a lower compensation accrual and decreased compensation expenses.

INTERNET SEGMENT


	Three Months Ended March 31,
	2009			2008			Better /
(in thousands)	(unaudited)			(unaudited)			(Worse)
Internet Segment Revenues
Advertising	$	2,620		$	2,310		$	310
Product		2			1,104			(1,102	)

Total Internet Segment Revenues		2,622			3,414			(792	)


Internet Segment Operating Costs and Expenses
Production, distribution and editorial		1,858			3,049			1,191
Selling and promotion		1,752			1,199			(553	)
General and administrative		592			1,035			443
Depreciation and amortization		452			378			(74	)


Total Internet Segment Operating Costs and Expenses		4,654			5,661			1,007


Operating Loss	$	(2,032	)	$	(2,247	)	$	215

Internet revenues decreased 23% for the three months ended March 31, 2009 from the prior year period. Product revenue decreased $1.1 million due to the inclusion of revenue from Martha Stewart Flowers in the first quarter of the prior year. Beginning in the second quarter of 2008, we transitioned to a co-branded agreement with 1-800-Flowers.com which is reported in our Merchandising segment. Advertising revenue increased $0.3 million due to an increase in page views and sold advertising volume, despite lower rates.

Production, distribution and editorial costs decreased $1.2 million due primarily to the prior year transition of our flowers business to 1-800-Flowers.com, which eliminated inventory and shipping expenses, as well as due to a lower compensation accrual in the first quarter of 2009 as compared to the prior year period. Costs related to our higher-margin 1-800-Flowers.com program are reported in the Merchandising segment. Selling and promotion expenses increased $0.6 million due to higher compensation expenses due to increased headcount and higher commissions. General and administrative expenses decreased $0.4 million due to lower compensation expenses and a lower compensation accrual in the first quarter of 2009 as compared to the prior year period.

MERCHANDISING SEGMENT


	Three Months Ended
	March 31,
	2009			2008		Better /
(in thousands)	(unaudited)			(unaudited)		(Worse)
Merchandising Segment Revenues
Kmart earned royalty	$	2,436		$	4,558	$	(2,122	)
Kmart minimum true-up		939			3,806		(2,867	)
Other		5,558			4,702		856

Total Merchandising Segment Revenues		8,933			13,066		(4,133	)


Merchandising Segment Operating Costs and Expenses
Production, distribution and editorial		2,255			3,107		852
Selling and promotion		517			1,437		920
General and administrative		819			1,902		1,083
Depreciation and amortization		18			24		6
Impairment on equity investment		7,100			—		(7,100	)

Total Merchandising Segment Operating Costs and Expenses		10,709			6,470		(4,239	)


Operating (Loss) / Income	$	(1,776	)	$	6,596	$	(8,372	)

Merchandising revenues decreased 32% for the three months ended March 31, 2009 from the prior year period. The decrease in segment revenues was due to the reduction of our contractual minimum guarantee and lower sales from Kmart. Actual retail sales of our products at Kmart declined 45% on comparable store and total store basis. The pro-rata portion of revenues related to the contractual minimum amounts covering the specified periods is listed separately above as Kmart minimum true-up. Other revenues increased primarily due to contributions from Emeril Lagasse’s brand and our partnership with 1-800-Flowers.com for our flowers program which both began contributing to our revenues in the second quarter of 2008.

Production, distribution and editorial expenses decreased $0.9 million due primarily lower compensation costs and a lower compensation accrual in the first quarter of 2009 as compared to the prior year period. Selling and promotion expenses decreased $0.9 million primarily as a result of a decrease of $0.6 million from services that we provide to our partners for reimbursable creative services projects. General and administrative costs decreased $1.1 million due to lower allocated facilities and compensation expenses. In the first quarter of 2009, we recorded a $7.1 million non-cash impairment charge related to a cost-based equity investment.

CORPORATE


	Three Months Ended March 31,
	2009			2008			Better /
(in thousands)	(unaudited)			(unaudited)			(Worse)
Corporate Operating Costs and Expenses
General and administrative	$	9,501		$	9,969		$	468
Depreciation and amortization		1,138			746			(392	)

Total Corporate Operating Costs and Expenses		10,639			10,715			76


Operating Loss	$	(10,639	)	$	(10,715	)	$	76

Corporate operating costs and expenses decreased 1% for the three months ended March 31, 2009 from the prior year period. General and administrative expenses decreased $0.5 million due to a lower compensation accrual and lower compensation costs partially offset by increased severance, as well as higher facility-related charges. Depreciation and amortization expenses increased $0.4 million due to accelerated depreciation charges related to vacating and subleasing a portion of our office space.

OTHER ITEMS

Interest (expense) / income, net. Interest expense, net, was $(0.01) million for the three months ended March 31, 2009 compared to interest income, net, of $0.5 million for the prior year period. The decrease was attributable primarily to first quarter 2009 interest expense from our $30 million term loan related to the acquisition of certain assets of Emeril Lagasse. Interest income decreased due to lower interest rates.

Loss on equity securities. Loss was $(0.8) million for the three months ended March 31, 2009. The first quarter 2009 expense was the result of marking certain assets to fair value in accordance with accounting principles governing derivative instruments.

