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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  Form 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 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.
  Delaware
    
    52-2187059(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)11 West 42nd Street, New York, New York
    
    10036(Address of Principal Executive Offices)
    
    (Zip Code)
 (212) 827-8000
 Securities Registered Pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredClass A Common Stock, Par Value
$0.01 Per Share
    
    NYSE
 Securities Registered Pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Large accelerated filer o
 o þ
  *
 Number of Shares Outstanding As of March 2, 2006:
25,227,342 shares of Class A Common Stock
26,873,512 shares of Class B Common Stock
 Documents Incorporated by Reference.




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##### 



TABLE OF CONTENTS
 Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    13Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    32Item 8. Financial Statements and Supplementary Data
    
    
    32Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    32Item 9A. Controls and Procedures
    
    
    32Item 9B. Other Information
    
    
    34Item 10. Directors and Executive Officers of the Registrant
    
    
    34Item 11. Executive Compensation
    
    
    34Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    35Item 13. Certain Relationships and Related Transactions
    
    
    35Item 14. Principal Accountant Fees and Services
    
    
    35Item 15. Exhibits and Financial Statement Schedules
    
    
    36Signatures
    
    
    39Index to Consolidated Financial Statements, Financial Statement Schedules and Other Financial Information
    
    
    F-1Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for years ended December 31, 2005, 2004 and 2003
    
    
    F-3Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended December 31, 2005, 2004 and 2003
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Financial Statement Schedule: II  Valuation and Qualifying Accounts for years ended December 31, 2005, 2004 and 2003
    
    
    F-25Exhibit Index
    
    
    II-1EX-21: LIST OF SUBSIDIARIESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
  2




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FORWARD-LOOKING STATEMENTS
 Recent
Developments
 PART I
 
 Item 1. Business.
 OVERVIEW
           HISTORY
 Entertaining Martha Stewart Living Martha Stewart Living Martha by Mail
 3




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RECENT DEVELOPMENTS
  Martha Stewart Crafts
  BUSINESS SEGMENTS
  PUBLISHING
  Magazines
 Martha Stewart Living. Martha Stewart Living Martha Stewart Living Martha Stewart Living Martha Stewart Living
 Everyday Food. Everyday Food Everyday Food
 Martha Stewart Weddings. Martha Stewart Weddings Martha Stewart Weddings Martha Stewart Weddings
 4




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##### Table of Contents



Body + Soul. Body +
Soul Dr. Andrew Weils Self Healing Body + Soul
  Title
    
    2005 Average Circulation
    
    Annual FrequencyMartha Stewart Living
    
    
    1,950,483
    
    
    
    12xEveryday Food
    
    
    875,669
    
    
    
    10xMartha Stewart Weddings
    
    
    255,033
    
    
    
    4xBody + Soul
    
    
    305,453
    
    
    
    8x
 Special Interest Publications. Martha Stewart Living
 Magazine Production, Distribution and Fulfillment. Martha Stewart Living
 Books
 Martha Stewart Living Martha Stewart Living Martha Stewart Living Martha Stewarts Baking Handbook The Martha Rules
 Competition
 Martha
Stewart Living Everyday Food Martha Stewart Weddings Body + Soul
 Seasonality
 Martha Stewart
Weddings
 5




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BROADCASTING
       Competition
  MERCHANDISING
  Martha Stewart Everyday
  6




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Martha Stewart Signature




Paint


Furniture


Flooring


Additional License Agreements


Crafts Martha Stewart Crafts


KB Home


7



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Summary of License Agreements
 License Partner
    
    Basis For Royalties
    
    Expiration DateBernhardt Furniture
    
    Wholesale sales of MSS products
    
    December 2007EK Success
    
    Primarily based on wholesale sales
    
    2011*KB Home
    
    Profit sharing calculation for
homes under the first agreement
and total
    
    February 2011**selling price under expanded agreementKmart
    
    Retail sales of certain MSE
products
    
    January 2010Sears Canada
    
    Retail sales of certain MSE
products
    
    August 2008Sherwin-Williams
    
    Wholesale sales of MSE products
and retail sale of MSS products
    
    December 2005***
 
 *
    
    EK has the option, in its discretion, to extend the agreement for up to three five-year terms, in
each case provided it has paid amounts equal to or in excess of the minimum annual royalties due
during each year of the then-current term.**
    
    Either party has the option to renew for an additional 3 year term.***
    
    Our agreement with Sherwin-Williams expired by its terms at the end of 2005. We are in
discussions to extend our agreement with Sherwin-Williams. Competition
 Martha Stewart
Everyday Martha Stewart Signature
 Seasonality
  INTERNET
  Catalog for Living
 Content
   Marthas Flowers
  8




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Competition
  Intellectual Property
 Martha Stewart Living Martha
Stewart Everyday Martha Stewart Signature Everyday Food Martha Stewart Weddings marthastewart.com, marthasflowers Body + Soul
 Available Information
  
 Item 1A. Risk Factors.
  Our success depends in part on the popularity of our brand and the reputation and popularity
of our founder, Martha Stewart. The value of our brand may diminish if the popularity of Ms.
Stewart were to suffer. Adverse reactions to publicity relating to Ms. Stewart, or the loss of her
services, could adversely affect our revenues, results of operations and our ability to maintain or
generate a consumer base.
    9




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




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.




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 very
expensive litigation.




Termination of our licensing agreement with Kmart relating to Martha Stewart Everyday products
could adversely affect our revenues and results of operations.


Martha Stewart Everyday


10



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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.
  If the MARTHA daily television show fails to maintain a sufficient audience, if adverse trends
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.
  Failure of our television programming to maintain a sufficient audience
  Adverse trends in the television production business generally
  We have placed emphasis on building our internet community. Failure to fulfill these
undertakings
would adversely affect our brand and business prospects.
  11




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
    
    make significant investments in our Internet business, including upgrading our
technology and adding a significant number of new employees;
    
    significantly increase our online traffic and revenue;
    
    attract and retain a base of frequent visitors to our website;
    
    expand the content and products we offer over our website;
    
    respond to competitive developments and maintain a distinct brand identity;
    
    form and maintain relationships with strategic partners; and
    
    continue to develop and upgrade our technologies.
  We are undertaking many new business ventures and expanding our business into new areas. We
cannot assure that these new businesses will be successful or that the relationships through which
we have entered these businesses will be successful. If we fail in any of these new businesses, or
if our relationships fail, our image and business may be adversely affected.
  Our business is largely dependent on advertising revenues in our publications, online
operations and broadcasts. Failure to attract or retain these advertisers would have a material
adverse effect on our business.
  A loss of the services of other key personnel could have a material adverse effect on our
business.
  We operate in four highly competitive businesses: Publishing, Broadcasting, Merchandising and
Internet, each of which subjects us to competitive pressures.
  12




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We have been named as a defendant in a class action lawsuit, the effects of which cannot be known.
 Item 3  Legal Proceedings
 
 Item 1B. Unresolved Staff Comments .
 None.
 
 Item 2. Properties.
  Approximate AreaLocation
    
    Use
    
    in Square Feet601 West 26th Street,
New York, NY
    
    Product design facilities,
photography studio, test
kitchens, and prop storage
    
    
    149,42111 West 42nd Street,
New York, NY
    
    Principal executive and
administrative offices;
publishing offices; and sales
offices
    
    
    73,38319 Newtown Turnpike
Westport, CT
    
    Former television production
facility
    
    
    30,523226 West 26th Street
New York, NY
    
    Executive and administrative
office for television
production
    
    
    22,000221 West 26th Street
New York, NY
    
    Television production facilities
    
    
    20,00064 Pleasant Street
Watertown, MA
    
    Publishing office for Body &
Soul Group
    
    
    5,560
    
 Item 3. Legal Proceedings.
  13




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14




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Item 4. S ubmission of Matters to a Vote of Security Holders.
  PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
 Securities Matters
  Q1 2004
    
    
    Q2 2004
    
    
    Q3 2004
    
    
    Q4 2004
    
    
    Q1 2005
    
    
    Q2 2005
    
    
    Q3 2005
    
    
    Q4 2005High Sales Price
    
    $
    17.00
    
    
    $
    11.25
    
    
    $
    19.60
    
    
    $
    33.50
    
    
    $
    37.45
    
    
    $
    30.60
    
    
    $
    34.74
    
    
    $
    25.39Low Sales Price
    
    $
    9.22
    
    
    $
    8.25
    
    
    $
    8.01
    
    
    $
    15.35
    
    
    $
    20.00
    
    
    $
    19.50
    
    
    $
    23.90
    
    
    $
    16.28
    15




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Item 6. Selected Financial Data.
 SELECTED FINANCIAL DATA
Five Years ended December 31,
(in thousands except per share data)
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001INCOME STATEMENT DATAREVENUESPublishing
    
    $
    125,765
    
    
    $
    95,960
    
    
    $
    135,529
    
    
    $
    182,064
    
    
    $
    176,877Broadcasting
    
    
    16,591
    
    
    
    10,580
    
    
    
    26,111
    
    
    
    27,216
    
    
    
    30,067Merchandising
    
    
    55,848
    
    
    
    53,386
    
    
    
    53,395
    
    
    
    48,896
    
    
    
    35,572Internet
    
    
    11,258
    
    
    
    27,512
    
    
    
    30,813
    
    
    
    36,873
    
    
    
