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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June
30, 2000
[ ] 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 0-25596
SHOP AT HOME, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1282758
(State of incorporation) (IRS EIN)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-05249
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 263-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0025 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and, (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Common Stock held by non-affiliates of the
registrant on August 29, 2000 was $103,362,275.
Number of shares of Common Stock outstanding as of August 29, 2000 was
31,266,787.
SHOP AT HOME, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
INDEX
PART I Page
Item 1. Business 4
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Shop At Home's Common Stock 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 63
PART III
Item 10. Directors and Executive Officers of the Company 64
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management 64
Item 13. Certain Relationships and Related Transactions 64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 65
SIGNATURES 72
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Shop At Home, Inc. (the "Company" or "Shop At Home") based
these forward-looking statements largely on its current expectations and
projections about future events and financial trends affecting the financial
condition of its business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about Shop At Home, including,
among other things:
o general economic and business conditions, both nationally and in the
Company's markets;
o the Company's expectations and estimates concerning future financial
performance and financing plans;
o anticipated trends in the Company's business;
o existing and future regulations affecting the Company's business;
o the Company's successful implementation of its business strategy;
o fluctuations in the Company's operating results;
o technological changes in the television and Internet industries;
o restrictions imposed by the terms of the Company's indebtedness and
the issuance of the Series B Convertible Preferred Stock;
o the Company's ability to manage its rapid growth and related expenses;
o significant competition in the sale of consumer products through
electronic media;
o the Company's dependence on exclusive arrangements with vendors;
o the Company's ability to achieve broad recognition of its brand names;
o continued employment of key personnel and the ability to hire
qualified personnel; and
o legal uncertainties and possible security breaches associated with the
Internet.
In addition, in this report, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Shop At Home, its business or management, are
intended to identify forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report. Because of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
ITEM 1. BUSINESS
Company Overview
The Company sells specialty consumer products, primarily collectibles,
through interactive electronic media including broadcast, cable and satellite
television and, increasingly, the Internet. The Company offers a variety of
products such as sports cards and memorabilia, coins, currency and jewelry, many
of which it sells on an exclusive basis. The Company produces programming in a
digital format at its facilities in Nashville, Tennessee. The programming is
transmitted by satellite to cable television systems, television broadcasting
stations and satellite dish receivers across the country. The Company launched
its website, collectibles.com, on November 12, 1999, and intends for
collectibles.com to be the premier website for the sale of collectible products.
The Company believes that the emergence of the Internet as a global
interactive communications medium provides it with an opportunity to leverage
its traditional broadcast assets and the Company's significant experience in
marketing specialty consumer products over an electronic medium. Since 1994, the
Company has increased its net revenues from $21.7 million to $200.1 million for
the year ended June 30, 2000, almost entirely through the use of traditional
television broadcasting. The Internet offers the Company the potential to
broaden its customer base, the ability to offer an expanded product line, the
capability to use computer technology to reduce the cost of processing and
fulfilling customer orders, and the opportunity to enhance the consumer shopping
experience, which the Company believes will result in additional repeat
customers and higher sales.
The Company owns and operates six UHF television stations, which are
located in the San Francisco, Boston, Houston, Cleveland, Raleigh and Bridgeport
markets. Five of these television stations are located in the top 15 television
markets in the United States, including the Bridgeport, Connecticut station
which covers a portion of the New York City designated market area (as defined
by Nielsen Media). As of June 30, 2000, the Company's television programming
reached, during all or part of the day, 60.1 million cable and direct broadcast
system (DBS) households, many of which received the programming on more than one
channel. Approximately 13.1 million households received the Company's
programming on essentially a full time basis (20 or more hours per day).
The Company's products are segmented into two categories: jewelry and
lifestyle products, and sports and collectible products. Jewelry and lifestyle
products include high-end jewelry and gemstones, health and beauty aids,
exercise equipment and electronics. Sports and collectible products include
sports and entertainment memorabilia, trading cards, coins and knives. The
Company believes that its product mix and marketing strategy are unique in the
electronic commerce industry because it features higher quality products which
are not widely available.
The Company is incorporated in Tennessee and its principal place of
business and executive offices are located at 5388 Hickory Hollow Parkway,
Antioch, Tennessee 37013. The Company's telephone number is (615) 263-8000 and
its Internet address is www.collectibles.com.
Industry Background
Television Programming. Electronic commerce using full-time television
programming has grown to a $4.5 billion industry. The television commerce
industry is dominated by two competitors: The Home Shopping Network and the QVC
Network, which had a combined market share of approximately 90% in calendar
1999. The Company estimates that its market share has grown from 2.5% in
calendar 1997 to 4.0% in 1999.
Television station ownership allows a broadcaster to utilize
the "must carry" rules of the Federal Communications Commission (FCC).
Generally, the "must carry" rules require most cable systems (with the exception
of some small systems) to set aside up to one-third of their channels to carry
the broadcast signals of local, full-power television stations, including those
broadcasting programming that allows consumers to shop from their homes. These
signals must be carried on a continuous, uninterrupted basis and must be placed
in the same numerical channel position as when broadcast over-the-air, or on a
mutually agreeable channel.
In addition, the FCC has adopted rules for implementing digital
(including high-definition) television service, or DTV service. The FCC has
allotted to eligible existing television stations a second channel on which to
provide DTV service. Television stations will be allowed to use these channels
according to their best business judgment. These uses include multiple standard
definition program channels, data transfer, subscription video, interactive
materials, and audio signals, while continuing to provide a free programming
service digitally that is at least comparable to today's analog service.
Internet Commerce. The Internet is an increasingly significant global
medium for communications, content and commerce. The increasing functionality,
accessibility and overall usage of the Internet have made it an attractive
commercial medium. The Internet is evolving into an alternative sales and
marketing channel to retail stores, mail-order catalogues and television
shopping. Online retailers can interact directly with customers, adjusting their
featured selections, editorial insights, shopping interfaces, pricing and visual
presentations to effectively market their products. The Company believes that
the minimal cost to originate programming on the Internet, the ability to reach
and serve a large and global group of customers electronically from a central
location, and the potential for personalized low-cost customer interaction all
provide additional economic benefits for online retailers.
Increases in consumer purchases on the Internet are expected to be a
significant factor in the growth of electronic commerce. The online shopping
experience offers convenience to the consumer. An online consumer's ability to
comparison shop is greatly enhanced by the ability to access multiple retailers
via the Internet. Online shopping also offers the consumer access to a greater
depth and variety of products than available through traditional retailers in
a "brick and mortar" environment. Products commonly sold on the Internet
include software, books, music, airline tickets and, increasingly, specialty
consumer products and larger household consumer goods. The Gartner Group
estimates that online consumer purchases will total $29.3 billion in calendar
2000.
Despite the low barriers to entry for Internet retailers, the Company
believes that it has three significant advantages: (1) its capacity, at minimal
incremental cost, to direct traffic to its website utilizing promotion on Shop
At Home's television network; (2) its ability to sell products using a video
presentation, which will become even more important as web users are
increasingly connected via broadband and as a result wish to receive television
quality video on the Internet; (3) and its exclusive relationships with selected
collectibles vendors.
Specialty Consumer and Collectible Products. The sale of specialty
consumer products, and the collectibles industry in particular, is a large and
growing segment of the retail industry. Based upon a recent survey, by Unity
Marketing, the Company believes that the market for primary collectibles in the
United States is at least $80 billion.
The market for collectibles includes a broad range of products which
share in common a group of consumers interested in acquiring products as
collectors' items. Collectors purchase collectibles for a variety of reasons,
including nostalgia, hobby or investment. Collectibles have traditionally been
sold through specialty retailers, each of whom generally sells one category, or
a limited number of categories, of collectible products. As a result, the market
for collectible products, while large, is highly fragmented with no dominant
industry retailers.
The Company believes that traditional "brick and mortar" retailers face
a number of challenges in providing a satisfying shopping experience for
collectible products, including inventory restrictions due to physical space,
difficulties in blending merchandising strategies, a tendency to stock only high
volume inventory, in addition to building and personnel costs.
Increasingly, collectors are turning to the Internet as a source of
collectible products and information regarding collectibles.
Convergence. The Company's website, collectibles.com, has proven to be
successful since its launch in November of 1999. Revenue from the site has grown
continually reaching a monthly high in June 2000 of $1.6 million (net of
returns). This revenue growth was achieved even though Shop At Home has spent
minimally on outside advertising or customer acquisition costs.
By converging its two platforms, the Company has leveraged the use of
the television network to drive new customers to the more efficient Internet
channel. Customers are now able to view all of the products offered by Shop At
Home at their own leisure without having to rely on the network schedule. This
allows for a more personal shopping experience and the opportunity for those who
can only access Shop At Home part-time, or not at all, to see all of its quality
products 24 hours a day.
The first phase of collectibles.com was to provide a multi-media
platform for the display of the Company's product catalog. Shop At Home is
currently working on the second phase which will create a much richer and more
personal shopping experience. Phase two will provide customers a more network
centric web site with a focus on the convergence of the two platforms. This will
include an opportunity for customers to view scheduled product offerings for
current and future shows. The multi-media platform will feature both show and
product video clips and will offer customers the opportunity to further research
product descriptions and to discover similar items that may be of interest to
them.
By building strong affiliate programs and also by effectively using the
advertising opportunity provided by the Company's television network,
collectibles.com has steadily increased customer traffic. The Company is now
concentrating on increasing the conversion rate of visitors into customers. A
new design plan will enhance the customer's buying experience by improving the
navigational structure of the site. New features include true community pages,
more effective personalization for a customized shopping experience, a more
robust keyword and brand search engine, home pages for network shows, combined
with recent enhancements such as personalized branded e-mail, electronic coupons
and wish lists. The Company believes that these features will provide a rich and
rewarding shopping experience for site visitors and an opportunity for its
exclusive vendors to showcase more products.
Business Strategy
Operating results for the year, and particularly the quarter, ended
June 30, 2000 were significantly below the Company's expectations. As a result,
the Company has subsequently made high-level management changes as part of a
comprehensive turnaround plan. The major elements of the turnaround effort
include revenue improvement as well as cost reduction initiatives, all of which
are being implemented either immediately or, at the latest, by the end of the
current fiscal year.
Cost Reduction Improvements
Headcount reduction. The Company has reduced its number of employees by
more than 15% from its peak in May 2000, eliminating 90 full-time and 50
part-time positions, resulting in significant current savings. These reductions
have been achieved in several ways: by converging the sales and merchandising
staffs of the television network and collectibles.com; by improving information
flow and reaping the benefits of the Company's enterprise wide Oracle computer
system; and by reviewing all employment positions for efficiency and profit
contribution. The convergence of collectibles.com with the television network
eliminated several high level positions, including that of the network's Chief
Operating Officer. Annualized employee compensation savings from the convergence
are estimated at $1 million. Additional compensation savings are being realized
from improving systems and tightening controls on the creation of new positions.
Elimination of unprofitable distribution. The Company is aggressively
evaluating all of its broadcast and cable carriage agreements to ensure that
each is making a positive contribution to profitability. Since June 30, 2000,
the Company has canceled distribution agreements covering over 300,000 full-time
equivalent households. The Company intends to continue to cancel or renegotiate
carriage agreements until virtually all of the homes it reaches are profitable.
The Company will continue to add new homes not previously reached but with
strict cost criteria. While the Company expects its overall distribution to grow
in fiscal 2000, as it has consistently over the past several years, management
expects such growth to be relatively moderate in order to achieve the goals of a
reduction in the average cost per home and in distribution costs as a percentage
of revenues.
Reduction of Shipping Costs. During fiscal 2000, the Company utilized
its vendors to drop ship approximately 75% of purchases. The Company paid the
vendors a handling fee for each of these shipments, either separately invoiced
or as part of a higher product cost. To reduce those handling fees and to
eliminate internal costs for those packages (primarily jewelry and electronics)
which the Company ships itself, management will begin the implementation of a
centralized fulfillment system outsourced to a large third party provider of
such services. The Company believes that by centralizing its shipping with a
proven and dedicated fulfillment company, it can accrue cost savings while
actually improving delivery time and customer service. Additionally, based on
its growing volume, the Company has negotiated higher discounts with its major
shipping carrier. The Company estimates that savings from these shipping
initiatives will total at least $1 million annually.
Renegotiation of Major Contracts. The Company is implementing a
standard merchandise vendor contract which will generally improve payment terms
and product quality. For non-merchandise vendors, the Company is reviewing all
material contracts and commitments to determine whether they can be
renegotiated, canceled or replaced with more cost efficient alternatives. This
review has already resulted in the elimination of $500 thousand from projected
fiscal 2001 operating costs.
Revenue Improvement Initiatives
Reduction of Charge-Backs and Returns. During the second half of fiscal
2000, the Company became lax in the enforcement of its 30 day cutoff for return
of merchandise by its customers. The laxness was caused initially by the normal
conversion problems related to the Company's new order entry and customer
service systems (part of the enterprise wide Oracle installation), and because
management gave customers the benefit of the doubt regarding alleged billing or
shipping errors. This laxness was continued by merchandising management,
however, even after the systems' problems were corrected. In July, with the
management personnel changes discussed above, the Company aggressively
reinstituted its 30 day return policy. In addition, the Company has identified
statistically valid correlations between higher return rates and certain product
categories, price points and payment terms, and is adjusting its merchandising
strategy accordingly. "Charge-backs" are credit card payments from the Company's
customers which are subsequently credited back to the customer, primarily due to
fraudulent usage or theft, thus reducing revenues with no offsetting return of
the sold merchandise. Charge backs, similar to returns, increased significantly
during the second half of the fiscal year due to the system conversion, which
gave fraudulent customers temporary opportunities that have subsequently been
stopped. Also, the Company believes that credit card fraud in general is
increasing for all electronic retailers, and, therefore, has invested in
specific state-of-the-art fraud prevention software and databases, and has
established a separate fraud detection department reporting to the Vice
President of Finance. These efforts are yielding immediate results.
Returning To Destination Programming. During the later part of fiscal
2000, the Company became less consistent with regard to the products presented
on air during a given part of the day. The television network's programming
became less reliable for regular customers seeking sports memorabilia, jewelry,
electronics and other popular products which do not necessarily attract the same
audience. Too much experimentation resulted in breaking viewers' loyal habits.
The Company has now returned to predictable scheduling by daypart. To the extent
that the Company does vary product categories in a given hour, the Company
intends to substitute products which have a similar gender and lifestyle appeal.
For example, the Company may substitute a limited amount of health and beauty
products for jewelry or collectible knives for sports memorabilia.
Lowering Pricepoints. The Company's average pricepoint in fiscal 2000
was $202, believed to be three to four times the average for QVC and HSN. In
past years, the Company has been constrained in order taking capacity, with a
limited number of sales operators, thus encouraging the sale of fewer items at
higher prices. Now, however, a greater number of operators have been hired and
trained on improved order-taking software. In addition, the Company has
installed a new interactive voice response system to automatically take orders
from repeat customers. The Company also has access to an outside overflow sales
center. Customers with access to the Internet can bypass the sales operators and
order directly from collectibles.com. The Company will still offer certain
high-priced and one-of-a-kind items, but primarily on the website, without using
otherwise valuable television airtime. With more order processing capacity, the
Company plans to selectively reduce price points while maintaining its unique
position as a high quality collectible alternative to QVC and HSN.
Providing Customer Financing. The Company plans to launch a private
label credit card program, funded by a financial institution, for its customers'
exclusive use to purchase products from the television network and
collectibles.com. The card will be made available in the second quarter ending
December 31, 2000 as part of the Company's holiday marketing strategy. The
features of the card will include no annual fee and various attractive deferred
payment options which the Company believes will facilitate higher sales with
credit risk assumed by the funding financial institution.
Creating A Significant Database Marketing Revenue Stream. In past
years, the Company has not fully utilized its two million name customer database
to generate incremental revenue through telephone, mail and e-mail
solicitations. With the recent hiring of an experienced Vice President of
Database Marketing (a newly created position), the Company plans to selectively
target its customers using coupons, contests, special events, welcome kits and
reactivation incentives in order to generate sales over and above telephone
call-in and online transactions. In addition, the Company will monetize the
value of its database through partners who can utilize the customer lists to
offer products of proven interest.
Recent Developments
Channel 60-69 Auction
In the 1997 Balanced Budget Act, Congress directed the FCC to
reallocate the 746-806 MHz band of spectrum for both public safety and
commercial use. The FCC anticipates that this spectrum will be used for next
generation, or 3G, wireless services. This band currently is being used by
analog broadcast television stations operating on channels 60 through 69. The
spectrum is occupied by more than 100 analog broadcast television stations
("incumbent stations") throughout the country, including the Company's stations
located in the Houston, Boston and Cleveland markets.
Under the FCC's rules, these incumbent stations are permitted to
continue analog operations on Channels 60 through 69 until at least December 31,
2006. Auction of the spectrum for wireless services is scheduled for March 6,
2001. Because broadcasters and wireless carriers cannot use the spectrum
simultaneously, auction winners wishing to initiate commercial wireless services
before December, 2006, may desire to relocate the incumbent broadcast stations,
including the Company's incumbent stations.
The FCC has initiated a proceeding to investigate several 746-806 MHz
band-clearing proposals. While the Company is unable to predict the outcome of
this proceeding, the FCC also has concluded that there is a presumption in favor
of certain band-clearing agreements between broadcasters and auction winners.
Accordingly, assuming the auction is completed, there is a possibility that
either through an FCC-endorsed band-clearing plan, or through private
negotiations, opportunities may exist for broadcast station owners located in
the 746-806 MHz band (i.e. on channels 60-69), including the Company, to reach
agreements, including possible compensation with auction winners to facilitate
relocation of certain stations. If such an opportunity exists, the Company may
be willing, for a negotiated price to cover its investment in these stations and
to recoup expected losses from potential over-the-air viewership losses
occurring from vacating the analog spectrum early, to relocate any or all the
stations listed above to its digital allocation.
Distribution of Programming
The Company distributes its programming to viewers by or through:
o the Company's owned and operated television stations;
o television stations with which the Company has entered into agreements
to purchase broadcast time;
o the carriage of those television broadcasts by cable television
systems under the "must carry" or retransmission consent
provisions of federal law;
o direct carriage on cable television systems under agreements with
cable system operators;
o direct-to-home satellite programming services;
o the direct reception of the Company's satellite transmission by
individuals who own "backyard" satellite dishes; and
o the Company's website, collectibles.com.
As of June 30, 2000, the Company's programming was viewable on
television during all or part of each day by approximately 60.1 million cable
households throughout North America, including DBS households. Of these
households, approximately 13.1 million households received the programming on
essentially a full-time basis (20 or more hours per day). The Company estimates
(based on a proprietary formula) that the 60.1 million cable households that
received the Company's programming for all or part of a day on June 30, 2000,
are the equivalent of approximately 24.8 million cable and DBS households
receiving such programming on a full-time basis. These numbers do not include
the number of persons receiving the Company's programming with "backyard"
satellite downlink equipment or from over-the-air transmission of its signal.
The following table sets forth certain information with respect to the Company's
programming distribution to television cable households at June 30, 2000:
Number of Hours of Programming Available to Households per Day
0 TO 3 3+ TO 6 6+ TO 9 9+ TO 12 OVER 12 TOTAL
------ ------- ------- -------- ------- -----
Number of Households (in millions) 7.3 24.3 9.0 3.8 15.7 60.1
Programming Origination. The Company originates its programming from
its studios and technical facilities in Nashville, Tennessee. The Company
transmits its programming to transponders leased or subleased by it on
satellites. The satellites retransmit the Company's signal to (a) broadcast
television stations located throughout the United States, (b) cable television
and DBS systems and (c) "backyard" satellite dish receivers.
The Company also originates programming on its website with video
streaming of its live television network.