Loss in equity interest. The loss in equity interest was $(0.2) million for the three months ended March 31, 2009. We record our proportionate share of the results of our equity investments one quarter in arrears. Therefore, this loss represents our portion of the quarter ended December 31, 2008 results of our equity investments.

Income tax expense. Income tax expense for the three months ended March 31, 2009 was $0.4 million, compared to a $0.2 million expense in the prior year period.

Net Loss. Net loss was $(16.8) million for the three months ended March 31, 2009 compared to a net loss of $(4.2) million for the three months ended March 31, 2008, as a result of the factors described above.

Liquidity and Capital Resources

Overview

During the first quarter of 2009, our overall cash, cash equivalents and short-term investments decreased $0.5 million from December 31, 2008. The decrease was due to the satisfaction of our 2008 year-end receivable due from Kmart and other advertising receivables partially offset by capital expenditures related to our office relocation efforts as well as a principal pre-payment of our loan with Bank of America. Cash, cash equivalents and short-term investments were $59.6 million and $60.1 million at March 31, 2009 and December 31, 2008, respectively. Total debt was $18.0 million as of March 31, 2009.

Cash Flows from Operating Activities

Cash flows provided by operating activities were $2.6 million and $39.5 million for the three months ended March 31, 2009 and 2008, respectively. In the first quarter of 2009, cash flow from operations reflected the satisfaction of the 2008 year-end receivable due from Kmart and other advertising receivables partially offset by television distribution expenses.

Cash Flows from Investing Activities

Cash flows (used in) / provided by investing activities were $(1.5) million and $21.0 million for the three months ended March 31, 2009 and 2008, respectively. In the first quarter of 2009, cash flow used in investing activities reflected $1.5 million paid for capital improvements in conjunction with our relocation and consolidation of certain offices.

Cash Flows from Financing Activities

Cash flows used in financing activities were $1.6 million and $1.4 million for the three months ended March 31, 2009 and 2008, respectively. In the first quarter of 2009, cash used in financing activities primarily relates to a $1.5 million principal pre-payment made pursuant to our $30.0 million term loan agreement with Bank of America.

Debt

We have a line of credit with Bank of America in the amount of $5.0 million, which is generally used to secure outstanding letters of credit. Under the terms of the credit agreement, we are required to satisfy certain debt covenants, with which we were compliant as of March 31, 2009. We had no outstanding borrowings under this facility as of March 31, 2009 and had letters of credit of $2.7 million.

We entered into a loan agreement with Bank of America in the amount of $30 million related to the acquisition of certain assets of Emeril Lagasse. The loan is secured by substantially all of the assets of the Emeril businesses we acquired and the Company and most of its domestic subsidiaries are guarantors of the loan. The loan agreement requires equal principal payments and related interest to be paid by the Company quarterly for the duration of the loan term, approximately 5 years. During the first quarter of 2009, we prepaid $1.5 million in principal representing the amount due on March 31, 2010. In the next 12 months, there are no principal payments that are due. The interest rate on the loan is a floating rate of 1-month LIBOR plus 2.85%. We expect to pay the principal installments and interest expense with cash from operations.

The loan terms include financial covenants, failure with which to comply would result in an event of default and would permit Bank of America to accelerate and demand repayment of the loan in full. As of March 31, 2009, we were compliant with all the financial covenants. A summary of the most significant financial covenants is as follows:


Financial Covenant		Required at March 31, 2009
Tangible Net Worth		Greater than $40.0 million
Funded Debt to EBITDA (a)		Less than 2.0
Parent Guarantor (the Company) Basic Fixed Charge Coverage Ratio (b)		Greater than 2.75
Quick Ratio		Greater than 1.0


(a)		EBITDA is earnings before interest, taxes, depreciation and amortization as defined in the loan agreement.

(b)		Basic Fixed Charge Coverage is the ratio of EBITDA for the trailing four quarters to the sum of interest expense for the trailing four quarters and the current portion of long-term debt at the covenant testing date.

The loan agreement also contains a variety of other customary affirmative and negative covenants that, among other things, limit our and our subsidiaries’ ability to incur additional debt, suffer the creation of liens on their assets, pay dividends or repurchase stock, make investments or loans, sell assets, enter into transactions with affiliates other than on arm’s length terms in the ordinary course of business, make capital expenditures, merge into or acquire other entities or liquidate. The negative covenants expressly permit us to, among other things: incur an additional $15 million of debt to finance permitted investments or acquisitions; incur an additional $15 million of earnout liabilities in connection with permitted acquisitions; spend up to $30 million repurchasing our stock or paying dividends thereon (so long as no default or event of default existed at the time of or would result from such repurchase or dividend payment and we would be in pro forma compliance with the above-described financial covenants assuming such repurchase or dividend payment had occurred at the beginning of the most recently-ended four-quarter period); make investments and acquisitions (so long as no default or event of default existed at the time of or would result from such investment or acquisition and we would be in pro forma compliance with the above-described financial covenants assuming the acquisition or investment had occurred at the beginning of the most recently-ended four-quarter period); make up to $15 million in capital expenditures in fiscal year 2008 and $7.5 million in each subsequent fiscal year, provided that we can carry over any unspent amount to any subsequent fiscal year (but in no event may we make more than $15 million in capital expenditures in any fiscal year); sell one of our investments (or any asset we might receive in conversion or exchange for such investment); and sell assets during the term of the loan comprising, in the aggregate, up to 10% of our consolidated shareholders’ equity, provided we receive at least 75% of the consideration in cash.

