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 Showcontinues 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 . . .