    46,094Total revenues
    
    
    209,462
    
    
    
    187,438
    
    
    
    245,848
    
    
    
    295,049
    
    
    
    288,610Operating income (loss)
    
    
    (78,311
    )
    
    
    (60,004
    )
    
    
    (6,405
    )
    
    
    19,993
    
    
    
    37,064Income (loss) from continuing operations
    
    
    (75,295
    )
    
    
    (59,073
    )
    
    
    (1,923
    )
    
    
    13,314
    
    
    
    23,615Loss from discontinued operations
    
    
    (494
    )
    
    
    (526
    )
    
    
    (848
    )
    
    
    (2,909
    )
    
    
    (1,709
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,137
    )
    
    
    Net income (loss)
    
    $
    (75,789
    )
    
    $
    (59,599
    )
    
    $
    (2,771
    )
    
    $
    7,268
    
    
    $
    21,906PER SHARE DATAEarnings per share:Basic-Income (loss) from continuing operations
    
    $
    (1.48
    )
    
    $
    (1.19
    )
    
    $
    (0.04
    )
    
    $
    0.27
    
    
    $
    0.49Basic-Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.06
    )
    
    
    (0.04
    )Basic-Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.06
    )
    
    
    Basic-Net income (loss)
    
    $
    (1.49
    )
    
    $
    (1.20
    )
    
    $
    (0.06
    )
    
    $
    0.15
    
    
    $
    0.45Diluted-Income (loss) from continuing
operations
    
    $
    (1.48
    )
    
    $
    (1.19
    )
    
    $
    (0.04
    )
    
    $
    0.27
    
    
    
    0.48Diluted-Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.06
    )
    
    
    (0.03
    )Diluted-Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.06
    )
    
    
    Diluted-Net income (loss)
    
    $
    (1.49
    )
    
    $
    (1.20
    )
    
    $
    (0.06
    )
    
    $
    0.15
    
    
    $
    0.45Weighted average common shares outstandingBasic
    
    
    50,991
    
    
    
    49,712
    
    
    
    49,389
    
    
    
    49,250
    
    
    
    48,639Diluted
    
    
    50,991
    
    
    
    49,712
    
    
    
    49,389
    
    
    
    49,343
    
    
    
    49,039FINANCIAL POSITIONCash and cash equivalents
    
    $
    20,249
    
    
    $
    104,647
    
    
    $
    165,566
    
    
    $
    158,840
    
    
    $
    87,968Short-term investments
    
    
    83,788
    
    
    
    35,309
    
    
    
    3,100
    
    
    
    20,110
    
    
    
    53,194Total assets
    
    
    253,828
    
    
    
    264,678
    
    
    
    309,102
    
    
    
    324,542
    
    
    
    311,621Shareholders equity
    
    
    160,631
    
    
    
    187,628
    
    
    
    236,665
    
    
    
    236,635
    
    
    
    222,192OTHER FINANCIAL DATACash flow provided by (used in) operating
activities
    
    $
    (30,349
    )
    
    $
    (22,226
    )
    
    $
    (9,634
    )
    
    $
    38,042
    
    
    $
    19,389Cash flow provided by (used in) investing
activities
    
    
    (58,300
    )
    
    
    (39,756
    )
    
    
    15,956
    
    
    
    28,777
    
    
    
    (31,941
    )Cash flow provided by financing activities
    
    
    4,251
    
    
    
    1,063
    
    
    
    404
    
    
    
    4,053
    
    
    
    2,407
 16




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NOTES TO SELECTED FINANCIAL DATA
General
  Earnings from continuing operations
 Fiscal 2005
 Fiscal 2004
 Fiscal 2003
 Fiscal 2002 .
 Fiscal 2001 .
 17




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 EXECUTIVE SUMMARY
 Martha Stewart Living,
 Martha Stewart Crafts
   i.e.
 18




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1/31/02
    
    
    1/31/03
    
    
    1/31/04
    
    
    1/31/05
    
    
    1/31/06
    
    
    1/31/07
    
    
    1/31/08Minimum Royalty Amounts
    
    $
    15.3
    
    
    $
    40.4
    
    
    $
    47.5
    
    
    $
    49.0
    
    
    $
    54.0
    
    
    $
    59.0
    
    
    $
    65.0
   19




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##### Table of Contents



Comparison for the Year Ended December 31, 2005 to Year Ended December 31, 2004.
 PUBLISHING SEGMENT
 2005
    
    
    2004
    
    
    VariancePublishing RevenueAdvertising
    
    $
    52,032
    
    
    $
    34,084
    
    
    $
    17,948Circulation
    
    
    68,607
    
    
    
    60,086
    
    
    
    8,521Other
    
    
    5,126
    
    
    
    1,790
    
    
    
    3,336Total Publishing Segment Revenue
    
    
    125,765
    
    
    
    95,960
    
    
    
    29,805Publishing Operating Costs and ExpensesProduction, distribution and editorial
    
    
    74,086
    
    
    
    62,546
    
    
    
    (11,540
    )Selling and promotion
    
    
    61,337
    
    
    
    55,321
    
    
    
    (6,016
    )General and administrative
    
    
    2,536
    
    
    
    2,093
    
    
    
    (443
    )Non-cash equity compensation
    
    
    2,097
    
    
    
    143
    
    
    
    (1,954
    )Depreciation and amortization
    
    
    987
    
    
    
    472
    
    
    
    (515
    )Total Publishing Segment Operating Costs and Expenses
    
    
    141,043
    
    
    
    120,575
    
    
    
    (20,468
    )Publishing Segment Operating Loss
    
    $
    (15,278
    )
    
    $
    (24,615
    )
    
    $
    9,337
 Martha Stewart Living Martha Stewart Living Body + Soul Everyday Food Body + Soul The
Dr. Weil Self Healing Martha Stewart Living The Martha Rules Martha Stewart
Living. Blueprint: Design Your Life Blueprint Blueprint
 
 2005
    
    2004Martha Stewart Living
    
    Twelve Issues
    
    Twelve IssuesMartha Stewart Weddings(a)
    
    Five Issues
    
    Five IssuesEveryday Food
    
    Ten Issues
    
    Ten IssuesSpecial Interest Publications
    
    Seven Issues
    
    Eight IssuesBody + Soul(b)
    
    Eight Issues
    
    Four Issues
 
 (a)
    
    In each 2004 and 2005, we published one special Martha Stewart Weddingsissue.(b)
    
    Acquired in August 2004 and therefore the prior periods are not comparable. 20




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Martha Stewart Living Martha Stewart Living Everyday Food Everyday Food
 BROADCASTING SEGMENT
 2005
    
    
    2004
    
    
    VarianceBroadcasting RevenueAdvertising
    
    $
    6,061
    
    
    $
    4,134
    
    
    $
    1,927Licensing and other
    
    
    10,530
    
    
    
    6,446
    
    
    
    4,084Total Broadcasting Segment Revenue
    
    
    16,591
    
    
    
    10,580
    
    
    
    6,011Broadcasting Operating Costs and ExpensesProduction, distribution and editorial
    
    
    12,416
    
    
    
    14,371
    
    
    
    1,955Selling and promotion
    
    
    4,160
    
    
    
    1,267
    
    
    
    (2,893
    )General and administrative
    
    
    8,333
    
    
    
    3,420
    
    
    
    (4,913
    )Non-cash equity compensation
    
    
    17,421
    
    
    
    
    
    
    
    (17,421
    )Depreciation and amortization
    
    
    1,321
    
    
    
    230
    
    
    
    (1,091
    )Total Broadcasting Segment Operating Costs and Expenses
    
    
    43,651
    
    
    
    19,288
    
    
    
    (24,363
    )Broadcasting Segment Operating Loss
    
    $
    (27,060
    )
    
    $
    (8,708
    )
    
    $
    (18,352
    )
   21




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MERCHANDISING SEGMENT
 2005
    
    
    2004
    
    
    VarianceMerchandising RevenueKmart earned royalty
    
    $
    31,125
    
    
    $
    32,434
    
    
    $
    (1,309
    )Kmart minimum true-up
    
    
    18,708
    
    
    
    13,074
    
    
    
    5,634Other
    
    
    6,015
    
    
    
    7,878
    
    
    
    (1,863
    )Total Merchandising Segment Revenue
    
    
    55,848
    
    
    
    53,386
    
    
    
    2,462Merchandising Operating Costs and ExpensesProduction, distribution and editorial
    
    
    8,320
    
    
    
    9,005
    
    
    
    685Selling and promotion
    
    
    242
    
    
    
    926
    
    
    
    684General and administrative
    
    
    7,163
    
    
    
    6,340
    
    
    
    (823
    )Non-cash equity compensation
    
    
    230
    
    
    
    (72
    )
    
    
    (302
    )Depreciation and amortization
    
    
    845
    
    
    
    760
    
    
    
    (85
    )Total Merchandising Segment Operating Costs and Expenses
    
    
    16,800
    
    
    
    16,959
    
    
    
    159Merchandising Segment Operating Income
    
    $
    39,048
    
    
    $
    36,427
    
    
    $
    2,621
 Martha Stewart Everyday
  22




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INTERNET SEGMENT
 2005
    
    
    2004
    
    
    VarianceInternet RevenueProduct sale
    
    $
    8,742
    
    
    $
    26,820
    
    
    $
    (18,078
    )Other
    
    
    2,516
    
    
    