Seasonality and Quarterly Fluctuations

Our businesses can experience fluctuations in quarterly performance. Our Publishing segment results can vary from quarter to quarter due to publication schedules and seasonality of certain types of advertising. Advertising revenue from our Broadcasting segment is highly dependent on ratings which fluctuate throughout the television season following general viewer trends. Ratings tend to be highest during the fourth quarter and lowest in the summer months. Certain aspects of our business related to Emeril Lagasse also fluctuate based on production schedules since this revenue is generally recognized when services are performed. In our Internet segment, advertising revenue on marthastewart.com is tied to traffic among other key factors and is typically highest in the fourth quarter of the year. Revenues from our Merchandising segment can vary significantly from quarter to quarter due to new product launches and the seasonality and performance of certain product lines. In addition, we recognize the revenue resulting from the difference, if any, 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

Our bylaws may require us to indemnify our directors and officers against liabilities that may arise by reason of their status as such and to advance their expenses incurred as a result of any legal proceedings against them as to which they could be indemnified.

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 United States generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, deferred production costs, 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 disclosed in our 2008 10-K, 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.

The Emerging Issues Task Force reached a consensus in May 2003 on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) which became effective for revenue arrangements starting in the third quarter of 2003. In an arrangement with multiple deliverables, EITF 00-21 provides guidance to determine a) how the arrangement consideration should be measured, b) whether the arrangement should be divided into separate units of accounting, and c) how the arrangement consideration should be allocated among the separate units of accounting. We have applied the guidance included in EITF 00-21 in establishing revenue recognition policies for our arrangements with multiple deliverables. For agreements with multiple deliverables, if we are unable to put forth vendor specific objective evidence required under EITF 00-21 to determine the fair value of each deliverable, then we will account for the deliverables as a combined unit of accounting rather than separate units of accounting. In this case, revenue will be recognized as the earnings process is completed.

Advertising revenues in the Publishing segment are generally recorded upon release of magazines for sale to consumers and are stated net of agency commissions and cash and sales discounts. Subscription revenues are recognized on a straight-line basis over the life of the subscription as issues are delivered. Newsstand revenues are recognized based on estimates with respect to future returns and net of brokerage and newsstand-related fees. We base our estimates on our historical experience and current market conditions. Revenues earned from book publishing are recorded as manuscripts are delivered to and accepted by our publisher. Additional revenue is recorded as sales on a unit basis exceed the advanced royalty for the individual title or in certain cases, advances on cross-collateralized titles.

Television advertising revenues are generally recorded when the related commercials are aired and are recorded net of agency commission and estimated reserves for television audience underdelivery. Television integration revenues are recognized when the segment featuring the related product/brand immersion is initially aired. Television revenue related to Emeril Lagasse is generally recognized when services are performed. Revenue from our radio operations is recognized evenly over the four-year life of the contract, with the potential for additional revenue based on certain subscriber and advertising based targets.

Internet advertising revenues are generally based on the sale of impression-based advertisements, which are recorded in the period in which the advertisements are served.

Licensing-based revenues, most of which are in our Merchandising segment, are accrued on a monthly basis based on the specific terms of each contract. Generally, revenues are recognized based on actual sales while any minimum guarantees are earned evenly over the fiscal year. Revenues related to our agreement with Kmart are recorded on a monthly basis based on actual retail sales, until the last period of the year, when we recognize a substantial majority of the true-up between the minimum royalty amount and royalties paid on actual sales, when such amounts are determinable. Payments are generally made by our partners on a quarterly basis.

We maintain reserves for all segment receivables, as appropriate. These reserves are adjusted regularly based upon actual results. We maintain 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.

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. We base our 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.

Goodwill and Indefinite-Lived Intangible Assets

We are required to analyze our goodwill and indefinite-lived intangible assets on an annual basis as well as when events and circumstances indicate impairment may have occurred. Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets due to changes in estimates could negatively affect the fair value of our assets and result in an impairment charge. In estimating fair value, we must make assumptions and projections regarding items such as future cash flows, future revenues, future earnings and other factors. The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. If these estimates or their related assumptions change in the future, we may be required to record an impairment loss for any of our intangible assets. The recording of any resulting impairment loss could have a material adverse effect on our financial statements.

Long-Lived and Definite-Lived Intangible 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, which could have a material adverse effect on our financial statements.

Deferred Income Tax Asset Valuation Allowance

We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. In evaluating our ability to recover our deferred income tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. Our cumulative pre-tax loss in recent years represents sufficient negative evidence for us to determine that the establishment of a full valuation allowance against the deferred tax asset is appropriate. This valuation allowance offsets deferred tax assets associated with future tax deductions as well as carryforward items. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. See Note 6 of the Notes to the unaudited condensed consolidated financial statements for additional information.

