Updated from 8:07 a.m. EDT

Martha Stewart Living Omnimedia

(MSO)

swung to a $19 million loss in the second quarter, and the company forecast another big loss in the third quarter as it tries to spend its way out of the hole created by its founder's legal entanglements.

The New York-based company lost $19.3 million, or 39 cents a share, in the three months to June 30, compared with earnings of $931,000, or 2 cents a share, last year. Revenue slid 33% from a year ago to $44 million, reflecting a 40% decline in publishing revenue to $23.7 million.

Television revenue fell by over half to $3.1 million and merchandising sales dropped to $10.9 million from $11.8 million, hurt in part by

Kmart

(KMRT)

store closures in early 2003. The discount retailer sells a line of Martha Stewart Living home goods, of which Martha Stewart Living receives an annual royalty payment.

Two analysts surveyed by Thomson First Call were expecting a second-quarter loss of 33 cents a share on revenue of $45.8 million.

"Our second-quarter results, while reflecting losses due to the negative effects of Martha Stewart's personal legal situation primarily on the company's advertising performance, were nevertheless in line with our expectations and previous guidance," said Chief Executive Sharon L. Patrick in a statement. "Given the recent developments in Martha Stewart's legal situation, we are moving ahead with a substantial amount of the uncertainty behind us."

Martha Stewart Living forecast a loss of 50 cents a share in the third quarter, wider than the 33-cent Thomson First Call mean. The company said its expected fourth-quarter loss would narrow sharply from the third "due to the significant amount of revenue to be recognized by our merchandising segment as a result of certain minimum royalty guarantees."

The company also said it would shut its direct catalog unit, called Living, by the end of 2004 and announced that its

Everyday Food

television show would be carried on PBS. In the latest quarter, net income in the company's direct catalog unit fell to $6.4 million from $7.8 million in the year earlier due in part to falling circulation. Martha Stewart Living said it will continue to operate the floral business of the catalogue, marthasflowers, where it said sales have risen.

The company said the direct catalog unit will now focus "how-to" content through the company's Web site and help drive subscription magazine orders. It will also explore licensing and other alternative distribution opportunities through the company's merchandising segment.

The new half-hour

Everyday Food

show will feature an ensemble of cooks and will run nationwide beginning in January. The company hopes the show enhances interest in its

Everyday Food

magazine.

Meanwhile, the Martha Stewart Living television show is currently on hiatus.

Shares of Martha Stewart Living closed at $11.40 Monday on the

New York Stock Exchange

.

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