    692
    
    
    
    1,824Total Internet Segment Revenue
    
    
    11,258
    
    
    
    27,512
    
    
    
    (16,254
    )Internet Operating Costs and ExpensesProduction, distribution and editorial
    
    
    10,719
    
    
    
    29,912
    
    
    
    19,193Selling and promotion
    
    
    1,649
    
    
    
    1,735
    
    
    
    86General and administrative
    
    
    1,438
    
    
    
    3,739
    
    
    
    2,301Non-cash equity compensation
    
    
    38
    
    
    
    
    
    
    
    (38
    )Depreciation and amortization
    
    
    951
    
    
    
    987
    
    
    
    36Total Internet Operating Costs and Expenses
    
    
    14,795
    
    
    
    36,373
    
    
    
    21,578Internet Operating Loss
    
    $
    (3,537
    )
    
    $
    (8,861
    )
    
    $
    5,324
   CORPORATE
 2005
    
    
    2004
    
    
    VarianceCorporate Operating Costs and ExpensesProduction, distribution and editorial
    
    $
    391
    
    
    $
    370
    
    
    $
    (21
    )Selling and promotion
    
    
    87
    
    
    
    102
    
    
    
    15General and administrative
    
    
    42,519
    
    
    
    40,124
    
    
    
    (2,395
    )Non-cash equity compensation
    
    
    24,794
    
    
    
    9,428
    
    
    
    (15,366
    )Depreciation and amortization
    
    
    3,693
    
    
    
    4,223
    
    
    
    530Total Corporate Operating Costs and Expenses
    
    
    71,484
    
    
    
    54,247
    
    
    
    (17,237
    )Corporate Operating Loss
    
    $
    (71,484
    )
    
    $
    (54,247
    )
    
    $
    (17,237
    )
  23




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INTEREST INCOME, NET
 INCOME TAX PROVISION
 LOSS FROM DISCONTINUED OPERATIONS
 NET LOSS
 24




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##### Table of Contents



RESULTS OF OPERATIONS
 Comparison for the Year Ended December 31, 2004 to Year Ended December 31, 2003.
 PUBLISHING SEGMENT
 2004
    
    
    2003
    
    
    VariancePublishing RevenueAdvertising
    
    $
    34,084
    
    
    $
    75,735
    
    
    $
    (41,651
    )Circulation
    
    
    60,086
    
    
    
    58,634
    
    
    
    1,452Other
    
    
    1,790
    
    
    
    1,160
    
    
    
    630Total Publishing Segment Revenue
    
    
    95,960
    
    
    
    135,529
    
    
    
    (39,569
    )Publishing Operating Costs and ExpensesProduction, distribution and editorial
    
    
    62,546
    
    
    
    68,585
    
    
    
    6,039Selling and promotion
    
    
    55,321
    
    
    
    45,299
    
    
    
    (10,022
    )General and administrative
    
    
    2,093
    
    
    
    2,087
    
    
    
    (6
    )Non-cash equity compensation
    
    
    143
    
    
    
    202
    
    
    
    59Depreciation and amortization
    
    
    472
    
    
    
    165
    
    
    
    (307
    )Total Publishing Segment Operating Costs and Expenses
    
    
    120,575
    
    
    
    116,338
    
    
    
    (4,237
    )Publishing Segment Operating Income (Loss)
    
    $
    (24,615
    )
    
    $
    19,191
    
    
    $
    (43,806
    )
 Martha Stewart Living, Martha Stewart Living Everyday
Food Martha Stewart Weddings Everyday Food Body + Soul Dr. Weil Self Healing . Martha Stewart Living
 
 2004
    
    2003Martha Stewart Living
    
    Twelve Issues
    
    Twelve IssuesMartha Stewart Weddings (a)
    
    Five Issues
    
    Four IssuesEveryday Food
    
    Ten Issues
    
    Eight IssuesSpecial Interest Publications
    
    Eight Issues
    
    Seven IssuesBody + Soul(b)
    
    Four Issues
    
    n/a
 
 (a)
    
    In 2004 we published one special Martha Stewart Weddingsissue.(b)
    
    Acquired in August 2004 and therefore was not included in prior periods. 25




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##### Table of Contents



Martha Stewart Living Everyday Food, , Martha Stewart Living
 BROADCASTING SEGMENT
 2004
    
    
    2003
    
    
    VarianceBroadcasting RevenueAdvertising
    
    $
    7,546
    
    
    $
    18,103
    
    
    $
    (10,557
    )Licensing and other
    
    
    3,034
    
    
    
    8,008
    
    
    
    (4,974
    )Total Broadcasting Segment Revenue
    
    
    10,580
    
    
    
    26,111
    
    
    
    (15,531
    )Broadcasting Operating Costs and ExpensesProduction, distribution and editorial
    
    
    14,371
    
    
    
    18,985
    
    
    
    4,614Selling and promotion
    
    
    1,267
    
    
    
    2,845
    
    
    
    1,578General and administrative
    
    
    3,420
    
    
    
    3,517
    
    
    
    97Depreciation and amortization
    
    
    230
    
    
    
    2,974
    
    
    
    2,744Total Broadcasting Segment Operating Costs and Expenses
    
    
    19,288
    
    
    
    28,321
    
    
    
    9,033Broadcasting Segment Operating Loss
    
    $
    (8,708
    )
    
    $
    (2,210
    )
    
    $
    (6,498
    )
   26




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##### Table of Contents



MERCHANDISING SEGMENT
 2004
    
    
    2003
    
    
    VarianceMerchandising RevenueKmart earned royalty
    
    $
    32,434
    
    
    $
    35,579
    
    
    $
    (3,145
    )Kmart minimum true-up
    
    
    13,074
    
    
    
    10,208
    
    
    
    2,866Other
    
    
    7,878
    
    
    
    7,608
    
    
    
    270Total Merchandising Segment Revenue
    
    
    53,386
    
    
    
    53,395
    
    
    
    (9
    )Merchandising Operating Costs and ExpensesProduction, distribution and editorial
    
    
    9,005
    
    
    
    10,307
    
    
    
    1,302Selling and promotion
    
    
    926
    
    
    
    598
    
    
    
    (328
    )General and administrative
    
    
    6,340
    
    
    
    4,051
    
    
    
    (2,289
    )Non-cash equity compensation
    
    
    (72
    )
    
    
    51
    
    
    
    123Depreciation and amortization
    
    
    760
    
    
    
    671
    
    
    
    (89
    )Total Merchandising Segment Operating Costs and Expenses
    
    
    16,959
    
    
    
    15,678
    
    
    
    (1,281
    )Merchandising Segment Operating Income
    
    $
    36,427
    
    
    $
    37,717
    
    
    $
    (1,290
    )
 Martha Stewart Signature
  27




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##### Table of Contents



INTERNET SEGMENT
 2004
    
    
    2003
    
    
    VarianceInternet RevenueProduct sale
    
    $
    26,820
    
    
    $
    29,041
    
    
    $
    (2,221
    )Other
    
    
    692
    
    
    
    1,772
    
    
    
    (1,080
    )Total Internet Segment Revenue
    
    
    27,512
    
    
    
    30,813
    
    
    
    (3,301
    )Internet Operating Costs and ExpensesProduction, distribution and editorial
    
    
    29,912
    
    
    
    37,995
    
    
    
    8,083Selling and promotion
    
    
    1,735
    
    
    
    2,141
    
    
    
    406General and administrative
    
    
    3,739
    
    
    
    5,751
    
    
    
    2,012Non-cash equity compensation
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Depreciation and amortization
    
    
    987
    
    
    
    960
    
    
    
    (27
    )Total Internet Operating Costs and Expenses
    
    
    36,373
    
    
    
    46,826
    
    
    
    10,453Internet Operating Loss
    
    $
    (8,861
    )
    
    $
    (16,013
    )
    
    $
    7,152
   CORPORATE
 2004
    
    
    2003
    
    
    VarianceCorporate Operating Costs and ExpensesProduction, distribution and editorial
    
    $
    370
    
    
    $
    395
    
    
    $
    25Selling and promotion
    
    
    102
    
    
    
    738
    
    
    
    636General and administrative
    
    
    40,124
    
    
    
    37,764
    
    
    
    (2,360
    )Non-cash equity compensation
    
    
    9,428
    
    
    
    1,294
    
    
    
    (8,134
    )Depreciation and amortization
    
    
    4,223
    
    
    
    4,899
    
    
    
    676Total Corporate Operating Costs and Expenses
    
    
    54,247
    
    
    
    45,090
    
    
    
    (9,157
    )Corporate Operating Loss
    
    $
    (54,247
    )
    
    $
    (45,090
    )
    
    $
    (9,157
    )
  28




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INTEREST INCOME, NET
 INCOME TAX BENEFIT (PROVISION)
 LOSS FROM DISCONTINUED OPERATIONS
 NET LOSS
 29




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  Body +
Soul Dr. Weil Self Healing
     Future Commitments
 Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    year
    
    1-2 years
    
    3-4 years
    
    yearsLong-Term Debt Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    47,436
    
    
    
    13,103
    
    
    
    18,354
    
    
    
    10,639
    
    
    
    5,340Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term
Liabilities Reflected on
the Companys Balance
Sheet under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    47,436
    
    
    
    13,103
    
    
    