Non-Cash Equity Compensation

We currently have a stock incentive plan that permits us to grant various types of share-based incentives to key employees, directors and consultants. The primary types of incentives granted under the plan are restricted shares of common stock and stock options. Restricted shares are valued at the market value of traded shares on the date of grant, while stock options are valued using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires numerous assumptions, including expected volatility of our stock price and expected life of the option.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to certain market risks as the result of our use of financial instruments, in particular the potential market value loss arising from adverse changes in interest rates as well as from adverse changes in our publicly traded investments. We also hold a derivative financial instrument that could expose us to further market risk. We do not utilize financial instruments for trading purposes.

Interest Rates

We are exposed to market rate risk due to changes in interest rates on our loan agreement with Bank of America that we entered into on April 2, 2008 under which we borrowed $30.0 million to fund a portion of the acquisition of certain assets of Emeril Lagasse. Interest rates applicable to amounts outstanding under this facility are at variable rates based on the 1-month LIBOR rate plus 2.85%. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows but does not impact the fair value of the instrument. We had outstanding borrowings

of $18.0 million on the term loan at March 31, 2009 at an average rate of 3.3% for the quarter. A one percentage point increase in the interest rate would have increased interest expense by $0.05 million for the three months ended March 31, 2009.

We also have exposure to market rate risk for changes in interest rates as those rates relate to our investment portfolio. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the United States Government and its agencies, in high-quality corporate issuers and, by internal policy, limit both the term and amount of credit exposure to any one issuer. As of March 31, 2009, net unrealized gains and losses on these investments were not material. We did not hold any investments in either auction rate securities or collateralized debt obligations as March 31, 2009. We attempt to protect and preserve our invested funds by limiting default, market and reinvestment risk. Our future investment income may fluctuate due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. A one percentage point decrease in average interest rates would have decreased interest income by $0.1 million for the three months ended March 31, 2009.

Stock Prices

We have common stock investments in several publicly-traded companies that are subject to market price volatility. These investments had an aggregate fair value of approximately $2.4 million as of March 31, 2009. A hypothetical decrease in the market price of these investments of 10% would result in a fair value of approximately $2.2 million. The hypothetical decrease in fair value of $0.2 million would be recorded in shareholders’ equity as an other comprehensive loss, as any change in fair value of our publicly-held equity securities are not recognized on our statement of operations, unless the loss is deemed other-than-temporary.

We are also exposed to market risk due to changes in fair value of the publicly-traded common stock of Middleby that underlie our warrant to purchase 22,064 Middleby shares. This investment had a fair value of approximately $0.1 million as of March 31, 2009. For the three months ended March 31, 2009, we recognized an expense of $0.8 million related to the conversion of the warrant as the result of Middleby’s acquisition of TurboChef, partially offset by the increase in fair value of the Middleby stock.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as of the end of the period covered by this report. Based upon that evaluation, our Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our management, including our Principal Executive Officer and Chief Financial Officer, we have determined that, during the first quarter of fiscal 2009, 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.

There have been no material changes from legal proceedings as previously disclosed in the 2008 10-K, other than the Company’s settlement and dismissal from the case captioned Datatern, Inc. v. Bank of America Corp. et al. (No. 5-08CV-70), previously reported in “Item 3. Legal Proceedings” of our 2008 10-K.

ITEM 1A. RISK FACTORS

A wide range of factors could materially affect our performance. Like other companies, we are susceptible to macroeconomic downturns that may affect the general economic climate and our performance, the performance of those with whom we do business, and the appetite of consumers for products and publications. Similarly, the price of our stock is impacted by general equity market conditions, the relative attractiveness of our market sector, differences in results of operations from estimates and projections, and other factors beyond our control. In addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results of these operations elsewhere in this report, the following factors, among others, could adversely affect our operations:

Our success depends in part on the popularity of our brands and the reputation and popularity of Martha Stewart, our founder, and Emeril Lagasse. Any adverse reactions to publicity relating to Ms. Stewart or Mr. Lagasse, or the loss of either of their services, could adversely affect our revenues, results of operations and our ability to maintain or generate a consumer base.

While we believe there has been significant consumer acceptance for our products as stand-alone brands, the image, reputation, popularity and talent of Martha Stewart and Emeril Lagasse remain important factors.

Ms. Stewart’s efforts, personality and leadership have been, and continue to be, critical to our success. While we have managed our business without her daily participation at times in the past, the repeated diminution or loss of her services due to disability, death or some other cause, or any repeated or sustained shifts in public or industry perceptions of her, could have a material adverse effect on our business.

In addition, we recently acquired the assets relating Emeril Lagasse’s businesses other than his restaurants and foundation. The value of these assets is largely related to the ongoing popularity and participation of Mr. Lagasse in the activities related to exploiting these assets. The continued value of these assets would be materially adversely affected if Mr. Lagasse were to lose popularity with the public or be unable to participate in our business, forcing us potentially to write-down a significant amount of the value we paid for these assets.

The crisis in the financial markets and sustained weakening of the economy could significantly impact our business, financial condition, results of operations and cash flows, and could adversely affect the value of our intellectual property assets, hamper our ability to refinance our existing debt or raise additional funds.