Owned and Operated Stations. The following table sets forth certain
information regarding each of the broadcast stations owned by the Company:
Actual cable Households
DMA Households(1) Reached (2)
License (In Thousands) (In Thousands)
Date DMA Expiration Rank of Broadcast When
Call Sign Acquired Market Date DMA Television Cable Acquired June 30, 2000
WSAH 6/99 New York(3) 6/2007 1 6,875 5,070 680 765
KCNS 3/98 San Francisco 12/2006 5 2,423 1,747 1,229 1,427
WMFP 2/95 Boston 4/2007 6 2,211 1,767 750 1,753
KZJL 12/94(4) Houston 8/2006 11 1,712 985 3 843
WOAC 3/98 Cleveland 10/2005 15 1,479 1,058 205 963
WRAY 3/98 Raleigh 12/2004 29 858 536 331 382
(1) Total number of broadcast television households in the DMA in January 2000
according to Nielsen Media Research and total number of cable households in the
DMA in September 1999 according to Nielsen Media Research.
(2) The increase is due to the enforcement of the must carry rights of these
stations and, in some instances, is due to the installation of new broadcast
equipment.
(3) While WSAH, Bridgeport, Connecticut, is inside the New York DMA, the station
only covers a portion of the market.
(4) The Company acquired a 49% interest in KZJL in December 1994 and the
remaining 51% in September 1996. The station went on the air in June 1995 and
has always broadcast the Company's programming. The "When Acquired" cable
household number reflects the fact that the Company had only a nominal amount of
cable carriage when the station went on the air.
Affiliations. In 1993, the Company began an aggressive effort to
increase the distribution of its programming. Since that time, the Company has
been successful in significantly building a "network" for distribution of its
programming and in building relationships with television stations owned by
third parties, certain owners of multiple cable systems and with Echostar, a
leading DBS provider. The Company's programming is now viewed via broadcast or
cable affiliation in more than 150 television markets, including all of the
country's top fifty (50) DMAs.
The Company's affiliation agreements typically have a term of one year
and can be canceled upon 30 days notice by either party. The Company's
experience has been that most of the affiliation agreements are renewed beyond
their original terms. The time purchased under these agreements is usually
preemptible only under certain limited circumstances, including public interests
or breaking news programming, and the Company generally pays a fixed rate for
the hours its programming is actually carried.
Products and Customers
Products and Merchandise. The Company offers a variety of specialty
consumer products. Its products include sports collectibles and sports related
products, movie memorabilia and other signed and autographed merchandise,
electronic equipment, coins and currency, cutlery and knives, jewelry and
gemstones. A majority of these items are classified as collectible products.
The Company buys products from numerous vendors and believes that it
has excellent relationships with most of its vendors. Certain products sold by
the Company are available through multiple suppliers. The Company also acquires
unique products from a select group of vendors and believes that it will be able
to continue to identify sources of specialty products. The Company believes
offering unique products helps differentiate it from its competitors. Because of
the nature of the collectibles market, the Company attempts to sign agreements
with vendors in which it is the exclusive distributor of the vendors' products.
The Company continually monitors product sales and revises its product offerings
in an effort to maintain an attractive and profitable product mix. The Company
also is continuously evaluating new products and vendors to broaden its
merchandise selection.
During the year ended June 30, 2000, the Company had three vendors from
whom it purchased from each more than 10% of its total cost of goods sold. These
consisted of an electronics vendor, a coin vendor and a sports vendor which
accounted for approximately 15.3%, 14.9% and 11.1% of the Company's cost of
goods sold, respectively. The Company believes that it could find replacement
vendors for the products sold by any one of these vendors without a material
adverse effect on the Company.
The following table sets forth certain information about the types of
products sold by the Company during the years ended June 30, 2000, 1999 and
1998:
Type of Product Percentage of Net Revenues
2000 1999 1998
Sports Products 33.9 % 28.8 % 22.3 %
Electronics 23.1 16.6 11.5
Jewelry and Gemstones 17.9 11.4 12.9
Coins and Currency 16.4 12.7 11.8
Cutlery and Knives 4.4 6.5 13.4
Plush Toys 1.4 19.5 22.2
Health and Beauty Products 1.0 2.4 2.0
Other Items 1.9 2.1 3.9
Total 100.0 % 100.0 % 100.0 %
Programming and Presentation of Merchandise. The Company segments most
of its programming into product or theme categories. It has the studio and
broadcasting capability to produce multiple live shows simultaneously, and it
occasionally provides multiple broadcasts to differing viewer groups during peak
viewing times. The Company's technical facilities allow it to broadcast an
analog and digital signal to its main satellite transponder in the same
transmission signal. The Company plans to archive its digital programming and
replay the programming on its website so that visitors to the website can
download any portion of the video or audio programming they desire.
The Company's programs use a show host approach with the host conveying
information about the products and demonstrating their use. The viewer may
purchase any product the Company offers, subject to availability. The Company
seeks to differentiate itself from other televised shopping programmers by using
an informal, personal style of presentation and by offering unique, high-end
mail oriented products. The sale of coins, collectible sports-related items and
other limited availability products provides the Company's viewers with
alternatives to the products offered on other televised shopping programming.
The Company believes that continued use of such niche programming is important
to its future growth, especially the growth of the Internet site.
Returns of Products and Merchandise. The Company generally offers its
customers a full refund on merchandise returned within 30 days of the date of
purchase. For the year ended June 30, 2000, returns were 22.5% of total revenue,
compared to 18.0% for the year ended June 30, 1999 and 22.2% for the year ended
June 30, 1998. The Company is taking immediate measures to reduce returns (See
"Business Strategy" above).
Charge-Backs. The Company has experienced an increase in credit card
charge-backs from $1.0 million as of June 30, 1999 to $4.3 million as of June
30, 2000. The increase is primarily due to fraud. The Company is taking
immediate measures to reduce fraud (See "Business Strategy" above).
Shipping. The Company ships customer orders as promptly as possible
after taking the order, primarily by UPS or parcel post. The Company ships
either from its warehouse facility or through selected vendors with which it has
drop-ship agreements. The Company maintains its own customer service department
to address customer inquiries about ship dates, product, and billing
information. The Company intends to improve delivery times, packaging and other
aspects of its shipping operations through the utilization of a centralized
fulfillment operation beginning in the second quarter of fiscal 2001 (See
"Business Strategy" above).
Customer Relations. Customers can place orders with the Company 24
hours a day, seven days a week, over the Internet or via the Company's toll-free
number (800) 366-4010. The Company uses customer sales representatives and an
automated touch-tone ordering system to accept customer orders. A majority of
its customers pay for their purchases by credit card, and the Company also
accepts payment by money order, check, debit card and electronic funds transfer.
The Company continues to develop and implement an in-house training program
designed to improve the productivity, proficiency and product knowledge of its
customer service and sales center operators.
Mechanical, electronic and other items may be covered by manufacturer
warranties. The Company strives to continuously improve its customer service and
utilizes outside agencies to conduct objective comparisons with its competitors.
The Company periodically surveys and researches its customers to solicit ideas
for better products, programming, and service.
Collector's Edge. In March 1997, Collector's Edge was organized as one
of the Company's wholly-owned subsidiaries. Collector's Edge sells sports
trading cards, primarily football cards. Its principal assets are licenses from
National Football League Properties, Inc. and the National Football League
Players, Incorporated. Collector's Edge specializes in the production of these
cards using plastic rather than normal paper stock. Collector's Edge acquired
the assets of a business that previously held the NFL licensing agreements and
produced the sports trading cards for a period of four years. For the year ended
June 30, 2000, Collector's Edge had net revenues of approximately $9.7 million.
The licensing agreements with NFL Properties gives Collector's Edge the
right to use the logos and trademarks of NFL teams and certain players on its
trading cards. Both licenses expire in March 2001 and the Company expects these
licenses to be renewed in the ordinary course of business. Collector's Edge also
had a license with NFL Players giving it the right to use the likenesses of
certain other NFL players on its trading cards and is still paying the required
royalties under this license although it expired in February, 1999. The Company
believes this license will be renewed in the near future for like terms.
Seasonality. The Company's business is somewhat seasonal, with
its sales made in the last quarter of the calendar year normally being the
highest for the year.
Competition
Competition in Television Commerce. The television commerce industry is
highly competitive and is dominated by The Home Shopping Network and the QVC
Network. The Company's programming competes directly with The Home Shopping
Network, QVC Network and ValueVision in almost all of its markets. The Company's
competitors are well-established and have substantially greater financial,
distribution and marketing resources than the Company. They also reach a larger
percentage of U.S. television households. The Company is at a competitive
disadvantage in attracting viewers for a number of reasons, including the fact
that its programming is often not carried by cable systems on a full-time basis
and that it may have less desirable television channel positions on cable
systems. The Company also competes generally with traditional store and
catalogue retailers, many of whom also have substantially greater financial,
distribution and marketing resources. These competitors also may enter into
business combinations, joint ventures and strategic alliances with each other,
as well as with Internet retailers or websites which could further enhance their
resources.
Competition in Internet Retailing. Internet commerce is also highly
competitive. Many major retailers and marketers now sell their products on the
Internet. Despite a high failure rate, new retail websites are being launched
daily and may compete directly with collectibles.com in the future.
Employees
As of June 30, 2000, the Company employed approximately 673 persons of
which approximately 581 were full-time employees. It believes its relationship
with its employees is good. Presently, no collective bargaining agreements exist
between the Company and its employees.
Information Technology
Integrated "Enterprise Solution" Computer System. The Company has
implemented an Oracle enterprise wide system integrating customer management,
the Internet, and financial reporting. The system was implemented on Sun
Microsystems servers and EMC disk sub-systems. The system is scalable as the
Company grows. The new integrated system provides improved interfaces with the
Company's telephone center operations, its website, e-mail and vendors with
electronic data interchange capabilities. The Company believes that the
integrated system provides a platform for growth. The system also provides more
information to its customers, to its telephone operators and to management.
Customer Contact Center. The Company manages customer sales and service
through an Aspect Telecommunications Corporation telephone system. The telephone
system combined with the Oracle computer system to support automated ordering
through integrated voice response. The system also supports automated number
identification, skills based routing (to the most qualified operator) and
priority queuing for top customers. The Company is currently upgrading the
system to be more tightly integrated with the Oracle system. When complete, the
system will be able to provide the sales representatives with the purchase
history of its customers. The system is currently configured to handle increased
call volume. The Company also handles customer service contacts through Internet
chat sessions and e-mail.
Internet Architecture. The Company's web site, collectibles.com, is
designed around "best of breed" e-commerce computer solutions. The system is
totally integrated with the Sun Microsystems servers and EMC disk systems.
E-commerce software from BroadVision is used to provide rules based product
presentation (providing personalized product offerings for repeat customers).
The site is designed to support thousands of SKUs pulled directly from the
Company's product database and offers a live video stream of the Company's
television programming and show schedules. It also provides the customer with a
full 360-degree view of many of collectibles.com's products. Other key features
of the site include a persistent shopping cart which transfers from page to
page, e-mail product information to a friend, live chat, and free e-mail
accounts. The system is scalable to more than one million transactions per day.
The site is hosted at the Company's facilities in Nashville. The facility is
equipped with redundant DS3 communications delivered on a Sonnet ring. Redundant
servers, routers, and power generators support the site.
Broadcast Technology
Production. The Company's production facility in Nashville features
state-of-the-art digital equipment. Utilizing "serial digital" video processing
allows the Company to produce programs with minimal signal degradation in any
part of the production process, and to provide the viewer with optimum signal
quality. Computer video server technology and the MPEG-2 format are used
extensively to allow instant recall of product shots or promotional spots to be
used on the air. Panasonic's DVCPRO videotape format is used for digital content
recording and playback. Video promotions are produced in editing suites
utilizing computer equipment and the Motion-JPEG video format. The Company has
also improved operational standards through increased training, quality control,
and optimized flow of information among the different portions of the production
process.
Distribution. The Company currently has four satellite distribution
channels: three analog, and one digital. The uplink signals are transmitted
through state-of-the-art 9.3 meter dishes at the Company's Nashville facilities.
A portion of the Company's affiliates, including all six of its owned and
operated stations, have begun using the digital MPEG-2 signal for an ultra-clear
picture. This signal can be redistributed from each location at very high
quality. This system is also a component necessary in the upcoming conversion to
the DTV television format. The Company can also use this technology to
"multiplex," or send different programming to different affiliates
simultaneously. The Company's primary satellite feed has recently been upgraded
to PanAmSat's newest satellite, G-11, which was activated in July 2000. The
satellite features the latest digital video, audio, and data transmission
technology.
ITEM 2. PROPERTIES
The Company's technical facilities, studios and executive offices are
located in Nashville, Tennessee in a 74,000 square foot building it owns and
9,200 square feet of leased space in an adjacent facility. The adjacent facility
is owned by an entity controlled by J.D. Clinton, who is the Chairman of the
Board and a principal shareholder of the Company. The terms of the lease are
comparable to those available in similar facilities in the area where they are
located.
Each of the Company's owned television stations has studio, office and
transmitter facilities, all of which are leased. Collector's Edge leases a
10,000 square foot facility in Denver, Colorado, which it uses for offices,
production and warehousing.
ITEM 3. LEGAL PROCEEDINGS
The Company has been advised that it will be named in a lawsuit filed
in New York State alleging that the Company engaged in deceptive advertising
concerning the sale of Pokemon trading cards. The plaintiff also will ask that
it be granted class action status on behalf of all other New York residents. The
Company has just learned of this complaint and has not fully reviewed or
assessed its merits and at this time strenuously objects to the allegations and
intends to fully defend this action. The Company believes that because it has
advertising injury insurance and indemnifications from its vendors that this
lawsuit is not likely to have a material adverse effect on the Company.
The Company and Collector's Edge were named as defendants in a lawsuit
filed in Federal District Court, Central District of California, in March 2000
by Telepresence Technologies, LLC. The plaintiff alleges that certain sports
cards produced and sold by Collector's Edge that incorporate a piece of sports
memorabilia infringe its patent for such cards. The plaintiff asks for
injunctive relief, compensatory monetary damages, triple damages because of the
alleged willful infringement and attorney fees. The Company and Collector's Edge
have filed their answers to this complaint and plan to vigorously defend this
action.
A lawsuit was filed against the Company in January 2000 by a former
vendor, Classic Collectibles, LLC, in state Chancery Court in Chattanooga,
Tennessee. The vendor alleges that the Company improperly canceled some orders
and that certain amounts it paid to the Company under a written agreement should
be refunded because the Company did not provide that amount of broadcast network
time in 1999 that the vendor alleges was orally promised in connection with the
written agreement. The vendor sued for both compensatory damages and lost
profits. The Company has filed its answer and counterclaim and the parties are
actively engaged in settlement discussions.
On May 20, 1999, McDonald's Corporation filed a lawsuit against the
Company and one of the Company's vendors in the Federal District Court in
Nashville, Tennessee. McDonald's alleged violations of the federal Lanham Act
and state law, and sought injunctive relief, monetary damages and punitive
damages arising from the Company's sale of toys referred to as McDonald's Teenie
Beanie Babies. On May 28, 1999, the Court held a hearing on McDonald's request
that the Company be enjoined from shipping toys and denied McDonald's request.
McDonald's continued to pursue its lawsuit and the Company filed an answer and a
motion for summary judgment. On February 3, 2000, the federal court granted Shop
At Home's motion for summary judgment and dismissed McDonald's claims against
Shop At Home. The Court, however, did not issue a final order pending the
resolution of the case against another defendant and ordered all the parties to
participate in a mediation that is ongoing.
In May 1997, Signature Financial/Marketing, Inc. ("Signature") filed a
complaint for declaratory judgment in the U.S. District Court for the Northern
District of Illinois seeking a declaratory judgment of non-violation of the
Lanham Act (the federal law governing trademarks) with respect to Signature's
use of the designation "SHOP AT HOME" in connection with the promotion and sale
of goods. The parties reached a settlement of this matter in August 2000, in
which Signature agreed to transition out of using "SHOP AT HOME" within one year
and agreed thereafter to use a different name. The Company agreed to publicly
refer to itself as the "Shop At Home Network" during this transition period and
thereafter is free to use "SHOP AT HOME."
The Company is subject to other routine litigation arising out of the
normal and ordinary operation of its business. The Company believes that any
such litigation is likely covered by insurance or by its Vendors'
indemnifications so that such litigation is not likely to have a material
adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR SHOP AT HOME'S COMMON STOCK
The Company's common stock was quoted in the Nasdaq SmallCap Market
from June 1995 until February 9, 1999. Since February 9, 1999, the Company's
common stock has been quoted in the Nasdaq National Market under the symbol
"SATH".
The range of market prices for the Company's common stock during the
two most recent fiscal years, as reported by Nasdaq's SmallCap Market and
National Market, is shown below. Through the second quarter of fiscal 1999, the
range shown is the high and low bid prices as reported by the SmallCap Market.
For the third quarter of fiscal 1999, the high and low prices were determined by
comparing the high and low bid prices in the SmallCap Market for the period of
January 1, 1999 through February 9, 1999 with the high and low closing prices on
the National Market for the period of February 10, 1999 through March 31, 1999
and recording the highest and lowest of those prices. For the fourth quarter of
fiscal 1999 and all quarters of fiscal 2000, the prices shown are the high and
low closing prices on the National Market.
HIGH LOW
FISCAL 1999
First Quarter $ 3.81 $ 1.88
Second Quarter 10.69 1.88
Third Quarter 30.00 7.12
Fourth Quarter 14.88 7.62
FISCAL 2000
First Quarter $10.25 $ 6.94
Second Quarter 13.88 9.44
Third Quarter 14.00 8.17
Fourth Quarter 8.00 4.19
As of June 30, 2000, there were approximately 596 owners of record of
the common stock.
The Company has not declared or paid any dividends on its common stock
in the last two fiscal years and does not anticipate declaring or paying any
dividends in the foreseeable future. Any future determination as to the
declaration and payment of dividends will be made at the discretion of the
Company's Board of Directors and will depend on then existing conditions,
including its financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and such other factors as
the Board of Directors deems relevant. The Company's ability to pay cash
dividends is substantially restricted under the terms of the Indenture entered
into in March 1998 in connection with its issuance of the 11% Senior Secured
Notes due 2005, as well as under the terms of the loan agreement entered into in
connection with the $20 million senior credit facility and the terms of
agreements entered into in connection with the issuance of the Series B
Convertible Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Company's consolidated financial statements
and notes thereto included elsewhere herein. The statements of operations and
balance sheet data set forth below as of and for each of the five years in the
period ended June 30, 2000 are derived from the audited financial statements of
the Company.
For factors affecting the comparability of Selected Financial Data, refer to
Item 7.
Years Ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data and ratios)
Statements of Operations Data:
Net revenues $ 200,062 $ 151,966 $ 100,757 $ 68,998 $40,675
Cost of goods sold (excluding other 130,392 91,816 58,862 40,626 24,516
Other operating expenses 82,258 56,430 38,069 25,882 16,930
Non-recurring move related expenses(1) - 986 - - -
Other expense (income) 156 65 (900) - (43)
Interest income 749 643 564 66 14
Interest expense 9,688 8,964 2,850 1,080 795
-------------------------------------------------------------------------------
Income (loss) before income taxes (21,683) (5,652) 2,440 1,476 (1,509)
Income tax expense (benefit) (8,190) (2,348) 927 (80) (104)
-------------------------------------------------------------------------------
Net income (loss) (13,493) $ (3,304) $ 1,513 $ 1,556 (1,405)
===============================================================================
Weighted average common
shares-basic 30,490 23,771 14,511 10,651 10,284
Weighted average common
shares-dilutive 30,490 23,771 17,496 14,268 10,284
Basic earnings (loss) per share (2) $ (0.44) $ (0.14) $ 0.10 $ 0.14 $ (0.14)
Diluted earnings (loss) per share (2) $ (0.44) $ (0.14) $ 0.09 $ 0.12 $ (0.14)
Cash dividends per share of
common stock - - - - -
Balance sheet data
Working capital $ 21,864 $ (17,646) $ 11,568 $ (4,642) $ (3,707)
Total assets 227,294 170,697 143,770 34,410 20,287
Current liabilities 45,468 48,364 19,212 18,078 8,981
Long-term debt and capital leases, less
current protion 84,336 75,893 75,254 11,134 7,805
Redeemable preferred stock 12,504 834 1,393 1,393 1,393
Stockholders' equity 84,986 45,297 44,360 3,804 2,108
(1) these expenses relate mainly to employee relocation, rental of temporary
facilities, the grand opening of Shop At Home's Nashville headquarters and
employee bonuses associated with the relocation.