    18,354
    
    
    
    10,639
    
    
    
    5,340
 30




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##### Table of Contents



Seasonality and Quarterly Fluctuations
  Critical Accounting Policies and Estimates
 General
   Revenue Recognition
   31




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##### Table of Contents



Television production costs
  Intangible assets
   Long-Lived Assets
  Advertising Cost
  Non-cash Equity Compensation
  
 Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Managements Report on Internal Control Over Financial Reporting
 32




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##### Table of Contents



Evaluation of Disclosure Controls and Procedures
  Evaluation of Changes in Internal Control over Financial Reporting
  Managements Report on Internal Control over Financial Reporting
   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    33




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##### Table of Contents



Item 9B. Other Information.
  PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
 ELECTION OF DIRECTORS INFORMATION CONCERNING
EXECUTIVE OFFICERS, SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
 Item 11. Executive Compensation.
 COMPENSATION OF OUTSIDE DIRECTORS, EXECUTIVE COMPENSATION, EMPLOYMENT AND SEVERANCE
ARRANGEMENTS, EQUITY COMPENSATION PLANS, and COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
 34




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
 Item 13. Certain Relationships and Related Transactions.
 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
 Item 14. Principal Accountant Fees and Services.
 PRINCIPAL ACCOUNTANT FEES AND SERVICES
 35




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  Exhibits:
 ExhibitNumber
    
    
    
    Exhibit Title3.1
    
    
    
    Martha Stewart Living Omnimedia, Inc.s Certificate of Incorporation (incorporated by reference to our
Registration Statement on Form S-1, File Number 333-84001 (the Registration Statement)).3.2
    
    
    
    Martha Stewart Living Omnimedia, Inc.s By-Laws (incorporated by reference to the Registration Statement).10.1
    
    
    
    Form of Stockholders Agreement (incorporated by reference to the Registration Statement).10.2
    
    
    
    1999 Stock Incentive Plan (incorporated by reference to the Registration Statement), as amended by
Exhibits 10.2.1, 10.2.2 and 10.31.10.2.1
    
    
    
    Amendment No. 1 to the 1999 Stock Incentive Plan, dated as of March 9, 2000 (incorporated by reference to
our Annual Report on Form 10-K for the year ended December 31, 1999, File Number 001-15395 (the 1999
10-K)) as amended by Exhibits 10.2.2 and 10.31.10.2.2
    
    
    
    Amendment No. 2 to the Amended and Restated 1999 Stock Incentive Plan, dated as of May 11, 2000
(incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (the
June 2000 10-Q)) as amended by Exhibit 10.31.10.3
    
    
    
    1999 Non-Employee Director Stock and Option Compensation Plan (incorporated by reference to the
Registration Statement) as amended by Exhibit 10.32.10.4
    
    
    
    Martha Stewart Living Omnimedia LLC Nonqualified Class A LLC Unit/Stock Option Plan (incorporated by
reference to the Registration Statement).10.5
    
    
    
    Form of Employment Agreement, dated as of October 22, 1999, by and between Martha Stewart Living
Omnimedia, Inc. and Martha Stewart (incorporated by reference to the Registration Statement) as amended
by Exhibit 10.20.10.6
    
    
    
    Form of Intellectual Property License and Preservation Agreement, dated as of October 22, 1999, by and
between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to the
Registration Statement).10.7
    
    
    
    Form of Location Rental Agreement, dated as of October 22, 1999, by and between Martha Stewart Living
Omnimedia, Inc. and Martha Stewart (incorporated by reference to the Registration Statement) as amended
by Exhibit 10.7.1 and 10.21.10.7.1
    
    
    
    Amendment, dated as of January 1, 2003, to Location Rental Agreement, dated as of October 22, 1999, by
and between Martha Stewart Living Omnimedia, Inc. and Martha Stewart (incorporated by reference to our
Annual Report on Form 10-K for the year ended December 31, 2002 (the 2002 10-K)) as amended by Exhibit
10.21.10.8
    
    
    
    Lease, dated as of September 24, 1992, between Tishman Speyer Silverstein Partnership and Time Publishing
Ventures, Inc., as amended by First Amendment of Lease dated as of September 24, 1994 between 11 West 42
Limited Partnership and Time Publishing Ventures, Inc. (incorporated by reference to the Registration
Statement).10.9
    
    
    
    Lease, dated as of March 31, 1998, between 11 West 42 Limited Partnership and Martha Stewart Living
Omnimedia LLC (incorporated by reference to the Registration Statement).10.10
    
    
    
    Lease, dated August 20, 1999, between 601 West Associates LLC and Martha Stewart Living Omnimedia LLC
(incorporated by reference to the Registration Statement).10.10.1
    
    
    
    First Lease Modification Agreement, dated December 24, 1999, between 601 West Associates LLC and Martha
Stewart Living Omnimedia, Inc. (incorporated by reference to the 1999 10-K).10.11
    
    
    
    Lease, dated as of October 1, 2000, between Newtown Group Properties Limited Partnership and Martha
Stewart Living Omnimedia, Inc. (incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001(the June 2001 10-Q)).10.12
    
    
    
    License Agreement, dated June 21, 2001 by and between Kmart Corporation and MSO IP Holdings, Inc.
(incorporated by reference to the June 2001 10-Q) as amended by Exhibit 10.22.10.14.1
    
    
    
    Split-Dollar Life Insurance Agreement, dated February 28, 2001, by and among Martha Stewart Living
Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited Partnership (incorporated by
reference to our Annual Report on Form 10-K for the year ended December 31, 2000 (the 2000 10-K)) as
amended by Exhibits 10.14.2 and 10.14.3.
 36




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##### Table of Contents



ExhibitNumber
    
    
    
    Exhibit Title10.14.2
    
    
    
    Amendment, dated January 28, 2002, to Split-Dollar Life Insurance Agreement, dated February 28, 2001, by
and between Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha Stewart Family Limited
Partnership (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31,
2001 (the 2001 10-K)) as amended by Exhibit 10.14.3.10.14.3
    
    
    
    Amendment, dated as of January 1, 2003, to Split-Dollar Life Insurance Agreement, dated February 28,
2001, as amended, by and among Martha Stewart Living Omnimedia, Inc., Martha Stewart and The Martha
Stewart Family Limited Partnership (incorporated by reference to our Annual Report on Form 10-K for the
year ended December 31, 2002 (the 2002 10-K)).10.15
    
    
    
    Investment Agreement, dated as of January 8, 2002, by and among Martha Stewart Living Omnimedia, Inc.,
The Martha Stewart Family Limited Partnership, ValueAct Capital Partners, L.P., ValueAct Capital Partners
II, L.P. and ValueAct Capital International, Ltd (incorporated by reference to the 2001 10-K).10.16
    
    
    
    2002 Executive Severance Pay Plan (incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).10.17
    
    
    
    2002 Performance-Based Executive Bonus Plan (incorporated by reference to the 2002 10-K). 10.18
    
    
    
    2003 Key Executive Bonus Plan (incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2003 (the 2003 10-K)).10.20
    
    
    
    Amendment, dated as of March 15, 2004 to the Employment Agreement, dated October 22, 1999, as amended, by
and between the Company and Martha Stewart (incorporated by reference to our Quarterly Report on Form
10-Q for the quarter ended March 31, 2004 (the March 2004 10-Q)).10.21
    
    
    
    Amendment, dated as of March 15, 2004 to the Location Rental Agreement, dated October 22, 1999, as
amended, by and between the Company and Martha Stewart (incorporated by reference to the March 2004
10-Q). 10.22
    
    
    
    Amendment, dated as of April 22, 2004 to the License Agreement, by and between MSO IP Holdings, Inc. and
Kmart Corporation, dated June 21, 2001 (incorporated by reference to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004).10.23
    
    
    
    Employment Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc. and
Martha Stewart (incorporated by reference to the September 23, 2004 8-K). 10.24
    
    
    
    Location Rental Agreement dated as of September 17, 2004, between Martha Stewart Living Omnimedia, Inc.
and Martha Stewart (incorporated by reference to the September 23, 2004 8-K). 10.25
    
    
    
    Letter Agreement dated September 17, 2004 between Martha Stewart Living Omnimedia, Inc. and Martha
Stewart (incorporated by reference to the September 23, 2004 8-K). 10.26
    
    
    
    Employment Agreement dated as of November 11, 2004, between Martha Stewart Living Omnimedia, Inc. and
Susan Lyne (incorporated by reference to our Current Report on Form 8-K filed on November 16, 2004 (the
November 16, 2004 8-K)). 10.27
    
    
    
    Restricted Stock Agreement dated as of November 11, 2004, between Martha Stewart Living Omnimedia, Inc.
and Susan Lyne (incorporated by reference to the November 16, 2004 8-K).10.28
    
    
    
    Stock Option Agreement dated as of November 11, 2004, between Martha Stewart Living Omnimedia, Inc. and
Susan Lyne (incorporated by reference to the November 16, 2004 8-K). 10.29
    
    
    
    2005 Executive Severance Pay Plan (incorporated by reference to our Current Report on Form 8-K filed on
January 6, 2005). 10.30
    
    
    
    Form of Restricted Stock Award Agreement for use under the Martha Stewart Living Omnimedia, Inc. Amended
and Restated 1999 Stock Inventive Plan (incorporated by reference to our Current Report on Form 8-K filed
on January 14, 2005).10.31
    