The economy has experienced extreme disruption in 2008 and 2009, including extreme volatility and declines in securities prices, severely diminished liquidity and a drastic reduction in credit availability. These events have lead to increased unemployment, declines in consumer confidence, declines in discretionary income and spending, and extraordinary and unprecedented uncertainty and instability for many companies, across all industries. This economic downturn has adversely affected consumer spending and could severely impact many of the companies with which we do business. We cannot predict the health and viability of the companies with which we do business and upon which we depend for royalty revenues, advertising dollars and credit.

These economic conditions and market instability also make it increasingly difficult for us to forecast consumer and product demand trends and companies’ willingness to spend money to advertise in our media properties, We have experienced a decline in advertising revenues. An extended period of reduced cash flows could increase our need for credit, at a time when such credit may not be available due to the conditions in the financial markets. A reduction in cash flows also could also cause us to be in violation of certain debt covenants. We are not able to predict the likely duration and severity of the current disruption in the financial markets and the economic recession. If these economic conditions worsen or persist for an extended period of time, it is likely that our results of operations and cash flows will be negatively impacted leading to deterioration in our financial condition.

In addition, we have significant goodwill, intangible and other assets recorded on our balance sheet. We have already incurred impairment charges with respect to goodwill and certain intangible assets, and are now realizing a charge with respect to a tangible investment. We will continue to evaluate the recoverability of the carrying amount of our goodwill, intangible and other assets on an ongoing basis, and we may in the future incur additional, and possibly substantial, impairment charges, which would adversely affect our financial results. Impairment assessment inherently involves the exercise of judgment in determining assumptions about expected future cash flows and the impact of market conditions on those assumptions. Although we believe the assumptions we have used in testing for impairment are reasonable, significant changes in any one or our assumptions could produce a significantly different result. Future events and changing market conditions may prove assumptions to be wrong with respect to prices, costs, holding periods or other factors. Differing results may amplify impairment charges in the future.

These effects of the current financial crisis are difficult to forecast and mitigate. As a consequence, our operating results will be difficult to predict and prior results will not likely be indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect our stock price.

Our Merchandising business and licensing programs may continue to suffer from downturns in the health and stability of the general economy and housing market, and their adverse impact on our consumers and business relationships.

Reduction in the availability of credit, a downturn in the housing market, and other negative economic developments, including increased unemployment and negative year over year performance in the stock market, have occurred and may continue or become more pronounced in the future. Each of these developments has and could further limit consumers’ discretionary spending or further affect their confidence. These and other adverse consumer trends have lead to reduced spending on general merchandise, homes and home improvement projects — categories in which we license our brands. Further, downturns in consumer spending adversely impact consumer sales overall, resulting in weaker revenues from our licensed products. These trends also may affect the viability and financial health of companies with which we conduct business. Continued slowdown in consumer spending, or going-concern problems for companies with which we do business could materially adversely impact our business, financial condition and prospects.

Our business is largely dependent on advertising revenues in our publications, broadcasts, and online operations. The market for advertising has been adversely affected by the economic downturn. Our failure to attract or retain advertisers would have a material adverse effect on our business.

We depend on advertising revenue in our Publishing, Broadcasting, and Internet businesses. We cannot control how much or where companies choose to advertise. We have seen a significant downturn in advertising dollars generally in the marketplace, and more competition for the reduced dollars, which has hurt our publications and advertising revenues. As a result, fewer advertisers represent a greater proportion of our advertising revenue. We cannot assure how or whether this trend might correct. If advertisers continue to spend less money, or if they advertise elsewhere in lieu of our publications, broadcasts or website, our business and revenues will be materially adversely affected.

We face significant competition for advertising and consumer demand.

We face significant competition from a number of print and website publishers, some of which have greater financial and other resources than we have, which may enhance their ability to compete in the markets we serve. As advertising dollars have diminished, the competition for advertising dollars has intensified. Competition for advertising revenue in publications is primarily based on advertising rates, the nature and scope of readership, reader response to the promotions for advertisers’ products and services and the effectiveness of sales teams. Other competitive factors in publishing include product positioning, editorial quality, circulation, price and customer service, which impact readership audience, circulation revenues and, ultimately, advertising revenues. Because some forms of media have relatively low barriers to entry, we anticipate that additional competitors, some of which have greater resources than we do, may enter these markets and intensify competition.

Acquiring or developing additional brands or businesses, and integrating acquired assets, poses inherent financial and other risks and challenges.

Last year, we acquired certain assets of Chef Emeril Lagasse. Failure to manage or integrate those assets, or exploit the Emeril brand, could adversely affect our results of operations and our ability to acquire other brands.

The process of consolidating and integrating acquired operations and assets takes a significant period of time, places a significant strain on resources and could prove to be more expensive and time consuming than we predicted. We may increase expenditures to accelerate the integration process with the goal of achieving longer-term cost savings and improved profitability. We also may be required to manage multiple relationships with third parties as we expand our product offerings and brand portfolio. These developments may increase expenses if we hire additional personnel to manage our growth. These investments require significant time commitments from our senior management and place a strain on their ability to manage our existing businesses.

Part of our strategic plan is to acquire other businesses. These transactions involve challenges and risks in negotiation, execution, valuation, and integration. Moreover, competition for certain types of acquisitions is significant, particularly in the field of interactive media. Even if successfully negotiated, closed, and integrated, certain acquisitions may not advance our business strategy and may fall short of expected return on investment targets.