(2) for details of the calculation of basic and dilutive earnings per
share, see Note 12 to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" and the Company's consolidated financial
statements and related notes included elsewhere herein.
General
The Company, founded in 1986, sells specialty consumer products,
primarily collectibles, through interactive electronic media, including
broadcast, cable and satellite television and, increasingly, the Internet. It
offers a variety of products such as sports cards and memorabilia, coins,
currency and jewelry, many of which it sells on an exclusive basis.
The Company receives revenues primarily from the sale of merchandise
marketed through its programming carried by:
o television stations from which the Company has purchased broadcast
time;
o the Company's television stations, with its programming being
carried on cable television systems under the "must carry" or the
retransmission consent provisions of federal law;
o direct carriage on cable television systems under agreements with
cable system operators;
o direct broadcast satellite services (DBS), such as Echostar;
o direct reception of the Company's transmission by individuals who own
"backyard" satellite downlink equipment; and
o the Company's website, collectibles.com.
Approximately 92.8% of the Company's revenues are derived from the sale
of products on the television network. The Company's products include sports
collectibles and sports related products, movie memorabilia and other signed and
autographed merchandise, electronic equipment, coins and currency, cutlery and
knives, jewelry and gemstones. Beginning in 1997, the Company has also received
revenues from sales by its subsidiary, Collector's Edge. This subsidiary sells
sports trading cards under licenses from National Football League Properties,
Inc. and National Football League Players, Incorporated. The Company launched
its website, collectibles.com, on November 12, 1999. Since its launch,
collectibles.com has had $4.7 million dollars in net sales or 2.3% of the
Company's total revenue.
As of June 30, 2000, the Company's programming was viewable during all
or part of each day by approximately 60.1 million cable and DBS
households, of which approximately 13.1 million households received the
programming on essentially a full-time basis (20 or more hours per day)
and the remaining 47.0 million households received it on a part-time
basis. To measure performance in a manner that reflects both the growth
of the Company and the nature of its access to part-time households,
the Company uses a household full-time equivalent method to measure the
reach of its programming which accounts for both the quantity and
quality of time available to it. To derive this full-time equivalent
household base ("FTE Household"), the Company has developed a
methodology to assign a relative value of each hour of the day to its
overall sales, which is based on sales in markets where the programming
is carried on a full-time basis. Each hour of the day has a value based
on historical sales. FTE Households have grown from 8.3, 15.3 and 18.5
million at June 30, 1997, 1998, and 1999 respectively, to 24.8 million
at June 30, 2000. The Company believes that the change in the number of
FTE Households provides a consistent measure of its growth and applies
this methodology to all affiliates. Accordingly, the Company uses the
revenue per average FTE Household as a measure of pricing new affiliate
contracts and estimating their anticipated revenue performance.
Principal elements in the Company's cost structure are (a) cost of
goods sold, (b) transponder and affiliate costs and (c) salaries and wages. The
Company's cost of goods sold is a direct result of both the product mix and its
ability to negotiate favorable prices from its vendors. Transponder and
affiliate costs include expenses related to carriage under affiliation and
transponder agreements. Salaries and wages have increased with the Company's
increased revenues and the addition of staff to support its growth. The Company
is taking immediate measures to reduce each of its principal cost categories
(See "Business Strategy" above).
Overview of Results of Operations
The following table sets forth for the periods indicated the percentage
relationship to net revenues of certain items included in the Company's
Statements of Operations:
Years Ended June 30,
2000 1999 1998
---- ---- ----
Net revenues 100.0 % 100.0 % 100.0 %
Cost of goods sold (excluding items listed below) 65.2 60.4 58.4
Salaries and wages 8.0 7.0 7.4
Transponder and affiliate charges 16.6 17.3 17.7
Other general operating and administrative expenses 12.0 9.7 10.6
Depreciation and amortization 4.5 3.2 2.2
Non-recurring move-related expenses - 0.6 -
Interest income (0.4) (0.4) (0.6)
Interest expense 4.8 5.9 2.8
Other (income) expense (0.1) - 0.9
Income (loss) before income taxes (10.8) (3.7) 2.4
Income tax expense (benefit) (4.1) (1.5) 0.9
Net income (loss) (6.7) (2.2) 1.5
Results of Operations
Fiscal Year 2000 vs. Fiscal Year 1999
Net Revenues. Shop At Home's net revenues for the year ended June 30,
2000 were $200.1 million, an increase of 31.7% over net revenues of $151.9
million for the year ended June 30, 1999. The core business of sales through the
television network accounted for 92.8% of net revenues derived from an average
of 22.1 million FTE Households in the year ended June 30, 2000 compared to an
average of 16.6 million FTE Households for the year ended June 30, 1999. During
the year ended June 30, 2000, Shop At Home generated revenues per FTE Household
of approximately $9.05 compared with approximately $9.16 per FTE Household for
the year ended June 30, 1999. The remaining 7.2% of net revenues resulted from
approximately $9.7 million in net revenues from Collector's Edge and
approximately $4.7 million net revenues from collectibles.com.
Also included in net revenues was infomercial income generated by Shop
At Home's owned and operated television stations of $1.2 million compared to
approximately $1.9 million in the year ended June 30, 1999. This represents a
36.9% decrease, primarily due to Shop At Home's decision to concentrate more
fully on its core business sales.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and inbound freight. For the year ended June 30, 2000, the cost of
goods sold as a percentage of net revenues increased to 65.2% from 60.4% for the
year ended June 30, 1999. This increase is mainly due to a greater percentage of
sales of lower-margin product categories, electronics and coins, and the decline
of the plush toy market (a high margin item) which was 19.5% of sales in 1999 vs
1.4% in 2000. Margins were also negatively impacted by an increase in credit
card fraud.
Salaries and Wages. Salaries and wages for the year ended June 30, 2000
were $16.1 million, an increase of 51.2% compared to the year ended June 30,
1999. Salaries and wages as a percent of revenues increased to 8.0% from 7.0%.
This increase was associated with the start-up of collectibles.com which
represented approximately 50 new positions and the full year impact of increased
staffing needs within Customer Sales and Customer Service. However, the Company
has recently reduced total staffing through the convergence of the network and
collectibles.com (See "Business Strategy" above).
Transponder and Affiliate. Transponder and affiliate costs for the year
ended June 30, 2000 were $33.3 million, an increase of $7.0 million or 26.6%
compared to the year ended June 30, 1999. The affiliate component of this
expense category was 15.6% of revenue in 2000 versus 16.1% in 1999. Affiliate
costs, therefore, rose less than sales as 6.3 million FTE's were added during
the fiscal year. Nevertheless, the Company is aggressively seeking to reduce
affiliate costs relative to revenues (See "Business Strategy" above).
Other General Operating and Administrative Expenses. Other general
operating and administrative expenses for the year ended June 30, 2000 were
$23.9 million, an increase of $9.3 million or 63.7% compared to the year ended
June 30, 1999. As a percentage of revenues, this constituted an increase to
12.0% in 2000 from 9.7% in 1999. This increase as a percentage of revenue is
attributable to the start-up costs associated with collectibles.com.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 2000 was $8.9 million, an increase of $4.0 million or 81.0%
compared to the year ended June 30, 1999. The primary components of this
increase were the full year of amortization expense of the Bridgeport,
Connecticut, station's FCC license acquired in June 1999, depreciation of
Company's headquarters facilities acquired in September 1998 and depreciation of
the enterprise wide Oracle information system which became functional in October
1999.
Move-Related Expenses. Move-related expenses were approximately $1.0
million in the year ended June 30, 1999 and there was no comparable expense in
the current year. These expenses primarily relate to employee relocation, rental
of temporary facilities, the grand opening of Shop At Home's Nashville
headquarters and employee bonuses associated with the relocation.
Interest Expense. Interest expense for the year ended June 30, 2000 was
$9.7 million, an increase of $0.7 million over the year ended June 30, 1999. The
increase was due primarily to the interest on the Company's $20.0 million line
of credit and interest on capital leases.
Interest Income. Interest income, from cash and cash equivalents,
for the year ended June 30, 2000 was $0.7 million compared to $0.6 million in
1999. Average cash balances were similar year to year.
Income Tax (Benefit) Expense. Income tax (benefit) for the year
ended June 30, 2000 was provided at an effective tax rate of 38%.
Fiscal Year 1999 vs. Fiscal Year 1998
Net Revenues. Shop At Home's net revenues for the year ended June 30,
1999 were $152.0 million, an increase of 50.8% over net revenues of $100.8
million for the year ended June 30, 1998. The core business of sales through the
television network media accounted for 93.7% of net revenues derived from an
average of 16.6 million FTE Households in the year ended June 30, 1999 compared
to an average of 11.1 million FTE Households for the year ended June 30, 1998.
During the year ended June 30, 1999, Shop At Home generated revenues per FTE
Household of approximately $9.16 compared with approximately $9.09 per FTE
Household for the year ended June 30, 1998. The increase is mainly attributable
to a greater contribution from the non-broadcast business. The remaining 6.3% of
net revenues resulted from approximately $9.6 million in net revenues from
Collector's Edge.
Also included in net revenues was infomercial income generated by Shop
At Home's owned and operated television stations, of $1.9 million compared to
approximately $1.4 million in the year ended June 30, 1998. This represents a
35.7% increase and is primarily due to Shop At Home's ownership of five stations
during most of 1999, and six by June 1999, compared to the prior year in which
it owned two stations for the first nine months and five stations for the last
three months of fiscal 1998. Shop At Home also sold approximately $0.3 million
of broadcast time to certain vendors during the year ended June 30, 1998, but
did not continue this practice in the year ended June 30, 1999.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and inbound freight. For the year ended June 30, 1999, the cost of
goods sold as a percentage of net revenues increased to 60.4% from 58.4% for the
year ended June 30, 1998. This increase is mainly due to a greater percentage of
sales of lower-margin product categories, electronics and coins, which
collectively represented approximately 29.4% of revenues for the year ended June
30, 1999 compared to 23.3% of revenues for the year ended June 30, 1998.
Salaries and Wages. Salaries and wages for the year ended June 30, 1999
were $10.6 million, an increase of 42.8% compared to the year ended June 30,
1998. Salaries and wages as a percent of revenues decreased to 7.0% from 7.4%
reflecting the increase in revenues without a corresponding increase in
salaries. In addition, during fiscal 1999, $0.9 million of salaries were
capitalized as a result of the company-wide installation of the Oracle system
and the development of the collectibles.com website.
Transponder and Affiliate. Transponder and affiliate costs for the year
ended June 30, 1999 were $26.3 million, an increase of $8.5 million or 48.0%
compared to the year ended June 30, 1998. The cable component of this expense
category was 16.1% in 1999 and 16.2% for 1998. The 1999 period reflects the
reduction of cable costs of KCNS, San Francisco, and WRAY, Raleigh, which were
acquired in March 1998 and therefore not included in the 1999 period. Overall,
the increase in cable costs outpaced the increase in revenues as a result of
approximately 1.9 million FTEs added in the quarter ended June 30, 1999, many of
which had not matured.
Other General Operating and Administrative Expenses. Other general
operating and administrative expenses for the year ended June 30, 1999 were
$14.6 million, an increase of $3.9 million or 36.4% compared to the year ended
June 30, 1998. As a percentage of revenues, this constituted a decrease to 9.7%
in 1999 from 10.6% in 1998 and was attributable to a number of factors,
including lower legal and consulting expenses and operating supplies.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 1999 was $4.9 million, an increase of $2.7 million or 125.6%
compared to the year ended June 30, 1998. The largest part of this increase was
the full year of amortization expense on the three television stations acquired
in March 1998 and depreciation of the new building and related contents that
were acquired September 1998.
Move-Related Expenses. Move-related expenses were approximately $1.0
million in the year ended June 30, 1999 and there was no comparable expense in
the previous year. These expenses primarily relate to employee relocation,
rental of temporary facilities, the grand opening of Shop At Home's Nashville
headquarters and employee bonuses associated with the relocation.
Interest Expense. Interest expense for the year ended June 30, 1999,
was $9.0 million, an increase of $6.1 million over the year ended June 30, 1998.
The increase was due primarily to the full year effect of the issuance in March
1998 of $75.0 million of 11% Senior Secured Notes due 2005.
Interest Income. Interest income for the year ended June 30, 1999,
was $0.6 million. This income was primarily due to the investment of cash.
Other Income. There was minimal other income for the year ended June
30, 1999 while the year ended June 30, 1998 included a one-time $900 thousand
gain on the sale of Shop At Home's contractual right to acquire a Knoxville
television station.
Income Tax (Benefit) Expense. Income tax (benefit) for the year
ended June 30, 1999 was provided at an effective tax rate of 41.5%.
Liquidity and Capital Resources
As of June 30, 2000, the Company had total current assets of $67.3
million and total current liabilities of $45.5 million, resulting in a positive
working capital position of $21.9 million. This represents a $39.5 million
increase in the working capital position at the end of the prior year. The major
components of the increase were:
Proceeds of $44.3 million (net of underwriting commissions) from the
public offering of 5,828,000 shares of common stock in July 1999, the sale of
$20.0 million in preferred stock in June 2000 and an additional $20.0 million in
long-term debt, offset by approximately $19.2 million spent to acquire equipment
and software and an increase of approximately $14.7 million in the combined
level of inventory and accounts receivable. The Company used $20.0 million,
including $0.6 million of restricted cash, to pay off the bridge loan relating
to the acquisition of the assets of the Bridgeport television station.
During the year ended June 30, 2000, the Company used approximately
$23.2 million for operations. The major components of this net use were the loss
of $13.5 million, which included non-cash items of a $8.2 million increase in
net deferred tax assets, offset by $9.5 million in depreciation and amortization
and $4.6 million in increased accounts payable and accrued expenses. In
addition, the Company used approximately $7.0 million to support a higher level
of receivables, primarily as a result of the Company offering a greater number
of products on installment payments and an increase in revenues from Collector's
Edge; and $6.8 million to carry higher inventory levels, primarily jewelry and
electronic products, as well as an increase of $1.8 million in Collector's Edge
inventory.
The Company used approximately $19.7 million for investing activities.
Approximately $19.3 million was used to acquire new equipment and an enterprise
wide software system funded partially by $1.6 million in additional capital
leases. An additional $1.7 million was recognized as increased cost of the
Bridgeport, Connecticut, station (WSAH) acquisition, based on estimated final
proration of escrow funds subject to arbitration.
Approximately $63.3 million was provided to Shop At Home from financing
activities during the year ended June 30, 2000, due primarily to $44.2 million
of proceeds from the public stock offering in July 1999 and $19.1 million in the
preferred stock offering in June 2000.
Approximately 90% of Shop At Home's receipts are customer credit card
charges. During the quarter ended June 30, 2000, the Company provided "stretch
pay" terms for approximately half of its revenues. "Stretch pay" terms allow the
customer to pay for the Company's merchandise over two or three monthly credit
card installments. Increased utilization of stretch pay by the Company's
merchandisers resulting in higher accounts receivable balances as of June 30,
2000, as well as increased bad debt expenses during the quarter and year then
ended. The Company is implementing a private label credit card program funded by
a financial institution to significantly reduce its stretch pay receivables and
bad debt.
As of June 30, 2000, the Company was in default on several financial
covenants required by its $20.0 million senior bank facility originally entered
into on December 15, 1999. The Company has subsequently obtained a permanent
waiver from its bank of these defaults, and has renegotiated the terms of the
loan going forward. The new terms provide for earlier repayment of the loan,
with $6.0 million due upon execution of the amendment, $2.0 million on December
31, 2000, $4.0 million on March 31, 2001, and the balance of $8.0 million on
July 1, 2001. The interest rate margin above LIBOR will increase by .25% on
October 31, 2000 and again on December 31, 2000. The Company has agreed to place
sufficient funds in escrow to pay for interest charges through December 31,
2000.
The Company is highly leveraged. Although the Company believes that it
has sufficient working capital, when combined with anticipated positive cash
flow from operations during fiscal 2001, to meet its current debt obligations
and capital equipment needs, management will seek to refinance the $20.0 million
senior bank facility on a more favorable basis in terms of maturity and cost. In
addition, the Company will evaluate new sources of equity and continue to
consider strategic alternatives for its station assets as well as the entity as
a whole.
Issuance of the Series B Preferred Stock
On June 30, 2000, the Company issued 2,000 shares of its Series B
Convertible Preferred Stock, $10,000 stated value per share, and warrants to
purchase 2,000,000 shares of its common stock with a current warrant exercise
price of $5.00 per share, subject to adjustment, in a private placement to
select institutional investors. The net proceeds of the offering, after
expenses, were approximately $19.2 million. The Company will receive an
additional $10.0 million if the warrants are exercised in full.
The Series B Preferred Stock carries a dividend rate of 6% per annum,
payable semi-annually during the first year and quarterly thereafter or upon
conversion or redemption. At the Company's option, dividends may be paid in cash
or shares of common stock, subject to satisfaction of the conditions described
below. If the Company chooses to pay dividends in shares of common stock, the
number of shares to be issued in payment of a dividend on the Series B Preferred
Stock will be equal to the accrued dividends divided by the dividend conversion
price as described below. If the Company does not pay dividends within five
business days of the date the dividends are due, the Company will be obligated
to pay interest on the unpaid amount at the rate of 18% per annum.
For purposes of this calculation, the dividend conversion price will be
equal to 95% of the average of the closing sale prices of the Company's common
stock during the five consecutive trading days immediately preceding the
dividend date.
The Company will not have the right to pay dividends in shares of its
common stock if a triggering event, as described below, has occurred and is
continuing. Triggering events include the following:
o if the effectiveness of the registration statement with regard
to the common stock which might be issued upon conversion of
the Series B Preferred Stock, which is currently effective,
lapses for any reason, and such lapse continues for a period
of 5 consecutive trading days or for more than an aggregate of
10 trading days in any 365-day period;
o the suspension or delisting from trading of the Company's
common stock on the Nasdaq National Market for a period of
five consecutive trading days or for more than 10 trading days
in any 365-day period;
o the Company's notice to any holder of Series B Preferred
Stock of the Company's intent not to comply with a proper
request for conversion;
o the Company's failure to issue shares of common stock upon
conversion prior to the 10th business day after the required
date of delivery;
o the Company's failure to pay any daily payment due to a
triggering event (explained below);
o the Company's failure to issue shares of common stock after a
proper request from a holder of the Series B Preferred Stock,
if the Company's stockholders do not approve issuance of
shares of common stock upon conversion of the Series B
Preferred Stock and exercise of the related warrants and the
failure is due to the limitation on the number of shares the
Company may issue to comply with Nasdaq Rule 4460;
o the Company's failure to receive shareholder approval on or
before November 30, 2000 for the issuance of the common stock
upon conversion of the Series B Preferred Stock, the exercise
of the warrants, and in payment of dividends on the Series B
Preferred Stock;
o an event of default under any other document evidencing the
Company's debt which causes the debt to become due or failure
to pay any of the Company's debt at the maturity date; or
o the Company's breach of any representation, warranty, covenant
or other term or condition of the documents governing the
issuance of the Series B Preferred Stock unless the breach
would not have a material adverse effect on the Company and is
cured within 10 business days after it occurs.
The Series B Preferred Stock matures on June 30, 2003, at which time
the shares must be redeemed or converted at the Company's option. If the Company
elects to redeem any Series B Preferred Stock outstanding on June 30, 2003, the
amount required to be paid will be equal to the liquidation preference of the
Series B Preferred Stock, which equals the price originally paid for such shares
plus accrued and unpaid dividends. If the Company elects to convert any Series B
Preferred Stock outstanding on that date, the Company will be required to issue
shares in an amount determined as described in the following paragraph.