    
    
    Amendment No. 2 to the Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to our
Current Report on Form 8-K filed on May 17, 2005 (the May 17, 2005 8-K)).10.32
    
    
    
    Amendment No. 1 to the Martha Stewart Living Omnimedia, Inc. Non-Employee Director Stock and Option
Compensation Plan (incorporated by reference to the May 17, 2005 8-K).10.33
    
    
    
    Martha Stewart Living Omnimedia, Inc. Annual Incentive Plan (incorporated by reference to the May 17,
2005 8-K). 10.34
    
    
    
    Employment Agreement dated as of May 2, 2005, between Martha Stewart Living Omnimedia, Inc. and Robin
Marino (incorporated by reference to our Current Report on Form 8-K filed on June 10, 2005). 10.35
    
    
    
    Employment Agreement dated as of July 21, 2005, between Martha Stewart Living Omnimedia, Inc. and John R.
Cuti (incorporated by reference to our Current Report on Form 8-K filed on September 8, 2005). 
 37




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##### Table of Contents



ExhibitNumber
    
    
    
    Exhibit Title10.36
    
    
    
    Consulting Agreement dated as of October 21, 2005 between Martha Stewart Living Omnimedia, Inc. and CAK
Entertainment Inc., an entity for which Mr. Charles A. Koppelman serves as Chairman and Chief Executive
Officer (incorporated by reference to our Current Report on Form 8-K filed on October 21, 2005 (the
October 21, 2005 8-K)). 10.37
    
    
    
    Consulting Agreement between Charles A. Koppelman and Martha Stewart Living Omnimedia, Inc. dated January
24, 2005 (incorporated by reference to the October 21, 2005 8-K).10.38
    
    
    
    Registration Rights Agreement between Charles A. Koppelman and Martha Stewart Living Omnimedia, Inc.
dated January 24, 2005 (incorporated by reference to the October 21, 2005 8-K).10.39
    
    
    
    Employment Agreement dated as of November 15, 2005, between Martha Stewart Living Omnimedia, Inc. and
Sheraton Kalouria (incorporated by reference to our Current Report on Form 8-K filed on November 22,
2005). 21*
    
    
    
    List of Subsidiaries.31.1*
    
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32*
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
      38




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##### Table of Contents



SIGNATURES
  MARTHA STEWART LIVING OMNIMEDIA,INC.By:
    
    /s/ Susan LyneName:
    
    Susan LyneTitle:
    
    President and ChiefExecutive Officer
  Signature
    
    Title/s/ Susan Lyne
    
    President, Chief Executive Officer andSusan Lyne
    
    Director (Principal Executive Officer)/s/ James Follo
    
    Chief Financial and Administrative OfficerJames Follo
    
    (Principal Financial and Accounting Officer)/s/ Rick Boyko
    
    DirectorRick Boyko/s/ Michael Goldstein
    
    DirectorMichael Goldstein/s/ Jill A. Greenthal
    
    DirectorJill A. Greenthal/s/ Charles Koppelman
    
    Chairman of the BoardCharles Koppelman/s/ Wenda Harris Millard
    
    DirectorWenda Harris Millard/s/ Thomas C. Siekman
    
    Lead Independent DirectorThomas C. Siekman/s/ Bradley E. Singer
    
    DirectorBradley E. Singer
  39




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULES AND OTHER FINANCIAL INFORMATION
 Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2005, 2004 and 2003
    
    F-3Consolidated Balance Sheets at December 31, 2005 and 2004
    
    F-4Consolidated Statements of Shareholders Equity for each of the three years in the
period ended December 31, 2005, 2004, and 2003
    
    F-5Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2005, 2004, and 2003
    
    F-6Notes to Consolidated Financial Statements
    
    F-7Financial Statement Schedule:II- Valuation and Qualifying Accounts for each of the three years ended
December 31,
2005, 2004 and 2003
    
    F-25
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 F-2




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands except per share data)
 2005
    
    
    2004
    
    
    2003REVENUESPublishing
    
    $
    125,765
    
    
    $
    95,960
    
    
    $
    135,529Broadcasting
    
    
    16,591
    
    
    
    10,580
    
    
    
    26,111Merchandising
    
    
    55,848
    
    
    
    53,386
    
    
    
    53,395Internet
    
    
    11,258
    
    
    
    27,512
    
    
    
    30,813Total revenues
    
    
    209,462
    
    
    
    187,438
    
    
    
    245,848OPERATING COSTS AND EXPENSESProduction, distribution and editorial (excluding amounts shown
separately below)
    
    
    105,932
    
    
    
    116,204
    
    
    
    136,267Selling and promotion (excluding amounts shown separately below)
    
    
    67,475
    
    
    
    59,351
    
    
    
    51,621General and administrative (excluding amounts shown separately
below)
    
    
    61,989
    
    
    
    55,716
    
    
    
    53,170Non-cash equity compensation
    
    
    44,580
    
    
    
    9,499
    
    
    
    1,526Depreciation and amortization
    
    
    7,797
    
    
    
    6,672
    
    
    
    9,669Total operating costs and expenses
    
    
    287,773
    
    
    
    247,442
    
    
    
    252,253OPERATING LOSS
    
    
    (78,311
    )
    
    
    (60,004
    )
    
    
    (6,405
    )Interest income, net
    
    
    3,423
    
    
    
    1,799
    
    
    
    1,439LOSS BEFORE INCOME TAXES
    
    
    (74,888
    )
    
    
    (58,205
    )
    
    
    (4,966
    )Income tax provision (benefit)
    
    
    407
    
    
    
    868
    
    
    
    (3,043
    )LOSS FROM CONTINUING OPERATIONS
    
    
    (75,295
    )
    
    
    (59,073
    )
    
    
    (1,923
    )Loss from discontinued operations, net of tax benefit of
$589 in 2003
    
    
    (494
    )
    
    
    (526
    )
    
    
    (848
    )NET LOSS
    
    $
    (75,789
    )
    
    $
    (59,599
    )
    
    $
    (2,771
    )LOSS PER SHAREBasic and diluted  Loss from continuing operations
    
    $
    (1.48
    )
    
    $
    (1.19
    )
    
    $
    (0.04
    )Basic and diluted  Loss from discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Basic and diluted  Net loss
    
    $
    (1.49
    )
    
    $
    (1.20
    )
    
    $
    (0.06
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBasic and Diluted
    
    
    50,991
    
    
    
    49,712
    
    
    
    49,389
 The accompanying notes are an integral part of these consolidated financial statements.
 F-3




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(in thousands except per share data)
 2005
    
    
    2004ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    20,249
    
    
    $
    104,647Short-term investments
    
    
    83,788
    
    
    
    35,309Accounts receivable, net
    
    
    55,381
    
    
    
    31,332Inventories, net
    
    
    3,910
    
    
    
    5,229Deferred television production costs
    
    
    6,507
    
    
    
    Income taxes receivable
    
    
    519
    
    
    
    6,321Other current assets
    
    
    4,366
    
    
    
    3,573Total current assets
    
    
    174,720
    
    
    
    186,411PROPERTY, PLANT AND EQUIPMENT,net
    
    
    19,797
    
    
    
    17,175INTANGIBLE ASSETS,net
    
    
    53,680
    
    
    
    54,264OTHER NONCURRENT ASSETS
    
    
    5,631
    
    
    
    6,828Total assets
    
    $
    253,828
    
    
    $
    264,678LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIESAccounts payable and accrued liabilities
    
    $
    28,545
    
    
    $
    25,604Accrued payroll and related costs
    
    
    7,488
    
    
    
    9,407Income taxes payable
    
    
    476
    
    
    
    412Current portion of deferred subscription revenue
    
    
    31,060
    
    
    
    27,160Current portion of deferred royalty revenue
    
    
    6,578
    
    
    
    Total current liabilities
    
    
    74,147
    
    
    
    62,583DEFERRED SUBSCRIPTION REVENUE
    
    
    8,688
    
    
    
    7,668DEFERRED REVENUE
    
    
    7,321
    
    
    
    3,438OTHER NONCURRENT LIABILITIES
    
    
    3,041
    
    
    
    3,361Total liabilities
    
    
    93,197
    
    
    
    77,050COMMITMENTS AND CONTIGENCIES
SHAREHOLDERS EQUITYClass A common stock, $.01 par value, 350,000
shares authorized: 24,882 and 21,660 shares
issued in 2005 and 2004, respectively
    
    
    249
    
    
    
    217Class B common stock, $.01 par value, 150,000
shares authorized; 26,873 and 29,123 shares
outstanding in 2005 and 2004, respectively
    
    
    269
    
    
    
    291Capital in excess of par value
    
    
    253,615
    
    
    
    196,781Unamortized restricted stock
    
    
    (10,845
    )
    
    
    (2,793
    )Accumulated deficit
    
    
    (81,882
    )
    
    
    (6,093
    )161,406
    
    
    
    188,403Less Class A treasury stock  59 shares at cost
    
    
    (775
    )
    
    
    (775
    )Total shareholders equity
    
    
    160,631
    
    
    
    187,628Total liabilities and shareholders equity
    
    $
    253,828
    
    
    $
    264,678
 The accompanying notes are an integral part of these consolidated financial statements.
 F-4




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
 Class A
    
    
    
    
    
    
    