Our Merchandising business has relied heavily on revenue from a single source, the reduction of revenue from which has hurt and continues to hurt our profitability.

For the twelve months ended January 31, 2009, the minimum guaranteed royalty payment from Kmart was $20.0 million, significantly less that the $65.0 million we received for the twelve months ended January 31, 2008. This drop in guarantees from Kmart is permanent, and our agreement with Kmart continues only through January 2010. In this final year, our expected guaranteed payment is $15.0 million. We have not yet earned royalties from other sources in sufficient scope to recoup the loss in guaranteed payments from Kmart. While we continue to diversify our merchandise offerings in an effort to build up alternative royalty streams, we may not be able to earn, from sources other than Kmart, revenue in excess of the reduction of guarantees from our Kmart contract. This shortfall has adversely affected our operating results and business.

We are expanding our merchandising and licensing programs into new areas and products, the failure of any of which could diminish the perceived value of our brand, impair our ability to grow and adversely affect our prospects.

Our growth depends to a significant degree upon our ability to develop new or expand existing retail merchandising programs. We have entered into several new merchandising and licensing agreements in the past few years and have acquired new agreements through our acquisition of the Emeril Lagasse assets. Some of these agreements are exclusive and have a duration of many years. While we require that our licensees maintain the quality of our respective brands through specific contractual provisions, we cannot be certain that our licensees, or their manufacturers and distributors, will honor their contractual obligations or that they will not take other actions that will diminish the value of our brands. Furthermore, we cannot be certain that our licensees are not adversely impacted by general economic or market conditions, including decreased consumer spending and reduced availability of credit. If these companies experience financial hardship, they may be unwilling or unable to pay us royalties or continue selling our product, regardless of their contractual obligations.

There is also a risk that our extension into new business areas will meet with disapproval from consumers. We have limited experience in merchandising in some of these business areas. We cannot guarantee that these programs will be fully implemented, or if implemented, that they will be successful. If the licensing or merchandising programs do not succeed, we may be prohibited from seeking different channels for our products due to the exclusive nature and multi-year terms of these agreements. Disputes with new or existing licensees may arise which could hinder our ability to grow or expand our product lines. Disputes also could prevent or delay our ability to collect the licensing revenue that we expect in connection with these products. If such developments occur or our merchandising programs are otherwise not successful, the value and recognition of our brands, as well as our business, financial condition and prospects, could be materially adversely affected.

If The Martha Stewart Show fails to maintain a sufficient audience, if adverse trends continue or develop in the television production business generally, or if Martha Stewart were to cease to be able to devote substantial time to our television business, that business would be adversely affected. We also derive value from Mr. Lagasse’s television shows, the popularity of which cannot be assured.

Our television production business is subject to a number of uncertainties. Our business and financial condition could be materially adversely affected by:

Failure of our television programming to maintain a sufficient audience

Television production is a speculative business because revenues derived from television depend primarily upon the continued acceptance of that programming by the public, which is difficult to predict. Public acceptance of particular programming depends upon, among other things, the quality of that programming, the strength of stations on which that programming is broadcast, promotion of that programming, the quality and acceptance of competing television programming and other sources of entertainment and information. The Martha Stewart Show television program has experienced a decline in ratings that reflects both the general decline in daytime broadcast television viewers discussed below, as well as the decision by some major market stations to shift the airing of the show. These developments have negatively impacted our television advertising revenues. If ratings for the show were to further decline, it would adversely affect the advertising revenues we derive from television and may result in the show being broadcast on fewer stations. A ratings decline further than we anticipate could also make it economically inefficient to continue production of the show in the daily one-hour format or otherwise. If production of the show were to cease, we would lose a significant marketing platform for us and our products, as well as cause us to write down our capitalized programming costs. The amount of any writedown would vary depending on a number of factors, including when production ceased and the extent to which we continued to generate revenues from the use of our existing program library.

We do not produce the television shows featuring Emeril Lagasse. Nonetheless, Emeril’s failure to maintain or build popularity would result in the loss of a significant marketing platform for us and our products, as well as the loss of anticipated revenue and profits from his television shows.

Adverse trends in the television business generally

Television revenues may also be affected by a number of other factors, most of which are not within our control. These factors include a general decline in daytime broadcast television viewers, pricing pressure in the television advertising industry, strength of the stations on which our programming is broadcast, general economic conditions, increases in production costs, availability of other forms of entertainment and leisure time activities and other factors. Any or all of these factors may quickly change, and these changes cannot be predicted with certainty. There has been a reduction in advertising dollars generally available and more competition for the reduced dollars across more media platforms. While we currently benefit from our ability to sell advertising on our television programs, if adverse changes occur, we cannot be certain that we will continue to be able to sell this advertising or that our advertising rates can be maintained. Accordingly, if any of these adverse changes were to occur, the revenues we generate from television programming could decline.

We have placed emphasis on building an advertising-revenue-based website, dependent on high levels of consumer traffic and resulting page views. Failure to fulfill these undertakings would adversely affect our brand and business prospects.