Subject to the conditions described below, the Company may require the
selling securityholders to convert the Series B Preferred Stock into shares of
the Company's common stock. In addition, beginning on December 31, 2000 or
earlier under the conditions described below, the selling securityholders will
have the right to convert their Series B Preferred Stock into shares of the
Company's common stock. Regardless of whether the selling securityholders elect
to convert or the Company requires conversion, the number of shares of common
stock to be issued upon conversion of a Series B Preferred Share is determined
by dividing the sum of $10,000 plus accrued and unpaid dividends by the
applicable conversion price. The applicable conversion price will be a
percentage of the lowest closing bid price of the Company's common stock for the
four consecutive trading days ending on and including the conversion date, but
the conversion price will not exceed $12.00 per share, subject to adjustment.
The conversion percentage equals 100% on July 1, 2000 and then decreases
permanently one percentage point on the first day of every calendar month
following July 1, 2000, but the conversion percentage will never be less than
88%.
Subject to the conditions discussed below, the Company has the right to
require conversion of any or all of the outstanding Series B Preferred Stock,
subject to a volume limitation equal to 20% of the Company's trading volume
between the date the Company gives notice of the Company's election to convert
the Series B Preferred Stock and the date the conversion is effective (a period
of time between 20 and 60 business days). Among the conditions to the Company's
ability to require conversion of the Series B Preferred Stock are the following:
o a registration statement is effective at all times, with
limited exceptions, during the period between the
effectiveness of the registration statement and the date of
the conversion, covering the resale of that number of shares
required to be registered pursuant to the related registration
rights agreement;
o the common stock has been listed on a national market or
exchange since the effective date on the registration
statement and delisting or suspension has not been threatened;
o from the date the Series B Preferred Stock was issued through
the required conversion date, there has not been a triggering
event or an event that without being cured would constitute a
triggering event or a public announcement of a pending change
of control;
o the aggregate amount of Series B Preferred Stock is at least
100 shares;
o from the date the Series B Preferred Stock was issued through
the required conversion date, the Company has timely delivered
shares of common stock upon conversion of the Series B
Preferred Stock and exercise of the related warrants;
o on or before November 30, 2000 the Company has obtained
stockholder approval for the issuance of the common stock
issuable upon conversion of the Series B Preferred Stock and
exercise of the related warrants;
o the Company must have made timely payments on the other debt
obligations the Company owes, and the Company cannot change
certain of the terms of such debt instruments which will
increase the amount of such debt or agree to certain more
restrictive terms and conditions;
o by October 31, 2000, the Company must deliver a notice to the
holders of the Series B Preferred Stock that the Company is a
party to a loan agreement giving it the ability to borrow at
least $20.0 million (less the amount of the loan then
outstanding), and that the Company is in compliance with the
terms of the loan agreement;
o the Company must disclose in this Form 10-K that the Company
is in compliance with all obligations under the Company's loan
facilities, or that any non-compliance has been permanently
waived;
o the Company is in compliance in all material respects with the
articles of amendment, the warrants, and the securities
purchase agreement and the registration rights agreement with
regard to the Series B Preferred Stock; and
o during the period between the date the Company gives notice of
its election to require conversion and the actual conversion
date, the Company cannot give another notice of the its
election to require a conversion.
The selling securityholders do not have the right to convert any of the
Series B Preferred Stock before December 31, 2000. This restriction, however,
will not apply:
o with respect to the amount of Series B Preferred Stock the
Company requires the holders to convert;
o after the delisting or suspension or the threatened delisting
or suspension from trading of the Company's common stock;
o after the occurrence of a change of control or the
announcement of a pending change of control;
o the occurrence of a triggering event or an event that without
being cured would constitute a triggering event;
o after the Company issues any other convertible securities or
options at a price which varies or may vary with the market
price of the Company's common stock;
o after any date on which the Company fails to pay the
redemption price for any Series B Preferred Stock in a timely
manner in accordance with a redemption at the Company's
election;
o if the closing sale price of the Company's common stock is
less than $3.00 per share for any 10 trading days during 15
consecutive trading days, or is less than $2.50 per share for
any three consecutive trading days;
o with respect to any conversion of Series B Preferred Stock at
a price equal to $12.00, subject to adjustment;
o on and after the date of the stockholder meeting, but no later
than November 30, 2000, if the Company fails to obtain
stockholder approval for the issuance of the shares of common
stock issuable upon conversion of and the issuance of the
common stock dividends on the Series B Preferred Stock and
exercise of the related warrants;
o if the Company does not make timely payments on the other debt
obligations the Company owes, or if the Company changes the
terms of such debt instruments in ways which will increase the
amount of such debt or agree to certain more restrictive terms
and conditions; or
o after October 31, 2000, if by that date the Company has not
delivered a notice to the holders of the Series B Preferred
Stock that the Company is a party to a loan agreement giving
it the ability to borrow at least $20.0 million (less the
amount of the loan then outstanding), and that the Company is
in compliance with the terms of the loan agreement.
On and after December 31, 2000, the holders of the Series B Preferred
Stock have the right to convert their shares of Series B Preferred Stock without
restriction, except as described in the next paragraph.
No holder may convert any Series B Preferred Stock exceeding the number
of shares which, upon giving effect to such conversion, would cause the holder,
together with the holder's affiliates, to have acquired a number of shares of
common stock during the 60-day period ending on the date of conversion which,
when added to the number of shares of common stock held at the beginning of such
60-day period, would exceed 9.99% of the Company's then outstanding common
stock, excluding for purposes of such determination any shares of common stock
issuable upon conversion of the Series B Preferred Stock that have not been
converted and upon exercise of the related warrants that have not been
exercised.
The Company also has the right, provided specified conditions are
satisfied, to redeem some or all of the outstanding Series B Preferred Stock for
cash equal to a percentage of the price paid for each preferred share plus
accrued dividends. The redemption percentage equals 100% on July 1, 2000 and
then increases permanently one percentage point on the first day of every
calendar month following July 1, 2000, provided that the redemption percentage
will never be greater than 120%. Under the terms of the indenture the Company
entered into in connection with the Company's issuance in 1998 of $75,000,000
11% Senior Secured Notes Due 2005, the Company cannot redeem the Company's
outstanding shares for cash (subject to certain exceptions). So long as the
Senior Notes are outstanding, the Company does not expect to redeem for cash any
material amount of the Series B Preferred Stock.
If any of the triggering events occur, the Company is obligated to pay
to each holder of Series B Preferred Stock a payment equal to 2% of the
liquidation preference on the outstanding Series B Preferred Stock on each day
during the period of time between the date of such event until it is cured, but
not more than 15 days in any 365-day period. In addition, the total of all such
payments will not exceed $5.0 million (unless a greater amount is permitted
under the Company's credit agreements). In addition, the Company will also be
obligated to adjust the fixed conversion price of $12.00 to the amount which is
68% of the lowest closing bid price for the Company's common stock during
certain periods of time.
In addition, if the Company's stockholders do not approve the issuance
of shares of common stock upon conversion of the Series B Preferred Stock and
exercise of the related warrants, and the Company fails to issue shares of
common stock to a holder of the Series B Preferred Stock who converts due to the
limitation on the number of shares the Company may issue to comply with Nasdaq
Rule 4460, the Company is required to notify each holder of Series B Preferred
Stock that the Company has elected to redeem all Series B Preferred Stock
submitted for redemption or to delist the Company's shares from the Nasdaq
National Market. Any such redemption must be at the greater of:
o 125% of the price paid for the Series B Preferred Stock plus
accrued dividends; or
o the product of the number of shares of common stock into which
the Series B Preferred Stock is convertible multiplied by the
closing sale price of the Company's common stock on the
trading day immediately before the event occurs.
So long as the Senior Notes are outstanding, any redemption of the
Series B Preferred Stock would likely constitute a breach of the terms of the
indenture, making a cash redemption by the Company unlikely.
In the event of a merger transaction, a hostile takeover or a sale of
all or substantially all of the Company's assets, each holder of the Series B
Preferred Stock at its option has the right to require the Company to redeem all
or a portion of such holder's preferred shares at a price equal to 125% of the
price paid for such shares plus accrued dividends.
Warrants to purchase the 2,000,000 shares of the Company's common stock
were issued in connection with the sale of the Series B Preferred Stock as of
June 30, 2000 at an exercise price of $5.00 per share, subject to anti-dilution
adjustments. The exercise price may also be lowered to the average of the
closing bid prices for the 10 trading days immediately preceding and including
June 30, 2001, if such average price is less than $5.00, subject to adjustment.
The warrants expire if not exercised on or prior to June 30, 2003.
Risks Related to the Series B Preferred Stock
The conversion of the Series B Preferred Stock and the exercise of the
related warrants could result in substantial numbers of additional shares being
issued if the Company's market price declines. The Series B Preferred Stock
converts at a floating rate based on the market price of the Company's common
stock, but the conversion price may not exceed $12.00 per share, subject to
adjustment. As a result, the lower the price of the Company's common stock at
the time of conversion, the greater the number of shares the holder will
receive.
To the extent the Series B Preferred Stock is converted or dividends on
the Series B Preferred Stock are paid in shares of common stock rather than
cash, a significant number of shares of common stock may be sold into the
market, which could decrease the price of the Company's common stock and
encourage short sales. Short sales could place further downward pressure on the
price of the Company's common stock. In that case, the Company could be required
to issue an increasingly greater number of shares of the Company's common stock
upon future conversions of the Series B Preferred Stock, sales of which could
further depress the price of the Company's common stock.
The conversion of and the payment of dividends in shares of common
stock in lieu of cash on the Series B Preferred Stock may result in substantial
dilution to the interests of other holders of the Company's common stock.
The Company may be required to delist its shares from Nasdaq if
specific events occur. In accordance with Nasdaq Rule 4460, which generally
requires stockholder approval for the issuance of securities representing 20% or
more of an issuer's outstanding listed securities, and under the terms of the
agreement pursuant to which the Company sold the Series B Preferred Stock and
related warrants, the Company must solicit stockholder approval of the issuance
of such preferred shares and warrants, including the shares of common stock
issuable upon conversion of the Series B Preferred Stock and exercise of the
warrants, at a meeting of the Company's stockholders, which shall occur on or
before November 30, 2000. If the Company obtains stockholder approval, there is
no limit on the amount of shares that could be issued upon conversion of the
Series B Preferred Stock. If the Company does not obtain stockholder approval
and is not obligated to issue shares because of restrictions relating to Nasdaq
Rule 4460, the Company may be required to pay a substantial penalty and may be
required to voluntarily delist the Company's shares of common stock from the
Nasdaq Stock Market. In that event, trading in the Company's shares could
decrease substantially, and the price of the Company's shares of common stock
may decline.
Substantial sales of the Company's common stock could cause the
Company's stock price to fall. If the Company's stockholders sell substantial
amounts of the Company's common stock, including shares issued upon the exercise
of outstanding options and upon conversion of and issuance of common stock
dividends on the Series B Preferred Stock and exercise of the related warrants,
the market price of the Company's common stock could fall. Such sales also might
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that the Company deems appropriate.
The Company may be required to pay substantial penalties to the holders
of the Series B Preferred Stock and related warrants if specific events occur.
In accordance with the terms of the documents relating to the issuance of the
Series B Preferred Stock and the related warrants, the Company is required to
pay substantial penalties to a holder of the Series B Preferred Stock under
specified circumstances, described above.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income. The
Statement establishes standards for reporting comprehensive income and its
components in a full set of financial statements. The Company adopted the
Statement for the fiscal year ending June 30, 1999. The adoption had no effect
as Shop At Home currently has no items that would be classified as other
comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This Statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement was
adopted for the June 30, 1999 fiscal year beginning with the quarter ending
September 30, 1999, Shop At Home determined that its reportable segments were
Network, collectibles.com and Collector's Edge and commenced providing
supplemental disclosures in accordance with SFAS131.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits (FAS 132). This Statement revises and simplifies
employers' disclosures about pension and other post-retirement benefit plans.
Since the revisions promulgated in this Statement primarily apply to defined
benefit plans, of which the Company has none, adoption of this Statement in the
June 30, 1999 fiscal year did not have a significant impact on the Company's
financial statements. As required by FAS 132, the Company has disclosed a brief
description of its defined contribution pension plan and the cost recognized
during the respective periods.
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for financial statements for the years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company adopted
the provisions of SOP 98-1 in its fiscal year ending June 30, 1999. The adoption
of this statement resulted in $14,200 and $5,000 of capitalized software costs
at June 30, 2000 and 1999 respectively. The Company also recognized $80 in
expensed training costs in the June 30, 1999 fiscal year.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs, requiring costs of
start-up activities and organization costs to be expensed as incurred. The
Company adopted this SOP for the June 30, 2000 fiscal year financial statements.
Adoption of this statement resulted in $0.7 million of start-up and organization
costs incurred with the launching of collectibles.com in November 1999 to be
expensed during the June 30, 2000 fiscal year financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
effective for fiscal years beginning after June 15, 1999. The FASB issued SFAS
137 in July 1999 to delay the effective date of SFAS No. 133 for one year to
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the consolidated balance sheet and to measure those instruments at fair
value. The adoption of SFAS 133 is not expected to have an effect as the Company
has no items that would be classified as derivative instruments and hedging
activities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
The Company is exposed to some market risk through interest rates,
related to its investment of its current cash and cash equivalents of
approximately $27.5 million as of June 30, 2000. These funds are generally
invested in highly liquid debt instruments with short-term maturities. As such
instruments mature and the funds are re-invested, the Company is exposed to
changes in market interest rates. This risk is not considered material and the
Company manages such risk by continuing to evaluate the best investment rates
available for short-term high quality investments.
The Company is not exposed to market risk through changes in interest
rates on its $75.0 million of Senior Secured Notes because the debt is at a
fixed rate. The Company is, however, exposed to interest fluctuations on its
senior bank facility of $20.0 million, which floats on a LIBOR basis. Management
believes that the exposure is immaterial.
The Company has certain risks associated with the products it sells, in
that the prices of its products are subject to changes in market conditions. The
Company manages this risk by maintaining minimal inventory levels in
relationship to its revenues. The Company also has the right to return many of
its products to its vendors. The Company's products are purchased domestically,
and, consequently, there is no foreign currency exchange risk.
The Company has no activities related to derivative financial
instruments or derivative commodity instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Accountants 35
Consolidated Balance Sheets at June 30, 2000 and June 30, 1999 36-37
Consolidated Statements of Operations for the years ended June 30, 2000,
June 30, 1999, and June 30, 1998 38
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2000, June 30, 1999, and June 30, 1998 39
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, June 30, 1999, and June 30, 1998 40-41
Notes to Consolidated Financial Statements 42-46
Report of Independent Accountants
Board of Directors and Stockholders
Shop At Home, Inc.
In our opinion, the consolidated financial statements listed in the Index to
Consolidated Financial Statements presents fairly, in all material respects, the
financial position of Shop At Home, Inc. and its subsidiaries at June 30, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2000 in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the Index appearing under Item 14
(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits. We conducted our audits of these financial statements and
the financial statement schedule in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Nashville, Tennessee
August 31, 2000
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
June 30,
2000 1999
CURRENT ASSETS
Cash and cash equivalents $ 27,515 $ 7,066
Restricted cash 5,058 5,433
Accounts receivable - trade, net 15,892 8,969
Inventories, net 15,828 7,234
Prepaid expenses 1,214 919
Deferred tax assets 1,825 1,097
-----------------------------------------------
Total current assets 67,332 30,718
NOTE RECEIVABLE-RELATED PARTY, net
of unamortized discount of $64 and $96 703 690
for 2000 and 1999, respectively
PROPERTY and EQUIPMENT, net 48,812 35,403
Deferred Tax Asset 8,128 -
LICENSES, net of accumulated amortization of $7,440 and $4,646 96,615 97,020
for 2000 and 1999, respectively
GOODWILL, net of accumulated amortization of $518 and $353 2,202 2,367
for 2000 and 1999, respectively
OTHER ASSETS 3,502 4,499
-----------------------------------------------
TOTAL ASSETS $ 227,294 $ 170,697
===============================================
The accompanying notes are an integral part of these
consolidated financial statements
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
---------------------------------------------------------------
2000 1999
-------------------------------------------------------------
CURRENT LIABILITIES
Current portion - long term debt and capital leases $ 12,775 $ 298
Loan payable - 20,000
Accounts payable - trade 19,418 15,511
Credits due to customers 2,711 3,069
Other payables and accrued expenses 10,086 9,375
Deferred revenue 478 111
-------------------------------------------------------------
Total current liabilities 45,468 48,364
LONG-TERM LIABILITIES
Capital leases 1,336 893
Long-term debt 83,000 75,000
Deferred income taxes - 309
REDEEMABLE PREFERRED STOCK
Series A - $10 par value, 1,000,000 shares
authorized, 92,732 and 82,038 issued and
outstanding in 2000 and 1999, respectively-
redeemable at $10 per share plus unpaid
dividends accrued 941 834
Series B - $10,000 stated value, 2,000 shares
authorized, 2,000 and none issued and
outstanding in 2000 and 1999, respectively-
redeemable as discussed in Note 6. 11,563 -
COMMITMENTS (NOTES 4, 5, 6, 9, 10,13, and 17)
STOCKHOLDERS' EQUITY
Common stock - $.0025 par value,
100,000,000 and 30,000,000 shares authorized
in 2000 and 1999, respectively, 31,264,772 and
24,557,822 shares issued and outstanding in
2000 and 1999, respectively 78 61
Additional paid in capital 106,482 53,317
Accumulated deficit (21,574) (8,081)
-------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 227,294 $ 170,697
=============================================================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
-----------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------
NET REVENUES $ 200,062 $ 151,966 $ 100,757
COST OF GOODS SOLD (excluding items 130,392 91,816 58,862
listed below)
Salaries and wages 16,086 10,636 7,446
Transponder and affiliate charges 33,291 26,303 17,768
Other general operating and
administrative expenses 23,946 14,555 10,667
Depreciation and amortization 8,935 4,936 2,188
Non-recurring move-related expenses - 986 -
-----------------------------------------------------------------------
Total operating expenses 212,650 149,232 96,931
-----------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (12,588) 2,734 3,826
-----------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 749 643 564
Interest expense (9,688) (8,964) (2,850)
Other income (expense) (156) (65) 900
-----------------------------------------------------------------------
Total other income (expense) (9,095) (8,386) (1,386)
-----------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (21,683) (5,652) 2,440
INCOME TAX EXPENSE (BENEFIT) (8,190) (2,348) 927
-----------------------------------------------------------------------
NET INCOME (LOSS) $ (13,493) $ (3,304) $ 1,513
=======================================================================
BASIC EARNINGS (LOSS) PER SHARE $ (.44) $ (.14) $ .10
=======================================================================
DILUTED EARNINGS (LOSS) PER SHARE $ (.44) $ (.14) $ .09
=======================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998
(In thousands, except share data)
Additional
Common Paid-In Accumulated
Stock Capital Deficit
-----------------------------------------------------------------
Balance, June 30, 1997 (10,714,414 shares) $ 27 $ 10,067 $ (6,290)
Exercise of stock warrants (200,000 shares) 1 226 -
Exercise of employee stock options
(454,600 shares) 1 506 -
Issuance of common stock in payment of a
(444,177 shares)-net 1 1,190 -
Preferred stock dividend accrued - (14) -
Tax benefit of non-qualified stock options exercised - 245 -
Issuance of 11,500,000 shares in connection
with public offering, net of offering costs 28 36,859 -
Net income - - 1,513
-----------------------------------------------------------------
Balance, June 30, 1998 (23,313,191 shares) 58 49,079 (4,777)
Issuance of 11,226 shares in consideration of personal
guarantee - 40 -
Purchase and retirement of 90,300 shares - (203) -
Preferred stock dividend accrued - (14) -
Exercise of 350,000 warrants 1 419 -
Exercise of 600,000 options 1 1,499 -
Exercise of 317,800 employee stock options exercised 1 921 -
Conversion of 55,905 shares of preferred stock - 559 -
Tax benefit of non-qualified stock options - 1,017 -
Net loss - - (3,304)
-----------------------------------------------------------------
Balance, June 30, 1999 (24,557,822 shares) 61 53,317 (8,081)
-----------------------------------------------------------------
Issuance of 5,828,000 shares in connection with
public offering - net of issuance costs 15 43,219 -
Issuance of warrants to purchase common stock - 4,002 -
Allocation of preferred stock proceeds to beneficial
conversion feature - 3,596 -
Preferred stock dividend - (6) -
Exercise of 479,934 warrants 1 700 -
Exercise of 400,600 employee stock options 1 800 -
Tax benefit of nonqualified stock options exercised - 973 -
Conversion of preferred stock - 199 -
Reversal of prior conversion of preferred stock - (318) -
-----------------------------------------------------------------
Net loss (13,493)
-----------------------------------------------------------------
Balance, June 30, 2000 (31,264,772 shares) 78 106,482 (21,574)
=================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Years Ended June 30,
--------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (13,493) $ (3,304) $ 1,513
Gain on sale of contractual right - - (900)
Non-cash items included in net income (loss):
Depreciation and amortization 9,405 5,479 2,331
(Gain)/loss on sale of equipment - 65
Deferred income taxes (8,190) (2,332) 290
Deferred interest expense 222 (30) (32)
Provision for inventory obsolescence 855 602 78
Provision for bad debt 1,816 561 188
Asset disposal 193 - -
Changes in current and non-current items:
Accounts receivable (8,738) (5,700) (1,003)
Inventories (9,449) (3,504) (1,318)
Prepaid expenses and other assets (295) 95 755
Accounts payable and accrued expenses 4,307 7,297 3,512
Deferred revenue 142 (156) 159
--------------------------------------------------------------
Net cash (used) provided by operations (23,225) (927) 5,573
--------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Note receivable-related party - - (800)
Proceeds from note receivable-related party - - 12
Cash payments for acquisitions - (543) -
Restricted cash 375 (5,433) -
Purchase of property and equipment (17,671) (14,101) (16,800)
Proceeds from sale of equipment - 69 -
Cash payment for other assets - (262) (330)
Proceeds from sale of contractual right - - 900
Purchase of licenses (2,349) (14,807) (72,635)
--------------------------------------------------------------
Net cash used by investing activities (19,645) (35,077) (89,653)
--------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Purchase and retirement of common stock - (203) -
Payment of Preferred Stock dividends (21) (14) (14)
Exercise of stock options/warrants 1,500 2,842 734
Proceeds from Issuance of Series B Preferred Stock 20,000 - -
Proceeds from Issuance of common stock 46,624 - 40,250
Repayments of capital leases (667) (495) (11,551)
Proceeds of debt 20,000 20,000 78,000
Repayment of debt (20,000) - -
Payment of stock issuance costs (preferred & common) (3,161) (284) (3,363)
Payment of debt issuance costs (956) - (3,830)
--------------------------------------------------------------
Net cash provided by financing activities 63,319 21,846 100,226
--------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH 20,449 (14,158) 16,146
Cash beginning of period 7,066 21,224 5,078
--------------------------------------------------------------
Cash end of period $ 27,515 $ 7,066 $ 21,224
==============================================================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, except share data)
Years Ended June 30,
---------------------------------------------------------
2000 1999 1998
---------------------------------------------------------
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Accrued liability for purchase of equipment $ - $ 1,874 $ -
---------------------------------------------------------
Tax effect of qualified stock options $ 973 $ 1,017 $ 245
---------------------------------------------------------
Stock issued for loan guaranty $ - $ 40 $ -
---------------------------------------------------------
Conversion of 19,879 and 55,905 shares respectively of preferred stock
into common $ 199 $ 599 $ -
---------------------------------------------------------
Reversal of conversion of preferred stock
into shares of common stock (31,820 shares) $ (318) $ - $ -
---------------------------------------------------------
Cost of equipment purchased through
capital lease obligation $ 1,667 $ 1,271 $ 326
---------------------------------------------------------
Stock issued in connection with retirement
of debt (144,177 shares) $ - $ - $ 1,190
---------------------------------------------------------
Accrued preferred stock dividend $ 6 $ 14 $ 14
---------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid during the year for:
Interest $ 9,094 $ 8,711 $ 857
---------------------------------------------------------
Income taxes $ - $ - $ 432
---------------------------------------------------------
.