    Class B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class Acommon stock
    
    
    
    common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury StockRetainedCapital in
    
    
    Unamortized
    
    
    Earningsexcess of par
    
    
    Restricted
    
    
    (AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    value
    
    
    Stock
    
    
    deficit)
    
    
    Shares
    
    
    Amount
    
    
    TotalBalance at January 1, 2003
    
    
    19,342
    
    
    $
    194
    
    
    
    30,295
    
    
    $
    303
    
    
    $
    181,629
    
    
    $
    (993
    )
    
    $
    56,277
    
    
    
    (59
    )
    
    $
    (775
    )
    
    $
    236,635Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,771
    )
    
    
    
    
    
    
    
    
    
    
    (2,771
    )Shares returned on net treasury basis
    
    
    
    
    
    
    
    
    
    
    (236
    )
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in conjunction with
stock options exercises
    
    
    316
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    404Tax benefit from the issuance of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    871Return of restricted stock
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    483
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,526Balance at December 31, 2003
    
    
    19,628
    
    
    
    196
    
    
    
    30,059
    
    
    
    301
    
    
    
    183,744
    
    
    
    (307
    )
    
    
    53,506
    
    
    
    (59
    )
    
    
    (775
    )
    
    
    236,665Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,599
    )
    
    
    
    
    
    
    
    
    
    
    (59,599
    )Conversion of shares
    
    
    786
    
    
    
    8
    
    
    
    (786
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares returned on net treasury basis
    
    
    
    
    
    
    
    
    
    
    (150
    )
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in conjunction with
stock options exercises
    
    
    824
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    4,294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,303Issuance of shares of stock and
restricted stock, net of cancellations
and tax liabilities
    
    
    422
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    (3,622
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,240
    )Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,363
    
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,499Balance at December 31, 2004
    
    
    21,660
    
    
    
    217
    
    
    
    29,123
    
    
    
    291
    
    
    
    196,781
    
    
    
    (2,793
    )
    
    
    (6,093
    )
    
    
    (59
    )
    
    
    (775
    )
    
    
    187,628Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,789
    )
    
    
    
    
    
    
    
    
    
    
    (75,789
    )Conversion of shares
    
    
    1,828
    
    
    
    18
    
    
    
    (1,828
    )
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares returned on a net treasury basis
    
    
    
    
    
    
    
    
    
    
    (422
    )
    
    
    (4
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in conjunction with
stock options exercises
    
    
    585
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    7,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,960Issuance of shares of stock and
restricted stock, net of cancellations
and tax liabilities
    
    
    809
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    10,426
    
    
    
    (14,143
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,709
    )Expense associated with common stock
warrant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,755Non-cash equity compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,695
    
    
    
    6,091
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,786Balance at December 31, 2005
    
    
    24,882
    
    
    $
    249
    
    
    
    26,873
    
    
    $
    269
    
    
    $
    253,615
    
    
    $
    (10,845
    )
    
    $
    (81,882
    )
    
    
    (59
    )
    
    $
    (775
    )
    
    $
    160,631
 The accompanying notes are an integral part of these consolidated financial statements.  .
 F-5




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##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(in thousands)
 2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (75,789
    )
    
    $
    (59,599
    )
    
    $
    (2,771
    )Adjustments to reconcile net loss to net cash
used in operating activities:Non-cash loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    325Depreciation and amortization
    
    
    7,797
    
    
    
    6,672
    
    
    
    9,669Deferred income tax (benefit) expense
    
    
    
    
    
    
    3,851
    
    
    
    (4,052
    )Tax benefit from stock option exercises
    
    
    
    
    
    
    
    
    
    
    871Non-cash equity compensation
    
    
    44,580
    
    
    
    9,499
    
    
    
    1,526Changes in operating assets and liabilities,
net of acquisitionAccounts receivable, net
    
    
    (24,050
    )
    
    
    9,049
    
    
    
    (1,962
    )Inventories
    
    
    1,319
    
    
    
    2,256
    
    
    
    1,169Other current assets
    
    
    (793
    )
    
    
    1,135
    
    
    
    334Deferred television production costs
    
    
    (6,507
    )
    
    
    3,465
    
    
    
    714Other non current assets
    
    
    1,145
    
    
    
    (2,328
    )
    
    
    337Accounts payable and accrued liabilities
    
    
    1,021
    
    
    
    (4,812
    )
    
    
    (13,238
    )Income taxes
    
    
    5,867
    
    
    
    3,979
    
    
    
    (156
    )Deferred subscription revenue
    
    
    4,920
    
    
    
    2,124
    
    
    
    (1,681
    )Deferred royalty revenue
    
    
    10,461
    
    
    
    3,438
    
    
    
    Other non current liabilities
    
    
    (320
    )
    
    
    (955
    )
    
    
    (719
    )Net cash used in operating activities
    
    
    (30,349
    )
    
    
    (22,226
    )
    
    
    (9,634
    )CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (9,822
    )
    
    
    (947
    )
    
    
    (1,054
    )Purchases of short-term investments
    
    
    (137,876
    )
    
    
    (40,909
    )
    
    
    Sales of short-term investments
    
    
    89,398
    
    
    
    8,700
    
    
    
    17,010Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (6,600
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (58,300
    )
    
    
    (39,756
    )
    
    
    15,956CASH FLOWS FROM FINANCING ACTIVITIESProceeds from exercise of stock options
    
    
    7,960
    
    
    
    4,303
    
    
    
    404Issuance of stock and restricted stock,
net of cancellations and tax liabilities
    
    
    (3,709
    )
    
    
    (3,240
    )
    
    
    Net cash provided by financing activities
    
    
    4,251
    
    
    
    1,063
    
    
    
    404Net increase (decrease) in cash
    
    
    (84,398
    )
    
    
    (60,919
    )
    
    
    6,726CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
    
    
    104,647
    
    
    
    165,566
    
    
    
    158,840CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    20,249
    
    
    $
    104,647
    
    
    $
    165,566
 The accompanying notes are an integral part of these consolidated financial statements.
 F-6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (in thousands except share data)
 1 THE COMPANY
  2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Cash and Cash Equivalents
  Short-term Investments
  Revenue Recognition
      F-7




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##### Table of Contents



Television Production Costs
  Intangible Assets
     AccumulatedAccumulated
    
    
    
    
    
    
    
    
    
    
    Amortization-Amortization
    
    
    
    
    
    
    Publishing
    
    
    PublishingPublishing
    
    
    - Publishing
    
    
    Publishing
    
    
    Subscriber
    
    
    SubscriberGoodwill
    
    
    Goodwill
    
    
    Trademarks
    
    
    Lists
    
    
    Lists
    
    
    TotalBalance January 1, 2005
    
    $
    67,841
    
    
    $
    (14,752
    )
    
    $
    500
    
    
    $
    900
    
    
    $
    (225
    )
    
    $
    54,264Adjustments to
goodwill
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Amortization
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (600
    )Balance December 31, 2005
    
    $
    67,857
    
    
    $
    (14,752
    )
    
    $
    500
    
    
    $
    900
    
    
    $
    (825
    )
    
    $
    53,680
 Impairment of Long- lived assets
  F-8




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##### Table of Contents



Inventories
  Advertising Costs
  Reclassification Adjustments
  Loss Per Share
   Property, Plant and Equipment
  Studios and studio equipment
    
    2-10 yearsFurniture, fixtures and equipment
    
    3-5 yearsComputer hardware and software
    
    3-5 yearsLeasehold improvements
    
    life of lease
 F-9




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##### Table of Contents



Use of Estimates
  Equity Compensation
   2005
    
    
    2004
    
    
    2003Risk-free interest rates
    
    
    3.74
    %
    
    
    3.47
    %
    
    
    2.94
    %Dividend yields
    
    Zero
    
    Zero
    
    ZeroExpected volatility
    
    
    68.3
    %
    
    
    68.5
    %
    
    
    70.0
    %Expected option life
    
    3.0 years
    
    4.7 years
    
    6.0 yearsAverage fair market value per
option granted
    
    $
    12.01
    
    
    $
    9.06
    
    
    $
    5.78
  2005
    
    
    2004
    
    
    2003Net loss, as reported
    
    $
    (75,789
    )
    
    $
    (59,599
    )
    
    $
    (2,771
    )Add back: Total stock option based
employee compensation expense
included in net loss
    
    
    3,496
    
    
    
    5,149
    
    
    
    1,315Deduct: Total stock option based
employee compensation expense
determined under fair value based
method for all awards
    
    
    (5,512
    )
    
    
    (7,136
    )
    
    
    (8,973
    )Pro forma net loss
    
    $
    (77,805
    )
    
    $
    (61,586
    )
    
    $
    (10,429
    )Loss per share:Basic and diluted  as reported
    
    $
    (1.49
    )
    
    $
    (1.20
    )
    
    $
    (0.06
    )Basic and diluted  pro forma
    
    $
    (1.53
    )
    
    $
    (1.24
    )
    
    $
    (0.21
    )
 F-10




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##### Table of Contents



Recent Accounting Pronouncements
    3 ACCOUNTS RECEIVABLE, NET
  2005
    
    
    2004Advertising
    
    $
    20,208
    
    
    $
    7,522Licensing
    
    
    31,527
    
    
    
    24,019Other
    
    
    5,952
    
    
    
    1,31457,687
    
    
    