Our growth depends to a significant degree upon the continued development and growth of our Internet business. We have had failures with direct commerce in the past, and only limited experience in building an advertising-revenue-based website. When initial results from the relaunch of the marthastewart.com site in the second quarter of 2007 were below expectations, we made changes to the site. We cannot be certain that those changes will enable us to sustain growth for our website in the long term. In addition, the competition for advertising dollars has intensified as the availability of advertising dollars has diminished. In order for our Internet business to succeed, we must, among other things:


	•		significantly increase our online traffic and advertising revenue;

	•		attract and retain a base of frequent visitors to our website;

	•		expand the content, products and tools we offer over our website;

	•		respond to competitive developments while maintaining a distinct brand identity;

	•		attract and retain talent for critical positions;

	•		maintain and form relationships with strategic partners to attract more consumers;

	•		continue to develop and upgrade our technologies; and

	•		bring new product features to market in a timely manner.

We cannot be certain that we will be successful in achieving these and other necessary objectives or that our Internet business will be profitable. If we are not successful in achieving these objectives, our business, financial condition and prospects could be materially adversely affected.

If we are unable to predict, respond to and influence trends in what the public finds appealing, our business will be adversely affected.

Our continued success depends on our ability to provide creative, useful and attractive ideas, information, concepts, programming, content and products, which strongly appeal to a large number of consumers. In order to accomplish this, we must be able to respond quickly and effectively to changes in consumer tastes for ideas, information, concepts, programming, content and products. The strength of our brands and our business units depends in part on our ability to influence tastes through broadcasting, publishing, merchandising and the Internet. We cannot be sure that our new ideas and content will have the appeal and garner the acceptance that they have in the past, or that we will be able to respond quickly to changes in the tastes of homemakers and other consumers. In addition, we cannot be sure that our existing ideas and content will continue to appeal to the public.

New product launches may reduce our earnings or generate losses.

Our future success will depend in part on our ability to continue offering new products and services that successfully gain market acceptance by addressing the needs of our current and future customers. Our efforts to introduce new products or integrate acquired products may not be successful or profitable. The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new product, or assimilating and marketing an acquired product, is both risky and costly. New products generally incur initial operating losses. Costs related to the development of new products and services are generally expensed as incurred and, accordingly, our profitability from year to year may be adversely affected by the number and timing of new product launches. For example, we had a cumulative loss of $15.7 million in connection with Blueprint, which we ceased publishing. Other businesses and brands that we may develop also may prove not to be successful.

Our principal Publishing vendors are consolidating and this may adversely affect our business and operations.

We rely on certain principal vendors in our Publishing business, and their ability or willingness to sell goods and services to us at favorable prices and other terms. Many factors outside our control may harm these relationships and the ability and willingness of these vendors to sell these goods and services to us on such terms. Our principal

vendors include paper suppliers, printers, subscription fulfillment houses and national newsstand wholesalers, distributors and retailers. Each of these industries in recent years has experienced consolidation among its principal participants. Further consolidation may result in all or any of the following, which could adversely affect our results of operations:

	•		decreased competition, which may lead to increased prices;

	•		interruptions and delays in services provided by such vendors; and

	•		greater dependence on certain vendors.

We may be adversely affected by fluctuations in paper and postage costs.

In our Publishing business, our principal raw material is paper. Paper prices have fluctuated over the past several years. We generally purchase paper from major paper suppliers who adjust the price periodically. We have not entered, and do not currently plan to enter, into long-term forward price or option contracts for paper. Accordingly, significant increases in paper prices could adversely affect our future results of operations.

Postage for magazine distribution is also one of our significant expenses. We primarily use the U.S. Postal Service to distribute magazine subscriptions. In recent years, postage rates have increased, and a significant increase in postage prices could adversely affect our future results of operations. We may not be able to recover, in whole or in part, paper or postage cost increases.

We may face increased costs for distribution of our magazines to newsstands and bookstores.

Distribution of magazines to newsstands and bookstores is conducted primarily through companies, known as wholesalers. Wholesalers have in the past advised us that they intended to increase the price of their services. We have not experienced any material increase to date, however some wholesalers have experienced credit and on-going concern risks. It is possible that other wholesalers likewise may seek to increase the price of their services or discontinue operations. An increase in the price of our wholesalers’ services could have a material adverse effect on our results of operations. The need to change wholesalers could cause a disruption or delay in deliveries, which could adversely impact our results of operations.

We may be adversely affected by a continued weakening of newsstand sales.

The magazine industry has seen a weakening of newsstand sales during the past few years. A continuation of this decline could adversely affect our financial condition and results of operations by further reducing our circulation revenue and causing us to either incur higher circulation expense to maintain our rate bases, or to reduce our rate bases which could negatively impact our revenue.

Our websites and networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our operations and result in the theft of our and our users’ proprietary or personal information.

Our Internet activities involve the storage and transmission of proprietary information and personal information of our users. We endeavor to protect our proprietary information and personal information of our users from third party access. However, it is possible that unauthorized persons may be able to circumvent our protections and misappropriate proprietary or personal information or cause interruptions or malfunctions in our Internet operations. We may be required to expend significant capital and other resources to protect against or remedy any such security breaches. Accordingly, security breaches could expose us to a risk of loss, or litigation and possible liability. Our security measures and contractual provisions attempting to limit our liability in these areas may not be successful or enforceable.

Martha Stewart controls our company through her stock ownership, enabling her to elect who sits on our board of directors, and potentially to block matters requiring stockholder approval, including any potential changes of control.