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. All dollar values in tables and the financial
statements and footnotes have been expressed in (000s) except for share and per
share data.
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Shop At Home, Inc. and its 100% owned
subsidiaries, SAH-Northeast Corporation ("Northeast"), SAH-Houston Corporation
("Houston"), Collector's Edge of Tennessee, Inc. ("Collector's"), SAH
Acquisition Corporation II ("SAH Acquisition II"), SAH Acquisition Corporation
("SAH AQ") and Partners - SATH L.L.C. ("Partners"), (collectively the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
Operations. The Company markets various consumer products through a
televised "Shop At Home" service and over the Internet through its website
collectibles.com. The programming is currently broadcast by satellite and is
available on the Internet on a twenty-four hours per day, seven days per week
schedule.
Northeast owns and operates a commercial television station, WMFP,
Channel 62, serving the Boston television market area. Northeast also operates a
commercial TV station, WSAH, channel 43, serving a portion of the New York City
market area. The assets of WSAH were acquired in June 1999. Houston owns and
operates a commercial television station, KZJL, Channel 61, serving the Houston,
Texas market.
Collector's Edge, formed in February 1997, is a trading card wholesaler
whose main assets are licenses from National Football League Properties, Inc.
and National Football League Players, Incorporated.
SAH Acquisition II owns and operates three commercial television
stations: KCNS, Channel 38, serving the San Francisco television market area;
WOAC, Channel 67, serving the Cleveland television market area and; WRAY,
Channel 30, serving the Raleigh-Durham television market area, all of which were
acquired on March 27, 1998.
Partners owns real property located at 5388 Hickory Hollow Parkway,
Antioch, Tennessee, the Company's office headquarters and studios. The real
property is Partners' only asset. SAH AQ's principal asset is a 1% membership in
Partners.
Cash and Cash Equivalents. For the purpose of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased with
original maturities of one year or less to be cash equivalents.
Restricted Cash. Restricted cash represents cash held in escrow of
$5.1 million for final settlement of the purchase of assets of WSAH-Bridgeport
Note 16).
Accounts Receivable--Trade. The Company has reduced accounts receivable
to the net realizable value through recording allowances for doubtful accounts.
At June 30, 2000 and 1999, the Company had recorded allowances of $1,595, and
$543, respectively.
Inventories. Inventories, which consist primarily of products held for
sale such as jewelry, electronics and sports collectibles, are valued at average
cost which approximates the first-in, first-out (FIFO) basis. Valuation
allowances are provided for carrying costs in excess of estimated market value.
Collector's Edge Inventories. The Collector's Edge inventories of sports
cards represent all of the contract manufacturing costs associated with each
release.
Property and Equipment. Property and equipment is stated at cost.
Expenditures for repairs and maintenance are expensed as incurred, and additions
and improvements that significantly extend the life of assets are capitalized.
On major construction projects requiring a number of months to complete, such as
the construction of the Nashville facilities, the Company's policy is to
capitalize the interest associated with these projects until completion.
Depreciation is computed under straight-line methods over the estimated
useful lives of the assets as reflected in the following table:
Furniture and fixtures 7 Years
Software costs 3 Years
Operating equipment 5-15 Years
Leasehold improvements 3-15 Years
Building 40 Years
FCC Licenses for Television Stations. During June 1999, the Company
through its subsidiary Northeast, acquired one FCC television license. During
fiscal 1998, the Company through its subsidiary, SAH Acquisition II, acquired
three FCC licenses for television stations and in fiscal 1995 the Company
acquired two subsidiaries that owned FCC television licenses. Although FCC
television licenses are granted for eight-year periods, they are required to be
renewed by the FCC unless (1) the holder has seriously violated the
Telecommuntication's Act or FCC rules and regulations; (2) failed to serve the
public interest, convenience, and necessity; or (3) followed a pattern of abuse
in violation of FCC rules and regulations. Accordingly, FCC licenses are
historically renewed for indefinite periods of time giving them indefinite
lives. Given the indeterminate lives afforded by the licensing process and the
historical appreciation in value of the license, the Company determined that a
life of 40 years would be appropriate. Amortization of these licenses was
$2,424, $2,138 and $773 for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
The Company has allocated the purchase price of its acquisitions based
upon independent appraisals. In each of the appraisals of broadcast properties,
with the exception of WMFP-Boston, the fair value of the property including the
intangible license was in excess of the purchase price, and accordingly,
resulted in no goodwill. The appraisal of WMFP-Boston resulted in the recording
of some goodwill.
NFL Licenses. In fiscal year 1997, the Company formed Collector's Edge,
a wholly owned subsidiary engaged in the business of selling sports trading
cards under licenses with National Football League Players, Incorporated and
National Football League Properties, Inc. The value ascribed to these licenses
in connection with their acquisition by Collector's Edge is being amortized over
the contract life of three years. Amortization of these licenses was $330, $485
and $479 for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Goodwill. Goodwill is amortized over 40 years, using the straight-line
method. The amortization period for goodwill was determined based on the
rationale developed to assign lives to the FCC licenses. Goodwill recorded in
connection with the acquisitions of WMFP and the assets of Collector's Edge
represent the excess purchase price over the fair value of the net identifiable
assets acquired. The amount of goodwill for WMFP was determined by independent
appraisal. Goodwill for Collector's Edge was determined by reference to the fair
values of net assets acquired and further supported by established business
relationships which represent future revenue streams. Goodwill amortization
amounted to $165, $165 and $112 for fiscal years ended June 30, 2000, 1999 and
1998, respectively. Management periodically evaluates the net realizability of
the carrying amount of goodwill.
Debt Issue Costs. The Company has $2,732 and $3,121 as of June 30, 2000
and 1999 of debt issuance costs recorded as other assets. These deferred costs
relate to the issuance of the $75,000 of Senior Secured Notes and a $20,000 line
of credit from Union Bank of California. The issuance costs of the Notes and the
line of credit are being amortized over 7 and 3 years, respectively, which is
the life of the debt. The amortization of $579 and $543 for the fiscal year
ended June 30, 2000 and 1999, respectively, has been recorded as additional
interest expense.
Sales Returns. The Company generally allows customers to return
merchandise for full credit or refund within 30 days from the date of receipt.
Collector's Edge sells to wholesalers and retailers; terms of sale and return
privileges are negotiated on an individual basis. At June 30, 2000 and 1999, the
Company had recorded credits due to customers of $2,711 and $3,069,
respectively, for actual and estimated returns.
Revenue Recognition. The Company's principal source of revenue is retail
sales to viewing and online customers. Other sources of revenue include
wholesale sales of collectible sports cards and rental of customer lists.
Product sales are recognized upon shipment of the merchandise to the customer.
List rental income is recognized over time as the lists are utilized. Deferred
revenue consists of sales proceeds relative to unshipped merchandise.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and inbound freight costs.
Income Taxes. The Company files a consolidated federal income tax return
with its subsidiaries. The Company files separate or consolidated state returns
as required by each jurisdiction. The Company determines deferred tax assets and
liabilities based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Earnings (Loss) Per Share. Statement of Financial Accounting Standards
No. 128, Earnings Per Share, requires the presentation of basic and diluted EPS.
Basic earnings (loss) per share is computed by dividing net income (loss)
available for common shareholders by the weighted average number of shares of
common stock outstanding. Diluted earnings (loss) per share is computed by
dividing adjusted net income (loss) by the weighted average number of shares of
common stock and assumed conversions of dilutive securities outstanding during
the respective periods. Dilutive securities represented by options, warrants,
redeemable preferred stock and convertible debt outstanding have been included
in the computation except in periods where such inclusion would be
anti-dilutive. The Company uses the treasury stock method for calculating the
dilutive effect of options and warrants and the if converted method with respect
to the effect of convertible securities.
Use of Estimates. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets. The Company follows statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets To Be Disposed Of, which requires
recognition of impairment losses for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses recognized is based on the
difference between the fair values and the carrying amounts of the assets. SFAS
121 also requires that long-lived assets held for sale be reported at the lower
of carrying amount or fair value less cost to sell. The Company has not
experienced such losses.
Stock-Based Compensation. The Company follows the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Certain pro forma
disclosures as required by Statement of Financial Accounting Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation, are included in Note 11.
Recent Accounting Pronouncements. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. The Statement establishes standards for
reporting comprehensive income and its components in a full set of financial
statements. The Company adopted the Statement for the fiscal year ending June
30, 1999. The adoption had no effect as Shop At Home currently has no items that
would be classified as other comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. This Statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement was
adopted for the June 30, 1999 fiscal year beginning with the quarter ending
September 30, 1999, Shop At Home determined that its reportable segments were
Network, collectibles.com and Collector's Edge and commenced providing
supplemental disclosures in accordance with SFAS131.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits (FAS 132). This Statement revises and simplifies
employers' disclosures about pension and other post-retirement benefit plans.
Since the revisions promulgated in this Statement primarily apply to defined
benefit plans, of which the Company has none, adoption of this Statement in the
June 30, 1999 fiscal year did not have a significant impact on the Company's
financial statements. As required by FAS 132, the Company has disclosed a brief
description of its defined contribution pension plan and the cost recognized
during the respective periods.
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for financial statements for the years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company adopted
the provisions of SOP 98-1 in its fiscal year ended June 30, 1999. The adoption
of this statement resulted in $14,200 and $5,000 of capitalized software costs
at June 30, 2000 and 1999 respectively. The Company also recognized $80 in
expensed training costs in the June 30, 1999 fiscal year.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs, requiring costs of
start-up activities and organization costs to be expensed as incurred. The
Company adopted this SOP for the June 30, 2000 fiscal year financial statements.
Adoption of this statement resulted in $0.7 million of start-up and organization
costs incurred with the launching of collectibles.com in November 1999 to be
expensed during the June 30, 2000 fiscal year financial statements.
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, effective
for fiscal years beginning after June 15, 1000. The FASB issued SFAS 137 in July
1999 to delay the effective date of SFAS No. 133 for one year to fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and to measure those instruments at fair value. The
adoption of SFAS 133 is not expected to have an effect as the Company has no
items that would be classified as derivative instruments and hedging activities.
Reclassifications. Certain amounts in the prior years' consolidated
financial statements have been reclassified for comparative purposes to conform
with the current year presentation.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following major classifications:
June 30,
2000 1999
---- ----
Leasehold improvements $ 572 $ 144
Building 11,908 11,651
Operating equipment 20,213 17,352
Software 18,075 861
Furniture and fixtures 2,975 2,310
Construction in progress 2,255 5,026
Land 1,250 1,250
------------------ ----------------
57,248 38,594
Accumulated depreciation (8,436) (3,191)
------------------ ----------------
Property and equipment, net$ 48,812 $ 35,403
================== ================
Depreciation expense totaled $5,736 and $2,145 for the fiscal years
ended June 30, 2000 and 1999, respectively. Interest capitalized amounted to $0
and $399 for the year ended June 30, 2000 and 1999, respectively.
NOTE 3 -- INVENTORY
The components of inventory at June 30, 2000 and 1999 are as follows:
June 30,
2000 1999
---- ----
Products purchased for resale $ 12,688 $ 5,570
Finished goods (Collector's Edge) 2,909 1,173
Work in progress (Collector's Edge) 900
--------------- ---------------
16,497 7,538
Valuation allowance (669) (304)
--------------- ---------------
Total $ 15,828 $ 7,234
=============== ===============
NOTE 4 -- CAPITAL LEASES
The Company has acquired various equipment under the provisions of
long-term capital leases.
Future minimum lease payments under capitalized leases are as follows at
June 30, 2000:
2001 $ 937
2002 1,109
2003 274
2004 64
2005 -
Thereafter -
-------------------------------------------------------------------------------- ----------------
Total minimum lease payments 2,384
Less amount representing interest (273)
-------------------------------------------------------------------------------- ----------------
Present value of minimum lease payments 2,111
Less current portion (775)
-------------------------------------------------------------------------------- ----------------
Long-term portion $ 1,336
================================================================================ ================
NOTE 5 -- INDEBTEDNESS
Issuance of $75,000 of 11% Senior Secured Notes
In March 1998, the Company issued $75,000 of 11% Senior Secured Notes
Due 2005 ("Notes"). Interest on the Notes is payable semi-annually on April 1
and October 1 of each year. The Notes are not redeemable at any time prior to
April 1, 2002. On or after April 1, 2002, the Notes will be redeemable at the
option of the Company, in whole or in part, at a redemption price equal to the
par value plus a premium and also including accrued and unpaid interest, if any,
to the date of redemption. Upon the occurrence of a change of control, holders
of the Notes will have the right to require the Company to repurchase their
Notes, in whole or in part, at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase.
The Notes are secured by a lien on all of the issued and outstanding
capital stock of SAH Acquisition II and the assets of SAH Acquisition II, other
than the FCC licenses held by it. The Notes are also secured by a lien on all of
the issued and outstanding capital stock of SAH-Northeast, the owner and
operator of WMFP(TV) in Boston and WSAH(TV) in Bridgeport, and SAH-Houston, the
owner and operator of KZJL(TV) in Houston, although this lien is subordinate to
the Company's $20,000 senior credit facility. In addition, the obligations of
the Company under the Notes are jointly and severally guaranteed on a senior
basis by each of the Company's subsidiaries.
The Indenture restricts the Company from incurring additional
indebtedness in excess of $20,000, which indebtedness may be secured by a first
priority lien on certain of the Company's assets, including the Company's
accounts receivable and inventory and a first priority lien on the capital stock
and other assets of the broadcast properties not owned by SAH Acquisition II.
The indenture also restricts the Company's ability to issue preferred stock,
incur liens, pay dividends, make certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person, issue
or sell stock of subsidiaries, or sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company or encumber
the assets of the Company or its subsidiaries.
Senior Credit Facility
As of June 30, 2000, the Company was in default on several financial
covenants required by its $20,000 senior bank facility originally entered into
on December 15, 1999. The Company has subsequently obtained a permanent waiver
of these defaults from its bank and has renegotiated the terms of the loan going
forward. The new terms provide for earlier repayment of the loan, with $6,000
million due upon execution of the amendment, $2,000 on December 31, 2000, $4,000
on March 31, 2001, and the balance of $8,000 on July 1, 2001. The interest rate
margin above LIBOR will increase by .25% on October 31, 2000 and again on
December 31, 2000. The Company has agreed to place sufficient funds in escrow to
pay for interest charges through December 31, 2000.
NOTE 6 -- REDEEMABLE PREFERRED STOCK
Series A Preferred Stock.
The Company is authorized to issue 140,000 shares of Series A Preferred
Stock, of which 92,732 shares were outstanding as of June 30, 2000. The Series A
Preferred Stock is entitled to receive dividends, preferences, qualifications,
limitations, restrictions and the distribution of assets upon liquidation before
the Company's common stock.
Holders of Series A Preferred Stock are entitled to receive, but only
when declared by the Board of Directors, cash dividends at the rate of $.10 per
share per annum.
In the event of the Company's liquidation, dissolution or winding up,
the holders of shares of Series A Preferred Stock are entitled to receive an
amount equal to $10.00 per share, plus accrued and unpaid dividends. The Company
must pay this amount before it distributes any of its assets to the holders of
common stock or any preferred stock that is junior to the Series A Preferred
Stock.
As long as there are shares of the Series A Preferred Stock outstanding,
the Company may not issue any capital stock that ranks senior to the Series A
Preferred Stock with respect to liquidation, dissolution and winding up without
the consent of the holders of the Series A Preferred Stock. Any holder of any
shares of Series A Preferred Stock may require the Company to redeem all or any
portion of the Series A Preferred Stock, for a redemption price per share of
$10.00, plus accrued and unpaid dividends. The Series A Preferred Stock is
convertible at any time into shares of common stock at a ratio of one share of
common stock for one share of Series A Preferred Stock.