    32,855Less: reserve for credits and
uncollectible accounts
    
    
    2,306
    
    
    
    1,523$
    55,381
    
    
    $
    31,332
  4 INVENTORIES
  2005
    
    
    2004Paper
    
    $
    3,910
    
    
    $
    4,279Product merchandise
    
    
    
    
    
    
    1,236
 F-11




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##### Table of Contents



2005
    
    
    20043,910
    
    
    
    5,515Less: reserve for obsolete and excess
inventory
    
    
    
    
    
    
    286$
    3,910
    
    
    $
    5,229
 5 PROPERTY, PLANT AND EQUIPMENT, NET
  2005
    
    
    2004Studios and equipment
    
    $
    10,304
    
    
    $
    6,729Furniture, fixtures and equipment
    
    
    10,426
    
    
    
    10,548Computer hardware and software
    
    
    18,708
    
    
    
    27,883Leasehold improvements
    
    
    23,948
    
    
    
    20,44963,386
    
    
    
    65,609Less: accumulated depreciation and
amortization
    
    
    43,589
    
    
    
    48,434$
    19,797
    
    
    $
    17,175
  6 LINE OF CREDIT
  7 STOCKHOLDERS EQUITY
 Common Stock
  8 EMPLOYEE AND NON EMPLOYEE BENEFIT AND COMPENSATION PLANS
 Retirement plans
   Stock Options
  F-12




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##### Table of Contents



WeightedNumber
    
    
    average exerciseof Shares
    
    
    priceOutstanding as of January 1, 2003
    
    
    922,102
    
    
    $
    0.62Exercised
    
    
    (295,160
    )
    
    
    0.68Outstanding as of December 31, 2003
    
    
    626,942
    
    
    
    0.60Exercised
    
    
    (424,544
    )
    
    
    0.60Outstanding as of December 31, 2004
    
    
    202,398
    
    
    
    0.60Exercised
    
    
    (87,817
    )
    
    
    0.60Outstanding as of December 31, 2005
    
    
    114,581
    
    
    $
    0.60Options exercisable at:December 31, 2003
    
    
    626,942
    
    
    $
    0.60December 31, 2004
    
    
    202,398
    
    
    $
    0.60December 31, 2005
    
    
    114,581
    
    
    $
    0.60
  WeightedNumber of
    
    
    averageshares
    
    
    exercise priceOutstanding as of January 1, 2003
    
    
    8,376,180
    
    
    $
    16.55Granted
    
    
    57,500
    
    
    
    9.73Exercised
    
    
    (28,675
    )
    
    
    6.78Cancelled
    
    
    (6,216,733
    )
    
    
    17.04Outstanding as of December 31, 2003
    
    
    2,188,272
    
    
    
    14.97Granted
    
    
    595,000
    
    
    
    15.48Exercised
    
    
    (388,392
    )
    
    
    10.39Cancelled
    
    
    (631,275
    )
    
    
    15.82
 F-13




---



##### Table of Contents



WeightedNumber of
    
    
    averageshares
    
    
    exercise priceOutstanding as of December 31, 2004
    
    
    1,763,605
    
    
    $
    15.85Granted
    
    
    437,500
    
    
    
    24.46Exercised
    
    
    (497,047
    )
    
    
    15.91Cancelled
    
    
    (17,850
    )
    
    
    9.31Outstanding as of December 31, 2005
    
    
    1,686,208
    
    
    $
    18.13Options exercisable at:December 31, 2003
    
    
    1,389,910
    
    
    $
    17.07December 31, 2004
    
    
    913,936
    
    
    $
    17.37December 31, 2005
    
    
    796,813
    
    
    $
    17.23
  Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedContractual
    
    
    
    
    
    Average
    
    
    
    
    
    AverageLife in
    
    Number
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Price Per Share
    
    Years
    
    Outstanding
    
    Price
    
    Exercisable
    
    Price$0.60
    
    
    1.9
    
    
    
    114,581
    
    
    $
    0.60
    
    
    
    114,581
    
    
    $
    0.60$6.78-$10.61
    
    
    4.1
    
    
    
    388,225
    
    
    
    7.93
    
    
    
    190,722
    
    
    
    7.73$14.90-$15.75
    
    
    5.1
    
    
    
    21,350
    
    
    
    15.38
    
    
    
    21,250
    
    
    
    15.38$15.90
    
    
    6.1
    
    
    
    150,000
    
    
    
    15.90
    
    
    
    112,500
    
    
    
    15.90$16.45-$18.90
    
    
    8.1
    
    
    
    533,933
    
    
    
    18.64
    
    
    
    267,141
    
    
    
    18.72$19.92-$26.25
    
    
    8.6
    
    
    
    240,900
    
    
    
    21.04
    
    
    
    53,400
    
    
    
    20.49$26.56-$33.75
    
    
    7.0
    
    
    
    351,800
    
    
    
    27.72
    
    
    
    151,800
    
    
    
    26.63$0.60-$33.75
    
    
    6.5
    
    
    
    1,800,789
    
    
    $
    17.01
    
    
    
    911,394
    
    
    $
    15.14
  Stock compensation plans
    F-14




---



##### Table of Contents



Executive bonus plan
   Non-employee compensation plans
 i.e.
 F-15
    Table of Contents      9 INCOME TAXES
   2005
    
    
    2004
    
    
    2003Current Income Taxes (Benefit)Federal
    
    $
    20
    
    
    $
    (1,755
    )
    
    $
    State and local
    
    
    96
    
    
    
    (1,401
    )
    
    
    350Foreign
    
    
    291
    
    
    
    173
    
    
    
    70Total current income tax expense/(benefit)
    
    
    407
    
    
    
    (2,983
    )
    
    
    420Deferred Income Taxes (Benefit)Federal
    
    
    
    
    
    
    3,754
    
    
    
    (3,120
    )State and local
    
    
    
    
    
    
    97
    
    
    
    (343
    )Total deferred income tax expense (benefit)
    
    
    
    
    
    
    3,851
    
    
    
    (3,463
    )Income tax provision (benefit) from
continuing operations
    
    $
    407
    
    
    $
    868
    
    
    $
    (3,043
    )
 F-16    Table of Contents  2005
    
    
    2004
    
    
    2003Computed tax at the federal statutory rate of 35%
    
    $
    (26,384
    )
    
    $
    (20,556
    )
    
    $
    (1,738
    )State income taxes, net of federal benefit
    
    
    62
    
    
    
    (848
    )
    
    
    5Non-deductible compensation
    
    
    994
    
    
    
    1,608
    
    
    
    Non-deductible expense
    
    
    164
    
    
    
    163
    
    
    
    243Foreign tax credit
    
    
    
    
    
    
    
    
    
    
    (351
    )Non-taxable foreign income
    
    
    (232
    )
    
    
    (152
    )
    
    
    (272
    )Non-taxable interest income
    
    
    (10
    )
    
    
    (253
    )
    
    
    (493
    )Valuation allowance
    
    
    26,104
    
    
    
    28,286
    
    
    
    Benefit of net operating loss (NOL) and tax credits
carried back
    
    
    
    
    
    
    (7,090
    )
    
    
    Other
    
    
    (291
    )
    
    
    (290
    )
    
    
    (437
    )Provision (benefit) for income taxes
    
    $
    407
    
    
    $
    868
    
    
    $
    (3,043
    )Effective tax rate
    
    
    0.5
    %
    
    
    1.5
    %
    
    
    61.3
    %
  2005
    
    
    2004Deferred Tax AssetsInventory obsolescence reserves
    
    $
    
    
    
    $
    117Provision for doubtful accounts
    
    
    990
    
    
    
    852Accrued rent
    
    
    1,667
    
    
    
    1,711Reserve for newsstand returns
    
    
    1,182
    
    
    
    465Reserve for catalog returns
    
    
    
    
    
    
    104Website impairment
    
    
    
    
    
    
    98Accrued compensation
    
    
    15,948
    
    
    
    3,465Deferred royalty revenue
    
    
    2,947
    
    
    
    1,410NOL/credit carryforwards
    
    
    45,276
    
    
    
    26,215Depreciation and amortization
    
    
    3,200
    
    
    
    Other
    
    
    468
    
    
    
    346Total deferred tax assets
    
    
    71,678
    
    
    
    34,783Deferred Tax LiabilitiesDepreciation and amortization
    
    
    
    
    
    
    (1,708
    )Prepaid expenses
    
    
    (102
    )
    
    
    (1,122
    )Total deferred tax liabilities
    
    
    (102
    )
    
    
    (2,830
    )Valuation allowance
    
    
    (71,576
    )
    
    
    (31,953
    )Net Deferred Tax Asset
    
    $
    
    
    
    $
    
  F-17
    Table of Contents  10 RELATED PARTY TRANSACTIONS
      F-18
    Table of Contents  F-19
    Table of Contents  11 COMMITMENTS AND CONTINGENCIES
 Operating leases
   OperatingLeases2006
    
    $
    13,1032007
    
    
    10,1392008
    
    
    8,2152009
    
    
    8,3172010
    
    
    2,322Thereafter
    
    
    5,340Total minimum lease payments
    
    $
    47,436
 Legal matters
  F-20
    Table of Contents       Other
  12 BUSINESS ACQUISITIONS
 Body & Soul Dr.
Andrew Weils Self Healing
 Body & Soul
 F-21