Ms. Stewart controls all of our outstanding shares of Class B common stock, representing over 90% of our voting power. The Class B common stock has ten votes per share, while Class A common stock, which is the stock available to the public, has one vote per share. Because of this dual-class structure, Ms. Stewart has a

disproportionately influential vote. As a result, Ms. Stewart has the ability to control unilaterally the outcome of all matters requiring stockholder approval, including the election and removal of our entire board of directors and any merger, consolidation or sale of all or substantially all of our assets, and the ability to control our management and affairs. While her 2006 settlement with the SEC bars Ms. Stewart for the five-year period ending in August 2011 from serving at the Company as a director, or as an officer with financial responsibilities, her concentrated control could, among other things, discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our businesses and stockholders.

Our intellectual property may be infringed upon or others may accuse us of infringing on their intellectual property, either of which could adversely affect our business and result in costly litigation.

Our business is highly dependent upon our creativity and resulting intellectual property. We are also susceptible to others imitating our products and infringing our intellectual property rights. We may not be able to successfully protect our intellectual property rights, upon which we depend. In addition, the laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Imitation of our products or infringement of our intellectual property rights could diminish the value of our brands or otherwise adversely affect our revenues. If we are alleged to have infringed the intellectual property rights of another party, any resulting litigation could be costly, affecting our finances and our reputation. Litigation also diverts the time and resources of management, regardless of the merits of the claim. There can be no assurance that we would prevail in any litigation relating to our intellectual property. If we were to lose such a case, and be required to cease the sale of certain products or the use of certain technology or were forced to pay monetary damages, the results could adversely affect our financial condition and our results of operations.

A loss of the services of other key personnel could have a material adverse effect on our business.

Our continued success depends to a large degree upon our ability to attract and retain key management executives, as well as upon a number of key members of our creative staff. The loss of some of our senior executives or key members of our creative staff, or an inability to attract or retain other key individuals, could materially adversely affect us.

We operate in four highly competitive businesses: Publishing, Broadcasting, Internet, and Merchandising, each of which subjects us to competitive pressures and other uncertainties.

We face intense competitive pressures and uncertainties in each of our four businesses: Publishing, Broadcasting, Internet, and Merchandising. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC for a description of our competitive risks in our applicable business lines as described under the following headings: see “Business — Publishing—Competition,” “Business — Broadcasting—Competition,” “Business — Internet—Competition” and “Business — Merchandising—Competition.”

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

(a)		None.

(b)		None.

(c)		Issuer Purchases of Equity Securities

The following table provides information about our purchases of our Class A Common Stock during each month of the quarter ended March 31, 2009:

(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 (1)

per Share (or Unit)

Plans or Programs

January 2009

26,521

2.85

Not applicable

February 2009

13,963

2.37

Not applicable

March 2009

22,236

2.12

Not applicable

Total for quarter ended March 31, 2009

62,720

2.48

Not applicable


(1)		Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our stock incentive plan allowing us to withhold, or the recipient to deliver to us, the number of shares of our Class A Common Stock 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.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

(a) Exhibits


Exhibit
Number		Exhibit Title

10.1		Employment Agreement dated as of March 24, 2009 between Martha Stewart Living Omnimedia, Inc. and Kelli Turner. *

10.2		Second Amendment, dated as of April 9, 2009, to the Employment Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart. *

10.3		Separation Agreement dated as of April 20, 2009 between Martha Stewart Living Omnimedia, Inc. and Wenda Harris Millard. *

10.4		Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 12, 2009.)

31.1		Certification of Principal Executive Officer *

31.2		Certification of Chief Financial Officer *

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


*		filed herewith

EXHIBIT INDEX


Exhibit
Number		Exhibit Title

10.1		Employment Agreement dated as of March 24, 2009 between Martha Stewart Living Omnimedia, Inc. and Kelli Turner. *

10.2		Second Amendment, dated as of April 9, 2009, to the Employment Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and Martha Stewart. *

10.3		Separation Agreement dated as of April 20, 2009 between Martha Stewart Living Omnimedia, Inc. and Wenda Harris Millard. *

10.4		Form of Performance-Based Restricted Stock Unit Agreement pursuant to the Martha Stewart Living Omnimedia, Inc. Omnibus Stock and Option Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 12, 2009.)

31.1		Certification of Principal Executive Officer *

31.2		Certification of Chief Financial Officer *

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


*		filed herewith


			Page
Part I. Financial Information

Item 1. Financial Statements.			3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			11

Item 3. Quantitative and Qualitative Disclosures About Market Risk.			22

Item 4. Controls and Procedures.			23

Part II. Other Information

Item 1. Legal Proceedings.			24

Item 1A. Risk Factors.			24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			31

Item 3. Defaults Upon Senior Securities.			31

Item 4. Submission of Matters to a Vote of Security Holders.			31

Item 5. Other Information.			31

Item 6. Exhibits.			32

Signatures			33
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32


MARTHA STEWART LIVING OMNIMEDIA, INC.

	Date:	May 11, 2009

		/s/ Kelli Turner

	Name:	Kelli Turner
	Title:	Chief Financial Officer
		(Principal Financial Officer and duly authorized officer)

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