The holders of Series A Preferred Stock generally are not entitled to
vote. There are some situations, however, in which the holders of Series A
Preferred Stock are entitled to vote. First, holders of Series A Preferred Stock
may vote if required by Tennessee corporate law. Second, the Company's charter
requires the holders of a majority of shares of the Series A Preferred Stock to
consent to (1) the authorization, creation or issuance of a new class of capital
stock or series of preferred stock having rights, preferences or privileges
senior to the Series A Preferred Stock, (2) any increase in the number of
authorized shares of any class of capital stock or series of preferred stock
having rights, preferences or privileges senior to the Series A Preferred stock,
or (3) the amendment of any provision of our charter which would materially and
adversely affect any right, preference, privilege or voting power of the Series
A Preferred Stock. Holders of Series A Preferred Stock have no preemptive rights
with respect to any of the Company's shares or other securities which may be
issued, and such shares are not subject to assessment.
Series B Convertible Preferred Stock.
On June 30, 2000, the Company issued 2,000 shares of its Series B
Convertible Preferred Stock, $10,000 stated value per share, in consideration of
a payment of $20,000.
The Series B Preferred Stock carries a dividend rate of 6% per annum,
payable semi-annually during the first year and quarterly thereafter or upon
conversion or redemption. At the Company's option, dividends may be paid in cash
or shares of common stock, subject to satisfaction of certain conditions. If the
Company chooses to pay dividends in shares of its common stock, the number of
shares to be issued will be equal to the accrued dividends divided by the
dividend conversion price, which is 95% of the average closing price of the
Company's common stock during the five trading days preceding the dividend
payment date.
Warrants to purchase the 2,000,000 shares of the Company's common stock
were issued in connection with the sale of the Series B Preferred Stock as of
June 30, 2000 at an exercise price of $5.00 per share, subject to anti-dilution
adjustments. The exercise price may also be lowered to the average of the
closing bid prices for the 10 trading days immediately preceding and including
June 30, 2001, if such average price is less than $5.00, subject to adjustment.
The warrants expire if not exercised on or prior to June 30, 2003.
The Series B Preferred Stock matures on June 30, 2003, at which time the
shares must be redeemed or converted to common stock at the Company's option. If
the Company elects to redeem any of these shares at that time, the amount
required to be paid will be equal to the liquidation preference of the Series B
Preferred Stock, which equals the price originally paid for such shares plus
accrued and unpaid dividends. If the Company elects to convert any Series B
Preferred Stock outstanding on that date, it will be required to issue shares of
common stock in an amount equal to a conversion price (described in next
paragraph below).
Subject to certain conditions, the Company may require the holders to
convert their Series B Preferred Stock into shares of the Company's common
stock. In addition, beginning on December 31, 2000 or earlier under certain
conditions, the holders will have the right to convert their Series B Preferred
Stock into shares of the Company's common stock. The number of shares of common
stock to be issued upon conversion of a Series B Preferred Share is determined
by dividing the sum of $10,000 plus accrued and unpaid dividends by the
conversion price. The conversion price will be a percentage of the lowest
closing bid price of the Company's common stock for the four consecutive trading
days ending on and including the conversion date, but the conversion price will
not exceed $12.00 per share, subject to adjustment. As a result, the lower the
price of the Company's common stock at the time of conversion, the greater the
number of shares the holder will receive. The conversion percentage was 100% on
July 1, 2000 and decreases permanently one percentage point on the first day of
every calendar month following July 1, 2000, but will never be less than 88%.
Subject to certain conditions, the Company has the right to require
conversion of any or all of the outstanding Series B Preferred Stock, subject to
a volume limitation equal to 20% of the trading volume between the date the
Company gives notice of its election to convert the Series B Preferred stock and
the date the conversion is effective.
No holder may convert any Series B Preferred Stock exceeding the number
of shares which, upon giving effect to such conversion, would cause the holder
to have acquired a number of shares of common stock during the 60-day period
ending on the date of conversion which, when added to the number of shares of
common stock held at the beginning of such 60-day period, would exceed 9.99% of
the Company's outstanding common stock.
The Company also has the right, provided specified conditions are
satisfied, to redeem some or all of the outstanding Series B Preferred Stock for
cash equal to a percentage of the price paid for each preferred share plus
accrued dividends. The redemption percentage was 100% on July 1, 2000 and
increases permanently one percentage point on the first day of every calendar
month following July 1, 2000, provided that the redemption percentage will never
be greater than 120%.
If certain default events occur, the Company is obligated to pay to each
holder of Series B Preferred Stock a payment equal to 2% of the liquidation
preference on the outstanding Series B Preferred Stock on each day during the
period of time between the date of such event until it is cured, but not more
than 15 days in any 365-day period. In addition, the total of all such payments
will not exceed $5.0 million (unless a greater amount is permitted under the
Company's credit agreements).
If certain default events occur, the Company is also obligated to adjust
the fixed conversion price of $12.00 to the amount which is 68% of the lowest
closing bid price for its common stock during certain periods of time.
In addition, if the Company's stockholders do not approve the issuance
of shares of common stock upon conversion of the Series B Preferred Stock and
exercise of certain related warrants, and the Company fails to issue shares of
common stock to a holder of the Series B Preferred Stock who converts due to the
limitation on the number of shares the Company may issue imposed by Nasdaq Stock
Market rules, the Company is required to notify each holder of Series B
Preferred Stock that it has elected to redeem all Series B Preferred Stock
submitted or to delist its shares from the Nasdaq National Market. Any such
redemption must be at the greater of (a) 125% of the price paid for the Series B
Preferred Stock plus accrued dividends; or (b) the product of the number of
shares of common stock into which the Series B Preferred Stock is convertible
multiplied by the closing sale price of the Company's common stock on the
trading day immediately before the event occurs.
In the event of a merger transaction, a hostile takeover or a sale of
all or substantially all of the Company's assets, each holder of the Series B
Preferred Stock, at its option, has the right to require the Company to redeem
all or a portion of such holder's preferred shares at a price equal to 125% of
the price paid for such shares plus accrued dividends.
In the event of the Company's liquidation, the holders of the Series B
Preferred Stock will be entitled to a liquidation preference before any amounts
are paid to the holders of the Company's common stock. The liquidation
preference is equal to the amount originally paid for the Series B Preferred
Stock, $10,000 per share, plus accrued and unpaid dividends. The liquidation
preference of the Series B Preferred Stock is on an equal basis with the Series
A Preferred Stock.
Other than as required by law, the holders of the Series B Preferred
Stock have no voting rights except that the consent of holders of at least
two-thirds of the outstanding shares of Series B Preferred Stock will be
required to effect any change in the Company's charter that would change any of
the rights of the Series B Preferred Stock or to issue any other additional
Series B Preferred Stock.
NOTE 7 -- COMMON STOCK
In April 1999, the Company's shareholders approved an amendment to its
charter which increased the number of authorized shares of common stock to 100
million from 30 million.
The Company's Board of Directors approved the authorization of 30
million shares of nonvoting common stock which was approved by shareholders at
the Annual Meeting held in March 1998. There are no shares issued for this class
of stock.
In July 1999, the Company issued a total of 5,828,000 shares of $.0025
par value common stock at $8.00 per share. The Company used $20,000 of the
proceeds to repay a $20,000 bridge loan used to acquire the Bridgeport
television station. In addition, the Company used the remaining funds for
operating costs and to pay a portion of the cost of the enterprise wide
information system.
In March 1998, the Company issued a total of 11.5 million shares
(including the underwriters over-allotment of 1.5 million shares) of $.0025 par
value common stock at $3.50 per share. A significant portion of the proceeds of
this common stock issuance, in conjunction with the debt issuance discussed in
Note 5, were used in the acquisition of three television stations (Note 15) and
acquisition, construction and equipping of the new Nashville headquarters and
broadcast facility.
In October 1997, the Company issued 444,177 shares of common stock in
connection with the conversion of a 10.75% note payable in the amount of $1,190
net of $143 of deferred interest. The conversion price of $3.00 per share was in
excess of the $2.50 market value of the stock at the time the note was issued.
This note was being amortized in monthly installments of $43 and was due
September 2000. The conversion of this note reduced interest expense by
approximately $75 in the fiscal year ending June 30, 1998.
The terms of the Indenture of Trust which the Company entered into in
March 1998 in connection with its issuance of the 11% Senior Secured Notes due
2005 ("Notes") restricts its ability to pay dividends. Under the restriction,
the Company cannot pay cash dividends as long as the Notes are outstanding,
unless it meets certain financial ratios as specified in the Indenture.
With respect to restrictions on the Company's ability to obtain funds
from its subsidiaries, under Tennessee law a corporation may not pay a cash
dividend if, after giving it effect, (1) the corporation would not be able to
pay its debts as they become due in the usual course of business, or (2) the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
NOTE 8 -- INCOME TAXES
The components of temporary differences and the approximate tax effects
at June 30, 2000 and 1999, are as follows:
June 30,
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards
and AMT credits $16,922 $5,918
Accruals 1,825 1,097
--------------------------------------------------------------------------------------------------------------
Total deferred tax assets $18,747 $7,015
===============================================================================================================
Deferred tax liabilities:
Licenses and intangibles 6,230 5,253
Depreciation 2,564 974
---------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 8,794 6,227
---------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $9,953 $ 788
===============================================================================================================
Current deferred tax assets $1,825 $1,097
Long-term deferred tax assets (liabilities), net 8,128 (309)
---------------------------------------------------------------------------------------------------------------
Net deferred tax assets $9,953 $ 788
===============================================================================================================
At June 30, 2000 the Company had $43,520 of net operating loss
carryforwards in addition to $95 of AMT credits available to offset taxable
income in future periods. Of these amounts, $40,857 of the net operating loss
carryforwards do not begin to expire until 2019. Due to the length of time until
the expiration date and the value of the Company's commercial television
stations the Company did not deem it necessary to provide a valuation allowance
at June 30, 2000.
Income tax expense (benefit) varies from the amount computed by applying
the federal corporate income tax rate of 34% to income (loss) before income
taxes as follows:
Years Ended June 30,
2000 1999 1998
---- ---- ----
Computed "expected" income tax expense (benefit) $ (7,373) $ (1,921) $ 830
Increase (decrease) in income taxes
Resulting from:
State income tax expense (benefit), net
of federal effect (859) (224) 98
Nondeductible expenses 64 45 38
Other (22) (248) (39)
- ----------------------------------------------------------------------------------------------------------------------------
Actual income tax expense (benefit) $ (8,190) $ (2,348) $ 927
============================================================================================================================
The components of income tax expense (benefit) for the years ended June
30, 2000, 1999 and 1998, are as follows:
Years Ended June 30,
2000 1999 1998
---- ---- ----
Current:
State $ - $ (16) $ 101
--------------------------------------------------- -------------- -------------- ---------------
Federal - - 536
--------------------------------------------------- -------------- -------------- ---------------
$ - $ (16) $ 637
Deferred:
State (854) (577) 46
Federal (7,336) (1,755) 244
--------------------------------------------------- -------------- -------------- ---------------
(8,190) (2,332) 290
--------------------------------------------------- -------------- -------------- ---------------
Total expense (benefit) $ (8,190) $ (2,348) $ 927
=================================================== ============== ============== ===============
The Company has allocated deferred tax benefits directly to additional
paid in capital for the years ended June 30, 2000 and 1999 of $973 and $1,017,
respectively. These amounts reflect the tax benefit received from the exercise
and disqualifying dispositions by employees of qualified stock options.
NOTE 9 - COMMITMENTS
Transponder Use Agreement and Purchased Air-Time. In December 1995, the
Company's transponder lease with Space Connection 402R became effective. The
Company's principal satellite transponder is leased on a fully protected and
non-preemptible basis, which means as a broker of satellite services, The
SPACECONNECTION, Inc. has agreed to furnish the Company alternative service on
another transponder of similar quality and location or, if necessary, on another
satellite to support an in-orbit failure of Galaxy XI C-Band transponder(s). The
expenses for the transponder and purchased air time (primarily for cable access
fees) were $33,291, $26,303, and $17,768, for fiscal years ended June 30, 2000,
1999 and 1998, respectively. The Company has recently agreed to change its
transponder to a more desirable satellite, and is currently re-negotiating its
transponder lease.
Royalty Commitments. Collector's Edge has minimum contractual
commitments to National Football League Players, Incorporated and National
Football League Properties, Inc., in addition to other minor licensors which are
in the normal course of its business.
The commitments at June 30, 2000, approximate $1,500, which will expire March
31, 2001.
Lease Commitments. Rental expense for transponder, office, studio and
miscellaneous equipment was $3,194, $2,874 and $2,312 for the fiscal years ended
June 30, 2000, 1999 and 1998, respectively.
Future minimum lease payments of noncancelable operating leases are as
follows at June 30, 2000:
2001 2,675
2002 2,636
2003 2,622
2004 2,517
2005 383
Thereafter 601
The Company has agreements with various affiliated television and cable
system operators to purchase air time. The terms of the agreements vary from
week-to-week to one year periods and are generally cancelable on 30 days notice.
NOTE 10 -- RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 2000, 1999 and 1998, the Company
engaged in some related party transactions in the normal course of business,
none of which exceeded $25 in total except, as described below.
The Company leased its Knoxville office and studio space from William
and Warren, Inc., an entity owned by W. Paul Cowell, a director of the Company
until December 2, 1998, and paid total lease payments of approximately $82
during the fiscal year ended June 30, 1999. Management of the Company determined
that these terms and conditions were competitive with comparable commercial
space being leased in the Knoxville market. With the relocation of its offices
and studios to Nashville, Tennessee, the Company terminated this lease in
January 1999.
On August 16, 1995, the Company issued its $2,000 Variable Rate
Convertible Secured Note Due 2000 to Global Network Television, Inc. J.D.
Clinton, a director and principal shareholder of the Company, is the sole
shareholder and Chairman of Global Network Television (now Gatehouse Equity
Management Corporation). The loan carried interest at the prime rate plus 2%,
and was payable in 60 monthly installments. The note was convertible to common
stock of the Company based upon one share of stock for each $3.00 of the
principal balance of the note. On October 1, 1997, the note was transferred to
FBR Private Equity Fund, L.P., which immediately converted the note to 444,177
shares of common stock of the Company.
In September 1998, the Company relocated its studios and headquarters to
newly constructed facilities in Nashville, Tennessee. The real property for the
new facility was initially acquired by a limited liability company organized by
individuals related to J.D. Clinton, and that company obtained a construction
loan (the "Facility Loan") in January 1998 from a commercial lender to build the
facility. The loan was guaranteed by Shop At Home and also was personally
guaranteed by Mr. Clinton. The Company agreed to pay to Mr. Clinton an annual
fee equal to 1% of the amount of the Facility Loan in consideration for Mr.
Clinton's guaranty, which was to be payable in either cash or in stock of the
Company. In March 1998, the Company acquired the facility by acquiring all of
the ownership interest in the limited liability company for a price equal to the
balance due on the Facility Loan, thereby generating no profits for the owners
of the limited liability company. The Company paid the Facility Loan in full
upon the acquisition of the limited liability company, thereby terminating Mr.
Clinton's guaranty. As a result of the agreement to pay a fee to Mr. Clinton for
his guaranty, the Company issued to Mr. Clinton a total of 11,226 shares of
Common Stock.
In connection with the relocation of the primary residence of Kent E.
Lillie, President & Chief Executive Officer of the Company, from Atlanta,
Georgia, to Nashville, Tennessee, the Company made an interest-free loan to Mr.
Lillie in the principal amount of $800,000. This loan is repayable from a
portion of any bonuses paid to Mr. Lillie by the Company. As of June 30, 2000, a
total of $33 of the principal balance of the note had been repaid. The note is
payable in full on June 30, 2002.
In February 1995, the Company entered into a financing lease transaction
with Brownsville Auto Leasing Corporation whereby the Company leased the
transmitter for WMFP(TV). The monthly principal payments on the lease were $10
and the outstanding balance on the lease at December 31, 1997, was $350. James
P. Clinton, the brother of J.D. Clinton, was a principal of Brownsville Auto
Leasing Corporation. This financing transaction was terminated in April 1998,
when the Company acquired the transmitter from the lessor at the price agreed
upon in the lease agreement.
In September 1999 the Company entered into a lease agreement with
InSouth Bank whereby the Company leased a portion of an office building located
adjacent to the Company's Nashville facilities. InSouth Bank is controlled by
J.D. Clinton, Chairman of the Board of Directors of the Company and a principal
shareholder. The terms of the lease were determined by management of the Company
to be competitive with comparable commercial facilities in the area where they
are located.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
1999 Stock Option Plan. In 1999 the Company's Board of Directors
adopted the 1999 Employee Stock Option Plan which provides for the issuance of
up to three million shares of common stock. The 1999 Plan is administered by a
committee of the Board of Directors consisting of non-employee directors. All
directors and key employees are eligible to receive options. Options granted
under the plan can be either incentive stock options or unqualified stock
options. Incentive stock options to purchase common stock may be granted at not
less than 100% of the fair market value of the stock on the date of the grant.
No options may be granted after July 21, 2009. No option that is an incentive
stock option shall be exercisable after the expiration of ten years from the
date such option was granted (five years if granted to a 10% shareholder). The
options may provide for vesting, in full or in part, after a change in control
of the Company.
1991 Stock Option Plan. In 1991, the Company adopted a stock incentive
plan for eligible employees. A special administrative committee of the Board of
Directors was appointed to administer the plan. All employees of the Company are
eligible to receive stock options under the plan. Options granted under the plan
can be either incentive stock options or nonqualified stock options. Incentive
stock options to purchase common stock may be granted at not less than 100% of
the fair market value of the common stock on the date of the grant. Options
granted under the plan become exercisable immediately in the event 80% or more
of the Company's outstanding stock or substantially all of its assets are
acquired by a third party. No options may be granted after October 15, 2001. No
option that is an incentive stock option shall be exercisable after the
expiration of ten years from the date such option was granted or five years
after the expiration in the case of any such option that was granted to a 10%
stockholder. A maximum of 1,500,000 shares of common stock may be issued under
the plan upon the exercise of options.
No compensation expense has been recognized for options granted under
the plans. Had compensation expense for the Company's plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the methods in SFAS 123, the Company's net income (loss) and net income
(loss) per share would have been adjusted to the pro forma amounts indicated in
the following table.
2000 1999 1998
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (13,493) $ (15,497) $ (3,304) $ (4,230) $ 1,513 $ 1,113
Basic earnings (loss) per share $ (.44) $ (.51) $ (.14) $ (.18) $ .10 $ .08
Diluted earnings (loss) per share $ (.44) $ (.51) $ (.14) $ (.18) $ .09 $ .06
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for the grants in the years ended June 30, 2000, 1999
and 1998, respectively: dividend yield of 0%; expected volatility of 77%, 76%
and 65%; risk-free interest rate of 6.05%, 4.5% and 5.5%; and expected life of
7.5 years.