---



##### Table of Contents



. Andrew Weils Self Healing
  13 DISCONTINUED OPERATIONS
     2005
    
    
    2004
    
    
    2003Revenues
    
    $
    
    
    
    $
    
    
    
    $
    616Loss from operations, including
accrued restructuring and shutdown
costs
    
    
    (494
    )
    
    
    (526
    )
    
    
    (1,437
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    589Net loss from discontinued operations
    
    $
    (494
    )
    
    $
    (526
    )
    
    $
    (848
    )
  Total assets
    
    $
    
    
    
    $
    52Account payable and accrued expenses
    
    
    (1,024
    )
    
    
    (1,027
    )Net liabilities of discontinued operations
    
    $
    (1,024
    )
    
    $
    (975
    )
 14 OTHER INFORMATION
  F-22




---



##### Table of Contents



15 INDUSTRY SEGMENTS
  Publishing
    
    Broadcasting
    
    Merchandising
    
    Internet
    
    Corporate
    
    Consolidated2005Revenues
    
    $
    125,765
    
    
    $
    16,591
    
    
    $
    55,848
    
    
    $
    11,258
    
    
    $
    
    
    
    $
    209,462Non-cash equity
compensation
    
    
    2,097
    
    
    
    17,421
    
    
    
    230
    
    
    
    38
    
    
    
    24,794
    
    
    
    44,580Depreciation and
amortization
    
    
    987
    
    
    
    1,321
    
    
    
    845
    
    
    
    951
    
    
    
    3,693
    
    
    
    7,797Operating income (loss)
    
    
    (15,278
    )
    
    
    (27,060
    )
    
    
    39,048
    
    
    
    (3,537
    )
    
    
    (71,484
    )
    
    
    (78,311
    )Total assets
    
    
    74,968
    
    
    
    21,222
    
    
    
    29,267
    
    
    
    3,819
    
    
    
    124,552
    
    
    
    253,828Capital expenditures
    
    
    242
    
    
    
    6,610
    
    
    
    125
    
    
    
    191
    
    
    
    2,654
    
    
    
    9,8222004Revenues
    
    $
    95,960
    
    
    $
    10,580
    
    
    $
    53,386
    
    
    $
    27,512
    
    
    $
    
    
    
    $
    187,438Non-cash equity
compensation
    
    
    143
    
    
    
    
    
    
    
    (72
    )
    
    
    
    
    
    
    9,428
    
    
    
    9,499Depreciation and
amortization
    
    
    472
    
    
    
    230
    
    
    
    760
    
    
    
    987
    
    
    
    4,223
    
    
    
    6,672Operating income (loss)
    
    
    (24,615
    )
    
    
    (8,708
    )
    
    
    36,427
    
    
    
    (8,861
    )
    
    
    (54,247
    )
    
    
    (60,004
    )Total assets
    
    
    66,914
    
    
    
    605
    
    
    
    24,014
    
    
    
    5,037
    
    
    
    168,108
    
    
    
    264,678Capital expenditures
    
    
    75
    
    
    
    37
    
    
    
    177
    
    
    
    132
    
    
    
    526
    
    
    
    9472003Revenues
    
    $
    135,529
    
    
    $
    26,111
    
    
    $
    53,395
    
    
    $
    30,813
    
    
    $
    
    
    
    $
    245,848Non-cash equity
compensation
    
    
    202
    
    
    
    
    
    
    
    51
    
    
    
    (21
    )
    
    
    1,294
    
    
    
    1,526Depreciation and
amortization
    
    
    165
    
    
    
    2,974
    
    
    
    671
    
    
    
    960
    
    
    
    4,899
    
    
    
    9,669Operating income (loss)
    
    
    19,191
    
    
    
    (2,210
    )
    
    
    37,717
    
    
    
    (16,013
    )
    
    
    (45,090
    )
    
    
    (6,405
    )Total assets
    
    
    62,380
    
    
    
    7,982
    
    
    
    22,547
    
    
    
    9,815
    
    
    
    206,378
    
    
    
    309,102Capital expenditures
    
    
    184
    
    
    
    31
    
    
    
    26
    
    
    
    146
    
    
    
    667
    
    
    
    1,054
 F-23




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (in thousands except per share data)
 16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 First
    
    
    Second
    
    
    
    
    
    
    FourthYear ended December 31, 2005
    
    Quarter
    
    
    Quarter
    
    
    Third Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    38,666
    
    
    $
    45,951
    
    
    $
    40,384
    
    
    $
    84,461
    
    
    $
    209,462Operating income/(loss)
    
    
    (19,782
    )
    
    
    (34,210
    )
    
    
    (26,854
    )
    
    
    2,535
    
    
    
    (78,311
    )Income/(loss) from continuing operations
    
    
    (19,036
    )
    
    
    (33,379
    )
    
    
    (25,946
    )
    
    
    3,066
    
    
    
    (75,295
    )Loss from discontinued operations
    
    
    (132
    )
    
    
    (120
    )
    
    
    (122
    )
    
    
    (120
    )
    
    
    (494
    )Net income/( loss)
    
    $
    (19,168
    )
    
    $
    (33,499
    )
    
    $
    (26,068
    )
    
    $
    2,946
    
    
    $
    (75,789
    )Earnings per share  basic and dilutedIncome/(loss) from continuing operations
    
    $
    (0.37
    )
    
    $
    (0.65
    )
    
    $
    (0.51
    )
    
    $
    0.06
    
    
    $
    (1.48
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net income/(loss)
    
    $
    (0.38
    )
    
    $
    (0.65
    )
    
    $
    (0.51
    )
    
    $
    0.06
    
    
    $
    (1.49
    )Weighted average common shares outstandingBasic
    
    
    50,863
    
    
    
    51,166
    
    
    
    50,849
    
    
    
    51,112
    
    
    
    50,991Diluted
    
    
    50,863
    
    
    
    51,166
    
    
    
    50,849
    
    
    
    52,104
    
    
    
    50,991
 First
    
    
    Second
    
    
    Third
    
    
    FourthYear ended December 31, 2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    TotalRevenues
    
    $
    44,501
    
    
    $
    44,072
    
    
    $
    38,653
    
    
    $
    60,212
    
    
    $
    187,438Operating loss
    
    
    (16,538
    )
    
    
    (17,827
    )
    
    
    (16,154
    )
    
    
    (9,485
    )
    
    
    (60,004
    )Loss from continuing operations
    
    
    (19,319
    )
    
    
    (17,697
    )
    
    
    (14,837
    )
    
    
    (7,220
    )
    
    
    (59,073
    )Loss from discontinued operations
    
    
    (161
    )
    
    
    (127
    )
    
    
    (129
    )
    
    
    (109
    )
    
    
    (526
    )Net loss
    
    $
    (19,480
    )
    
    $
    (17,824
    )
    
    $
    (14,966
    )
    
    $
    (7,329
    )
    
    $
    (59,599
    )Earnings per share  basic and dilutedLoss from continuing operations
    
    $
    (0.39
    )
    
    $
    (0.36
    )
    
    $
    (0.30
    )
    
    $
    (0.14
    )
    
    $
    (1.19
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net loss
    
    $
    (0.39
    )
    
    $
    (0.36
    )
    
    $
    (0.30
    )
    
    $
    (0.15
    )
    
    $
    (1.20
    )Weighted average common shares
outstandingBasic and diluted
    
    
    49,464
    
    
    
    49,572
    
    
    
    49,698
    
    
    
    50,119
    
    
    
    49,712
 Fourth Quarter Items:
  F-24




---



##### Table of Contents



MARTHA STEWART LIVING OMNIMEDIA, INC.
 
 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
 (IN THOUSANDS)
 ADDITIONSBalance
    
    CHARGED TOBEGINNING OF
    
    COSTS AND
    
    
    
    
    
    BALANCE, ENDDESCRIPTION
    
    YEAR
    
    EXPENSES
    
    DEDUCTIONS
    
    OF YEARAllowance for doubtful accounts:Year ended December 31,2005
    
    $
    944
    
    
    $
    376
    
    
    $
    99
    
    
    $
    1,2212004
    
    
    1,126
    
    
    
    383
    
    
    
    565
    
    
    
    9442003
    
    
    2,454
    
    
    
    (523
    )
    
    
    805
    
    
    
    1,126Reserve for audience underdelivery:Year ended December 31,2005
    
    $
    326
    
    
    $
    1,135
    
    
    $
    376
    
    
    $
    1,0852004
    
    
    529
    
    
    
    (93
    )
    
    
    110
    
    
    
    3262003
    
    
    1,275
    
    
    
    (577
    )
    
    
    169
    
    
    
    529Reserve for obsolete and excess inventory:Year ended December 31,2005
    
    $
    286
    
    
    $
    
    
    
    $
    286
    
    
    $
    2004
    
    
    1,926
    
    
    
    (1,640
    )
    
    
    
    
    
    
    2862003
    
    
    5,094
    
    
    
    1,291
    
    
    
    4,459
    
    
    
    1,926Reserve for product returns:Year ended December 31,2005
    
    $
    253
    
    
    $
    
    
    
    $
    253
    
    
    $
    2004
    
    
    256
    
    
    
    2,334
    
    
    
    2,337
    
    
    
    2532003
    
    
    469
    
    
    
    1,973
    
    
    
    2,186
    
    
    
    256
 F-25