A summary of the status of the Company's options as of June 30, 2000,
1999 and 1998 and changes during the periods ending on those dates is presented
below:
June 30,
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of
period: 2,449,200 $6.14 2,379,000 $2.51 2,192,500 $2.20
Granted 997,000 9.18 1,143,000 10.02 698,000 3.40
Exercised (400,600) 2.00 (917,800) 2.47 (454,600) 1.10
Forfeited (234,000) 7.75 (155,000) 3.90 (56,900) 2.88
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,811,600 $ 7.62 2,449,200 $ 6.14 2,379,000 $2.51
Options exercisable at period
end 987,500 901,800 1,175,000
Weighted average fair value of
options granted during the
year $ 7.08 $ 7.78 $ 2.61
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 6/30/00 Life Price at 6/30/00 Price
- -------------------------------- --- -------------- -- --------------- -- ------------ -- --------------- -- ------------
$2.00 - $2.99 748,600 6 years $ 2.85 315,200 $ 2.85
$3.00 - $3.99 292,000 8 years 3.52 101,400 3.65
$4.00 - $5.99 154,500 10 years 4.76 1,600 5.25
$6.00 - $7.99 189,500 9 years 6.63 70,000 6.97
$8.00 - $9.99 251,000 9 years 8.83 5,000 9.94
$10.00 - $10.99 194,500 9 years 10.50 22,000 10.47
$11.00 - $11.99 548,000 9 years 11.78 404,800 11.81
$12.00 - $12.99 211,000 10 years 12.49 - -
$13.00 - $13.99 222,500 9 years 13.18 67,500 13.11
- -------------------------------- --- -------------- -- --------------- -- ------------ -- --------------- -- ------------
2,811,600 987,500
================================ === ============== == =============== == ============ == =============== == ============
At June 30, 2000, warrants to purchase 4,170,066 shares of common stock
are outstanding. Of this total, warrants to purchases 2,170,066 shares are at
$1.43 per share and expire on June 30,2001. The remaining warrants to purchase
2,000,000 shares are at $5.00, subject to adjustment, and expire on June 30,
2003.
NOTE 12 -- EARNINGS (LOSS) PER SHARE
The following table sets forth for the periods indicated the calculation
of net earnings (loss) per share included in the Company's Consolidated
Statements of Operations:
Years Ended June 30,
2000 1999 1998
---- ---- ----
Numerator:
Net income (loss) $(13,493) $ (3,304) $ 1,513
Preferred stock dividends (6) ( 14) (14)
- --------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings per
share-income (loss) available to
common stockholders (13,499) (3,318) 1,499
Effect of dilutive securities:
Preferred stock dividends 6 14 14
- --------------------------------------------------------------------------------------------------------------------
Interest on convertible debt - 50
- --------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per
share-income available to
common stockholders after
assumed conversions $(13,493) $(3,304) $1,563
====================================================================================================================
Denominator:
Denominator for basic earnings per
share-weighted-average shares 30,490 23,771 14,511
Effect of dilutive securities:
a) Employee stock options - - 436
b) Non employee options - - 204
c) Warrants - - 2,088
d) Convertible preferred stock - - 138
e) Convertible debt - - 119
Denominator for diluted earnings per
Share-adjusted weighted-average
====================================================================================================================
Shares and assumed conversions 30,490 23,771 17,496
====================================================================================================================
Basic earnings (loss) per share $ (.44) $ (.14) $ .10
====================================================================================================================
Diluted earnings (loss) per share $ (.44) $ (.14) $ .09
====================================================================================================================
Although the amounts are excluded from the computations in loss years because
their inclusion would be anti-dilutive they are shown here for informational and
comparative purposes only:
a) Employee stock options 1,007 1,184 -
b) Non Employee options - 239 -
c) Warrants 2,035 2,389 -
d) Convertible preferred stock 94 121 -
NOTE 13 -- EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all full-time
employees who have one year of service and are age twenty-one or older.
Participants are permitted to make contributions in an amount equal to 1% to 15%
of their compensation actually paid or received. Employer contributions are
discretionary and allocated to each eligible employee in proportion to his or
her compensation as a percentage of the compensation of all eligible employees.
During 2000, 1999 and 1998, the Company did not make any cash contributions to
the plan. As of July 1, 1999, the Company has elected to match in the form of
Company stock a portion of the employee's contribution up to a maximum of 2.5%
of the employee's annual contribution. The Company match on the 401K for fiscal
year ended June 30, 2000 was 10,338 shares of common stock. The match is done as
of December 31.
NOTE 14 -- CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk include cash on deposit in financial
institutions and accounts receivable. Receivables are due from credit card
companies and ultimate customers. The Company maintains reserves which
management believes are adequate to provide for losses. Management believes the
financial institutions holding the cash to be financially sound.
The electronic retailing industry is sensitive to general economic
conditions and business conditions affecting consumer spending. The Company's
product lines include jewelry, sports cards, sports memorabilia, collectibles
and other unique items that may make it more sensitive to economic conditions.
Collector's Edge products include various sports cards and memorabilia, some of
which are sold through Shop At Home.
NOTE 15 -- ACQUISITION BY SAH ACQUISITION CORPORATION II
On March 27, 1998, SAH Acquisition Corporation II, a wholly-owned
subsidiary of the Company, acquired the assets and broadcast licenses of
television stations KCNS, San Francisco, California; WRAY, Wilson, North
Carolina (Raleigh market); and WOAC, Canton, Ohio (Cleveland market). The
stations were purchased pursuant to an Asset Purchase Agreement dated September
23, 1997 between Global Broadcasting Systems, Inc., and its affiliate ("Global
Broadcasting") and SAH Acquisition II. Under the agreement, Global Broadcasting
agreed to sell KCNS and WRAY to SAH Acquisition II and to assign to SAH
Acquisition II the right to purchase WOAC under a contract which Global
Broadcasting had with a third party. The total purchase price paid by SAH
Acquisition II to Global in connection with the acquisition of KCNS and WRAY was
$52,350, and SAH Acquisition II purchased WOAC for a total purchase price of
$23,500.
The acquisition of the stations was accounted for by the Company as an
acquisition of assets and not the acquisition of a "business," as defined in SEC
Rule 210.11-01(d). The Company reached this conclusion because, with the
exception of a de minimis period of time, none of the acquired stations had been
historically operated as a broadcast outlet for home shopping programming by
Global or the predecessor in title, and the Company concluded that there was no
continuity of revenues from those stations from which relevant historical
information could be derived.
Global Broadcasting also had a contractual right to acquire WPMC(TV) in
Jellico, Tennessee (Knoxville market) from the licensee of that station. Shop At
Home agreed to a transaction whereby the contractual right to acquire WPMC was
assigned to another party. As part of that assignment, Shop At Home received a
payment $900 from the party which ultimately purchased the station, and also
received a $500 reduction in the purchase price of KCNS and WRAY due to the
return to Global Broadcasting of a $500 escrow deposit it had previously paid in
connection with its agreement to purchase WPMC.
Since the purchase price for the assets of Global Broadcasting to SAH
Acquisition II did not change as a result of the assignment of the contract to
purchase WPMC, except to the extent of the $500 escrow payment returned to
Global Broadcasting, Shop At Home did not deem it to be appropriate to allocate
any portion of its purchase price of the assets of Global Broadcasting to its
rights in the WPMC contract.
NOTE 16 - ACQUISITION OF WSAH
On June 3, 1999, SAH-Northeast Corporation ("Northeast"), a wholly-owned
subsidiary of Shop At Home, acquired the assets of WBPT, Bridgeport,
Connecticut, and changed its call sign on that date to WSAH. Northeast acquired
WSAH at a potential total purchase price of $21,000, of which approximately
$4,800 was contingent consideration based on potential incremental increases
during the 12-month period following the purchase closing in the station's cable
household reach above the estimated 680,000 existing households at closing up to
a maximum of 900,000 households. The calculation of the contingent consideration
is at a rate of $22 per additional cable household (applied to the maximum of
220,000 incremental households). The Company estimates 765,000 households were
reached as of June 30, 2000 (representing 85,000 incremental households).
Accordingly, the Company estimates $1,870 of the $4,800 total potential
consideration is the final settlement of the purchase price. The Seller has
contested this conclusion and the settlement is currently in arbitration.
In accordance with the purchase agreement, the maximum contingent
consideration of $4,800 is held in a restricted escrow account. Upon the
conclusion of the arbitration, the portion not paid to the seller will be
returned to the Company and will be used for principal payment reduction of the
Company's revolving credit agreement in accordance with the terms of that
agreement.
The purchase price has therefore been allocated as follows:
FCC License $17,137
Property and equipment 933
- ------------------------------------------------ -- ---------------------
Total $18,070
================================================ == =====================
The purchase price (after applying the $1,000 escrow deposit) was funded
through a bridge loan which was repaid in July 1999 from the proceeds of Shop At
Home's public offering of common stock.
The acquisition of WSAH was accounted for by the Company as an
acquisition of assets and not the acquisition of a "business," as defined in SEC
Rule 210.11-01(d). The Company reached this conclusion because, with the
exception of a de minimis period of time, the acquired station had not been
historically operated as a broadcast outlet for television shopping programming
and the Company concluded that there was no continuity of revenues from this
station from which relevant historical information could be derived.
NOTE 17 -- CONTINGENCIES
The Company is subject to claims in the ordinary course of business.
Management does not believe the resolution of such claims will result in a
material adverse effect on the future financial condition, results of
operations, or cash flows of the Company.
NOTE 18 -- OPERATING SEGMENTS
Effective June 30, 1999, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which supercedes
previously issued segment reporting disclosure rules and requires reporting
segment information that is consistent with the way in which management operates
the Company. The segment disclosures for prior years have been restated to
conform with the current year presentation. The Company operates principally in
three segments; Network, collectibles.com and Collector's Edge. The Company
operates almost exclusively in the United States.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Intersegment sales and
transfers are accounted for as if the sales or transfers were with third
parties, that is, at current market prices.
OPERATING SEGMENT DATA
Years Ended June 30,
2000 1999 1998
---- ---- ----
Revenue:
Network $ 187,310 $ 142,360 $95,474
collectibles.com 4,675 - -
Collector's Edge 9,745 9,569 5,900
Intersegment eliminations (1,668) 37 (617)
-----------------------------------------------------------------------------------------------
$ 200,062 $ 151,966 $ 100,757
===============================================================================================
Operating profit (loss):
Network $ (4,447) $ 2,303 $ 4,394
collectibles.com (6,901) - -
Collector's Edge (1,240) 312 (449)
Intersegment eliminations - 119 (119)
-----------------------------------------------------------------------------------------------
$ (12,588) $ 2,734 $ 3,826
===============================================================================================
Depreciation and amortization:
Network $ 7,761 $ 4,202 $ 1,515
collectibles.com 612 - -
Collector's Edge 562 734 673
-----------------------------------------------------------------------------------------------
$ 8,935 $ 4,936 $ 2,188
===============================================================================================
Interest income:
Network $ 789 $ 663 $ 606
collectibles.com - - -
Collector's Edge - - -
Intersegment eliminations (40) (20) (42)
-----------------------------------------------------------------------------------------------
$ 749 $ 643 $ 564
===============================================================================================
Interest expense:
Network $ 9,529 $ 8,951 $ 2,735
collectibles.com 173 - -
Collector's Edge 26 33 157
Intersegment eliminations (40) (20) (42)
-----------------------------------------------------------------------------------------------
$ 9,688 $ 8,964 $ 2,850
===============================================================================================
Income (loss) before taxes:
Network $ (13,342) $ (6,051) $ 3,167
collectibles.com (7,074) - -
Collector's Edge (1,267) 280 (608)
Intersegment eliminations - 119 (119)
-----------------------------------------------------------------------------------------------
$ (21,683) $ (5,652) $ 2,440
===============================================================================================
Income taxes:
Network $ (5,035) $ (2,460) $ 1,158
collectibles.com (2,674) - -
Collector's Edge (481) 112 (231)
-----------------------------------------------------------------------------------------------
$ (8,190) $ (2,348) $ 927
===============================================================================================
Total assets:
Network $ 211,433 $ 164,009 $ 138,015
collectibles.com 8,830 - -
Collector's Edge 8,331 7,855 6,905
Intersegment eliminations (1,300) (1,167) (1,150)
-----------------------------------------------------------------------------------------------
$ 227,294 $ 170,697 $ 143,770
===============================================================================================
Capital expenditures:
Network $ 11,133 $ 14,089 $ 16,771
collectibles.com 6,617 - -
Collector's Edge - 12 29
-----------------------------------------------------------------------------------------------
$ 17,750 $ 14,101 $ 16,800
===============================================================================================
Vendor concentration. During the year ended June 30, 2000, the Company
had three vendors from whom it purchased from each more than 10% of its total
cost of goods sold. These consisted of an electronics vendor, a coin vendor and
a sports vendor which accounted for approximately 15.3%, 14.9% and 11.1% of the
Company's cost of goods sold. The Company believes that it could find
replacement vendors for the products sold by any one of these vendors without a
material adverse effect on the Company.
NOTE 19 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial
information for the Company, segregating the Parent from the guarantor
subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the
Company and guarantees are full, unconditional, joint and several. The separate
company financial statements of each guarantor subsidiary have not been included
herein because management does not believe that their inclusion would be more
meaningful to investors than the presentation of the condensed consolidating
financial information presented below.
CONSOLIDATING BALANCE SHEET DATA
June 30, 2000 June 30, 1999
------------- -------------
Guarantor Guarantor
Parent Subsidiaries Consolidated(1) Parent Subsidiaries Consolidated(1)
Assets:
Cash and cash equivalents $ 28,090 $ (575) $ 27,515 $ 6,760 $ 306 $ 7,066
Restricted cash 5,058 - 5,058 5,433 - 5,433
Accounts receivable 103,041 2,704 15,892 92,768 3,413 8,969
Inventories 12,367 3,461 15,828 5,531 1,702 7,234
Prepaid expenses 1,144 70 1,214 850 69 919
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 149,700 5,660 65,507 111,342 5,490 29,621
Deferred tax assets 7,909 2,044 9,953 1,097 - 1,097
Notes receivable 1,103 703 1,090 - 690
Property and equipment, net 40,804 8,008 48,812 26,484 8,919 35,403
FCC and NFL licenses, net 136 96,479 96,615 293 96,727 97,020
Goodwill, net 543 1,659 2,202 - 2,367 2,367
Other assets 3,179 323 3,502 3,953 546 4,499
Investment in subsidiaries 27,071 1,400 - 27,630 1,400 -
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 230,445 $ 115,573 $ 227,294 $ 171,889 $115,449 $ 170,697
==============================================================================-=================================================
Liabilities and
Stockholder's Equity:
Accounts payable and
accrued expenses $28,129 $91,250 $32,215 $26,387 $88,778 $27,955
Current portion--capital
leases and long-term
debt 12,775 - 12,775 20,298 - 20,298
Deferred revenue 475 3 478 105 6 111
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 41,379 91,253 45,468 46,790 88,784 48,364
Long-term debt including
Capital Leases 84,336 400 84,336 75,893 400 75,893
Deferred income taxes 898 (588) 309
Redeemable preferred
Stock 12,504 750 12,504 834 750 834
Common stock 78 2 78 61 2 61
Additional paid-in capital 106,482 27,719 106,482 53,317 28,278 53,317
Accumulated deficit (14,334) (4,551) (21,574) (5,904) (2,177) (8,081)
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity $230,445 $115,573 $227,294 $171,889 $115,449 $170,697
==============================================================================-=================================================
(1) Intercompany balances have been eliminated in the consolidated totals.
Consolidating Statement of Operations and Cash Flow Data
June 30, 2000 June 30, 1999 June 30, 1998
Parent Guarantor Consolidated Parent Guarantor Consolidated Parent Guarantor Consolidated
Subsidiaries (1) Subsidiaries (1) Subsidiaries (1)
Net revenues $ 190,786 $ 16,700 $ 200,062 $ 135,139 $16,791 $ 151,966 $ 92,689 $ 8,685 $100,757
Cost of goods sold 122,946 7,881 130,392 85,369 6,528 91,816 54,980 4,379 58,862
Operating expenses 73,905 12,653 82,258 49,556 7,814 57,416 33,958 4,111 38,069
- ----------------------------------------------------------------=------------------------------------=------------------------------
Income (loss) from
operations (6,065) (3,834) (12,588) 214 2,449 2,734 3,751 195 3,826
Interest expense 9,703 25 9,688 8,909 76 8,964 2,708 184 2,850
Interest income 789 - 749 655 8 643 606 - 564
Other income (expense) (185) 29 (156) 2,902 (2,967) (65) 1,967 (1,068) 900
- ----------------------------------------------------------------=------------------------------------=------------------------------
Income (loss) before
taxes (15,164) (3,830) (21,683) (5,138) (586) (5,652) 3,616 (1,057) 2,440
Income tax expense
(benefit) (6,735) (1,455) (8,190) (2,114) (234) (2,348) 1,400 (473) 927
- ----------------------------------------------------------------=------------------------------------=------------------------------
Net income (loss) $ (8,429) $ (2,375) $ (13,493) $ (3,024) $ (352) $ (3,304) $ 2,216 $ (584) $ 1,513
====================================================================================================================================
CASH FLOWS
Cash provided by
(used In) operations $ (24,693) $ 1,468 $(23,225) $(18,883) $17,956 $ (927) $(75,394) $80,810 $5,573
Cash provided by
(used in) investing
activities (17,394) (2,251) (19,645) (17,051) (18,026) (35,077) (12,763) (76,747) (89,653)
Cash provided by
(used in) financing
activities 63,319 - 63,319 21,846 - 21,846 104,248 (4,008) 100,226
- ----------------------------------------------------------------=------------------------------------=------------------------------
Increase (decrease) in
cash 21,232 (783) 20,449 (14,088) (70) (14,158) 16,091 55 16,146
Cash at beginning of
period 6,760 306 7,066 20,848 376 21,224 4,757 321 5,078
- ----------------------------------------------------------------=------------------------------------=------------------------------
Cash at end of period $ 27,992 $ (477) $ 27,515 $ 6,760 $ 306 $ 7,066 $ 20,848 $ 376 $ 21,224
====================================================================================================================================
(1) Intercompany balances have been eliminated in the consolidated totals.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information with respect to directors and executive officers of the
Company to be included in the definitive Proxy Statement which the Company will
file for the 2000 Annual Meeting of Shareholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Rumuneration of Directors and
Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information with respect to security ownership by management in the
Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Item 8 of Form
10-K:
1.Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 2000 and
1999 Consolidated Statements of Operations for the
years ended June 30, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998.
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
The other schedules are omitted because the
required information is either inapplicable or
has been disclosed in the consolidated
financial statements and notes thereto.
3. Exhibits
The Index to Exhibits is at page 78.
(b) Reports on Form 8-K
A Form 8-K filed on May 31, 2000 contained a transcript of the Company's
regularly scheduled quarterly conference call with financial analysts and other
interested parties discussing the Company's 3rd quarter financial results.
SHOP AT HOME, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(Thousands of Dollars)
Balance at Charged to Balance
beginning Returns and at end
of year Allowances Deductions (1) of year
Year ended June 30, 2000
estimated credits
due to customers $ 3,069 $ 60,792 $ 61,150 $ 2,711
Year ended June 30, 1999
estimated credits
due to customers $ 3,987 $ 32,610 $ 33,528 $ 3,069
Year ended June 30, 1998
estimated credits
due to customers $ 3,121 $ 28,363 $ 27,497 $ 3,987
(1) Merchandise returned
Balance at Balance
beginning Additional at end
of year provisions Reduction of year
Year ended June 30, 2000
Accounts receivable
Reserves $ 543 $ 1,816 $ 764 $ 1,595
Year ended June 30, 1999
Accounts receivable
Reserves $ 535 $ 561 $ 553 $ 543
Year ended June 30, 1998
Accounts receivable
Reserves $ 59 $ 476 (2) $ - $ 535
(2) net of $288 charged to goodwill as a result of adjustment to originally
recorded purchase transaction.
Year ended June 30, 2000
Inventory reserves $ 304 $ 855 $ 490 $ 669
Year ended June 30, 1999
Inventory reserves $ 21 $ 602 $ 319 $ 304
Year ended June 30, 1998
Inventory reserves $ 698 $ 78 $ 755 $ 21
INDEX TO EXHIBITS
Exhibit
No. Description
3(i).4 Restated Charter, recorded August 13, 1999, filed as Exhibit
3(i).4 to the Annual Report on Form 10-K, filed on August 31,
1999, and incorporated herein by this reference.
3(i).5 Articles of Amendment to the Restated Charter, recorded
April 13, 200, filed as Exhibit 3.3 to the Registration
Statement on Form S-3, filed on July 26, 2000, and
incorporated herein by this reference.
3(i).6 Articles of Amendment to the Restated Charter, recorded June
30, 2000, filed as Exhibit 3.1 to the Current Report on
Form 8-K, filed on July 5, 2000, and incorporated herein by
reference.
3(ii).1 Restated Bylaws, adopted July 21, 1999, filed as Exhibit
3(ii).1 to the Annual Report on Form 10-K, filed on August
31, 1999, and incorporated herein by this reference.
4.4 Specimen of Preferred Stock certificate, filed as Exhibit
4.9 to Amendment No. 1 to the Registration Statement on
Form S-4, filed on January20,1995,and incorporated herein by
this reference.
4.6 Form of Trust Indenture with PNC Bank, N.A., as Trustee, with
regard to the 11% Secured Notes due 2005, containing a
specimen of the Note, filed as Exhibit 4.6 to Amendment No. 2
to the Registration Statement on Form S-1, filed on
March 21, 1998, and incorporated herein by this reference.
4.7 Form of Security and Pledge Agreement, filed as Exhibit 4.7
to Amendment No. 2 to the Registration Statement on Form
S-1, filed on March 21,1998,and incorporated herein by this
reference.
4.8 Form of Warrant, filed as Exhibit 4.2 to the Current Report
on Form 8-K, filed on July 5, 2000, and incorporated
herein by this reference.
10.1 Company's Omnibus Stock Option Plan, filed as Exhibit 10.3
to the Annual Report on Form 10-K, for the fiscal year
ended June 30,1992, and incorporated herein by this reference.
10.4 Form of Transponder Use Agreement dated April 1, 1993 between
the Company and B & P The Space Connection, filed as
Exhibit 10.5 to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1993, and incorporated herein by
this reference.
10.5 Transponder Use Agreement dated June 6, 1994, between the
Company and Broadcast International, Inc., filed as
Exhibit 10.5 to the Registration Statement on Form S-4, filed
on December 28, 1994, and incorporated herein by this
reference.
10.6 Form of Transponder Lease Agreement dated December 21, 1994,
between the Company and Broadcast International, Inc.,
filed as Exhibit 10.7 to the Registration Statement on Form
S-4, filed on December 28, 1994, and incorporated herein
by this reference.
10.7 Stock and Warrant Purchase Agreement dated June 9, 1993,
between the Company, SAH Holdings, L.P., and Global Network
Television, Inc., filed as Exhibit B to the Statement on
Schedule 13D of SAH Holdings, L.P., filed on June 18, 1993,
and incorporated herein by this reference.
10.8 First Amendment to Stock and Warrant Purchase Agreement
dated July 12, 1993, between the Company, SAH Holdings,
L.P., and Global Network Television, Inc., filed as
Exhibit E to the Statement on Schedule 13D of SAH Holdings,
L.P., filed on July 27, 1993, and incorporated herein by this
reference.
10.11 Form of Warrant to Purchase Shares dated September 7, 1993,
between the Company and SAH Holdings, L.P., filed as Exhibit A
to the Current Report on Form 8-K, filed on September 17,
1993, and incorporated herein by this reference.
10.12 Form of Option Agreement for options issued to employees,
executive officers and others, filed as Exhibit 10.13 to the
Registration Statement on Form S-4, filed on December 28,
1994, and incorporated herein by this reference.
10.32 Lease Agreement dated December 28, 1993, by and between
H & C Communications, Inc. and Broadcast, Cable and
Satellite Technologies, Inc., filed as Exhibit 10.16 to the
Current Report on Form 8-K, filed on December 20, 1994,
and incorporated herein by this reference.
10.33 Agreement dated as of December 17, 1993, by and between
Blue Ridge Tower Corporation and Broadcast, Cable and
Satellite Technologies, Inc., filed as Exhibit 10.17 to the
Current Report on Form 8-K, filed on December 20, 1994,
and incorporated herein by this reference.
10.34 Amendment to Agreement dated December 17, 1993, by and between
Blue Ridge Tower Corporation and Broadcast, Cable and
Satellite Technologies, Inc., filed as Exhibit 10.18 to the
Current Report on Form 8-K, filed on December 20, 1994,
and incorporated herein by this reference.
10.43 Employment Agreement between Kent E. Lillie and the Company
dated July 1, 1997, filed as Exhibit 10.43 to the Annual
Report on Form 10-K for the fiscal year ended June 30, 1997,
filed on September 29, 1997, and incorporated herein by
this reference.
10.49 Amendment No.1 to Company's Omnibus Stock Option Plan
filed as Appendix A to the Company's Proxy Statement on
Schedule 14A for the fiscal year ended June 30, 1996, filed
on November 18, 1996, and incorporated herein by this
reference.
10.50 Form of options issued to directors dated June 19, 1997,
filed as Exhibit 10.50 to the Registration Statement on
Form S-1, filed on January 14, 1998, and incorporated herein
by this reference.
10.51 Form of Transponder Use Agreement dated June 25, 1995,
between the Company and B&P The SpaceConnection, filed as
Exhibit 10.51 to the Registration Statement on Form S-1,
filed on January 14, 1998, and incorporated herein by this
reference.
10.52 Asset Purchase Agreement between Shop At Home, Inc., and
Paxson Communications regarding WBPT(TV), Bridgeport,
Connecticut, dated February 26, 1999, filed as Exhibi
10.46 to the Current Report on Form 10-Q/A, filed May 14,
1999, and incorporated herein by this reference.
10.53 1999 Employee Stock Option Plan, filed as Exhibit 10.53 to
the Annual Report on Form 10-K, filed August 31, 1999,
and incorporated herein by this reference.
10.54 Employment Agreement with Kent E. Lillie and Shop At Home,
Inc. dated January 27, 1999, filed as Exhibit 10.54 to
the Annual Report on Form 10-K/A, filed on October 28, 1999,
and incorporated herein by this reference.
10.55 Employment Agreement with Arthur D. Tek and Shop At Home,
Inc. dated February 25, 1999, filed as Exhibit 10.55 to
the Annual Report on Form 10-K/A, filed on October 28, 1999,
and incorporated herein by this reference.
10.56 Lease Agreement with InSouth Bank dated September 1, 1999,
filed as Exhibit 10.56 to the Annual Report on Form
10-K/A, filed on October 28, 1999, and incorporated herein by
this reference.
10.57 Registration Rights Agreement, between the Company and
certain investors, dated June 30, 2000, and filed as Exhibit
10.1 to the Current Report on Form 8-K, filed on July 5, 2000,
and incorporated herein by this reference.
10.58 Securities Purchase Agreement, between the Company and
certain investors, dated June 30, 2000, and filed as Exhibit
10.2 to the Current Report on Form 8-K, filed on July 5, 2000,
and incorporated herein by this reference.
10.59 Revolving Credit Agreement between the Company and Union Bank
of California, N.A. dated December 15, 1999, and filed as
Exhibit 10.3 to the current report on Form 8-K, filed on July
5, 2000 and incorporated by this reference.
10.60* First Amendment to the Revolving Credit Agreement, dated
August 31, 2000, between the Company and Union Bank of
California, N.A.
11 Schedule of Computation of Net Income Per Share (in Note 12 to
Consolidated Financial Statements of the Company for
the period ended June 30, 2000, included herein).
21* Subsidiaries of the Company.
27* Financial Data Schedule. (For SEC Use Only)
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SHOP AT HOME, INC.
By: /s/ Kent E. Lillie Date: 08/30/00
Kent E. Lillie
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Arthur D. Tek Date: 08/30/00
Arthur D. Tek
Executive Vice President and
Chief Financial Officer
By: /s/ R. Steven Chadwell Date: 08/30/00
R. Steven Chadwell
Vice President Finance
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Company and in the capacities on the dates indicated.
By: /s/ J.D. Clinton Date: 08/30/00
J.D. Clinton, Director
By: /s/ A.E. Jolley Date: 08/30/00
A.E. Jolley, Director
By: /s/ Joseph I. Overholt Date: 08/30/00
Joseph I. Overholt, Director
By: /s/ Daniel J. Sullivan Date: 08/30/00
Daniel J. Sullivan, Director
By: /s/ Frank A. Woods Date: 08/30/00
Frank A. Woods, Director
By: /s/ Kent E. Lillie Date: 08/30/00
Kent E. Lillie, Director
Exhibit 21 Subsidiaries of the Company
Name State of Incorporation or Organization
SAH Acquisition Corporation Tennessee
SAH Acquisition Corporation II Tennessee
SAH-Northeast Corporation Tennessee
SAH-Boston License Corp. Tennessee
SAH-New York License Corp. Tennessee
SAH-Houston Corporation Tennessee
SAH-Houston License Corp. Tennessee
Partners-SATH, L.L.C. Tennessee
Collectors' Edge of Tennessee, Inc. Tennessee
Exhibit 60
FIRST AMENDMENT
FIRST AMENDMENT AND WAIVER, dated as of August 31, 2000, to
the Revolving Credit Agreement, dated as of December 15, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among Shop At Home, Inc., a Tennessee corporation (the "Borrower"), the lenders
from time to time parties thereto (the Lenders") and Union Bank of California,
N.A., as administrative agent (in such capacity, the Administrative Agent"); and
FIRST AMENDMENT, dated as of August 31, 2000, to the Guarantee
and Collateral Agreement, dated as of December 15, 1999 (as amended,
supplemented or otherwise modified from time to time, the "Guarantee and
Collateral Agreement"), made by the Borrower and certain of its Subsidiaries in
favor of the Administrative Agent.
This First Amendment ad Waiver to the Credit Agreement and
First Amendment to the Guarantee and Collateral Agreement is referred to herein
as the "Amendment".
W I T N E S S E T H :
WHEREAS, the Borrower, the Lenders and the Administrative
Agent are parties to the Credit Agreement;
WHEREAS, the Borrower and certain of its Subsidiaries have
executed and delivered the Guarantee and Collateral Agreement to the
Administrative Agent for the benefit of the Lenders;
WHEREAS, the Borrower has requested that the Administrative
Agent and the Lenders agree to amend certain provisions of the Credit Agreement
and the Guarantee and Collateral Agreement, as more fully described herein; and
WHEREAS, the Administrative Agent and the Lenders are willing
to amend such provisions of the Credit Agreement and the Guarantee and
Collateral Agreement, but only upon the terms and subject to the conditions set
forth herein;
NOW THEREFORE, in consideration of the premises contained
herein, the parties hereto hereby agree as follows:
Defined Terms. Unless otherwise defined herein, capitalized terms which are used
herein shall have the meanings assigned thereto in the Credit Agreement.
Amendments to Section 1.1 (Defined Terms) of the Credit Agreement. (a) Section
1.1 of the Credit Agreement is hereby amended by adding at the end of the table
contained in the definition of "Applicable Margin" the following:
provided that, on and as of October 31, 2000, each of the rates per
annum set forth in the table above shall be increased by 0.25% and,
provided further that, on and as of December 31, 2000, each of the
rates per annum set forth in the table above shall be increased by an
additional 0.25%.
(b) Section 1.1 of the Credit Agreement is hereby further
amended by deleting the definition of "Termination Date" in its entirety and
substituting the following new definition in lieu thereof:
"Termination Date": July 1, 2001.
(c) Section 1.1 of the Credit Agreement is hereby further
amended by adding thereto the following new definitions in the appropriate
alphabetical order:
"Cash Collateral Account": an account established at the
office of Union Bank of California, N.A., Domestic Customer Service, at
445 South Figueroa Street, Los Angeles, California 90071, designated
"UBOC--Shop At Home".
"Cumulative Interest Deposits": as of any date of
determination, an amount equal to (x) the sum of (i) deposits made by
the Borrower pursuant to Section 5.12 into the Cash Collateral Account,
plus (ii) interest earned on all amounts in the Cash Collateral Account
from the First Amendment Effective Date through such date of
determination, less (y) any amounts applied against scheduled interest
payments pursuant to Section 2.9 hereof.
"Estimated Rate": at any date of determination, a percentage
equal to a rate per annum of 7.7%, plus the then
Applicable Margin for ABR Loans or Eurodollar Loans as applicable.
"First Amendment Effective Date": as defined in the First
Amendment, dated as of August 31, 2000, to this Agreement.
Amendment to Section 2.3 (Scheduled Commitment Reductions) of the Credit
Agreement. Section 2.3 of the Credit Agreement is hereby amended by deleting the
table contained in such Section in its entirety and inserting the following new
table in lieu thereof:
Commitment Reduction Date Commitment Reduction
December 31, 2000 $2,000,000
March 31, 2001 $4,000,000
July 1, 2001 $8,000,000
Amendment to Section 2.6 (Mandatory Prepayments and Commitment Reductions) of
the Credit Agreement. Section 2.6(c) of the Credit Agreement is hereby amended
by deleting such Section in its entirety and substituting the following in lieu
thereof:
(c) If any amounts held in escrow under the Escrow Agreement
and the Acquisition Agreement shall be returned to the Borrower, the
first $1,500,000 of such amounts shall be applied on the date recovered
by the Borrower toward the prepayment of the Total Extensions of Credit
as set forth in Section 2.6(e).
Amendment to Section 5 (Affirmative Covenants) of the Credit Agreement. (a)
Section 5.2(b) of the Credit Agreement is hereby amended by deleting subsection
(ii)(x) of such Section and substituting the following in lieu thereof:
(ii) in the case of monthly financial statements beginning with the
period ending on September 30, 2000 and in the case of quarterly or
annual financial statements, (x) a Compliance Certificate containing
all information and calculations necessary for determining compliance
by the Borrower and its Subsidiaries with the provisions of this
Agreement referred to therein as of the last day of the month, fiscal
quarter or fiscal year of the Borrower, as the case may be, and
(b) Section 5 of the Credit Agreement is hereby further
amended by adding at the end of such Section the following new Sections:
5.12 Interest Reserve. (a) Deposit, on or prior to the First
Amendment Effective Date, into the Cash Collateral Account, an amount
which is equal to the aggregate amount of the Commitments in effect on
such date multiplied by the Estimated Rate multiplied by the number of
days during the period from the First Amendment Effective Date to
December 31, 2000 divided by 360.
(b) Deposit, on or prior to December 31, 2000, into the Cash
Collateral Account an amount which, when added to the Cumulative
Interest Deposits as of such date, is equal to the aggregate amount of
the Commitments in effect on such date multiplied by the Estimated Rate
multiplied by 6/12.
Amendment to Section 6 (Negative Covenants) of the Credit Agreement. (a) Section
6.1(a) of the Credit Agreement is hereby amended by deleting such Section in its
entirety and substituting the following in lieu thereof:
(a) Covenants Prior to Achievement of Positive Consolidated
Internet EBITDA. (i) (A) (x) Permit Consolidated Core EBITDA as at the
last day of any period of four consecutive fiscal quarters of the
Borrower ending with any fiscal quarter set forth below to be less than
the amount set forth below opposite such fiscal quarter or (y) permit
Consolidated Internet EBITDA as at the last day of any period of four
consecutive fiscal quarters of the Borrower ending with any fiscal
quarter set forth below to be less than the amount set forth below
opposite such fiscal quarter and (B) permit Consolidated EBITDA as at
the last day of any four consecutive fiscal quarters of the Borrower
ending with any fiscal quarter set forth below to be less than the
amount set forth below opposite such fiscal quarter:
Maximum Consolidated
December 31, 1999 $8,350,000 ($2,350,000) $6,675,000
March 31, 2000 $10,400,000 ($10,100,000) $2,100,000
June 30, 2000 $15,500,000 ($15,100,000) $3,715,000
September 30, 2000 ($2,250,000) ($7,600,000) ($9,850,000)
December 31, 2000 ($1,400,000) ($8,500,000) ($9,850,000)
March 31, 2001 $3,300,000 ($7,700,000) ($4,500,000)
June 30, 2001 $16,200,000 ($6,100,000) $10,100,000
(ii) (A) (x) Permit Consolidated Core EBITDA for any month of
the Borrower ending with any date set forth below to be less than the
amount set forth below opposite such date or (y) permit Consolidated
Internet EBITDA for any month of the Borrower ending with any date set
forth below to be less than the amount set forth below opposite such
date and (B) permit Consolidated EBITDA for any month of the Borrower
ending with any date set forth below to be less than the amount set
forth below opposite such date:
Maximum Consolidated
September 30, 2000 ($170,000) ($546,000) ($714,000)
October 31, 2000 $625,000 ($539,000) $226,000
November 31, 2000 $1,278,000 ($494,000) $913,000
December 31, 1999 $2,538,000 ($380,000) $2,258,000
January 31, 2001 $2,041,000 ($708,000) $1,518,000
February 28, 2001 $1,954,000 ($518,000) $1,571,000
March 31, 2001 $2,252,000 ($552,000) $1,844,000
April 30, 2001 $2,091,000 ($523,000) $1,704,000
May 31, 2001 $2,173,000 ($490,000) $1,811,000
June 30, 2001 $2,760,000 ($442,000) $2,433,000
(b) Section 6.1(c)(i) of the Credit Agreement is hereby
amended by deleting such Section in its entirety and substituting the following
in lieu thereof:
(i) Make or commit to make any Capital Expenditure, except
Capital Expenditures of the Borrower and its Subsidiaries (A) in the
amount of $10,500,000 in the nine-month period ending June 30, 2000 and
(B) in the amount of $3,100,000 in the fiscal year ending June 30,
2001.
(c) Section 6 of the Credit Agreement is hereby amended by
adding at the end of such Section the following new Section:
6.15 Minimum Cash Balance. Permit at any time the aggregate
amount on deposit in all bank accounts maintained by the Borrower and
its Subsidiaries with the Administrative Agent to be less than
$2,000,000.
Amendment to Schedule 1.1 (Commitments and Notice Address) of the Credit
Agreement. Schedule 1.1 to the Credit Agreement is hereby amended by deleting
such Schedule in its entirety and substituting the Schedule 1.1 attached hereto
as Exhibit A in lieu thereof.
Waivers. The Lenders hereby waive the violations of (a) Sections 6.1(a) and
6.1(c)(i) of the Credit Agreement that occurred as of June 30, 2000 and (b)
Section 2.6(a) of the Credit Agreement by reason of the failure of the Borrower
to apply 100% of the Net Cash Proceeds of the issuance of its Series B Preferred
Stock in accordance with the requirements of such Section.
Amendment to Section 8.6 (Set-Off) of the Guarantee and Collateral Agreement.
Section 8.6 of the Guarantee and Collateral Agreement is hereby amended by
deleting in the first sentence of such Section the phrase "while an Event of
Default shall have occurred and be continuing" and inserting in lieu thereof the
following: "in the event the Borrower fails to make any payment when due and
payable by the Borrower under the Credit Agreement (whether at the stated
maturity date, by acceleration or otherwise)".
Conditions to Effectiveness. (a) This Amendment shall become effective on the
date upon which the following conditions precedent shall have been satisfied
(the "First Amendment Effective Date"):
(i) the Administrative Agent shall have received counterparts
of this Amendment, executed and delivered by a duly authorized officer
of the Borrower, each Guarantor, the Administrative Agent and the
Lenders;
(ii) the Administrative Agent shall have received counterparts
of the Cash Collateral Agreement attached hereto as Exhibit B, executed
and delivered by a duly authorized officer of the Borrower and the
Administrative Agent;
(iii) the Administrative Agent shall have received $6,000,000
from the Borrower, which amount shall be applied toward prepayment of
the principal amount of the Loans then outstanding; and
(iv) the Borrower shall have deposited in the Cash Collateral
Account the amount required by Section 5.12(a) to be deposited therein.
(b) This Amendment shall terminate and no longer have any
force or effect unless on or before the date which is five days after the First
Amendment Effective Date, the Administrative Agent shall have received evidence
in form and substance satisfactory to it that the Borrower has transferred a
minimum amount of $11,000,000 in cash to bank accounts maintained by the
Borrower with the Administrative Agent.
Representations and Warranties. The Borrower hereby represents and warrants to
the Administrative Agent and the Required Lenders that the representations and
warranties set forth in the Loan Documents are true and correct in all material
respects on and as of the First Amendment Effective Date (after giving effect
hereto) as if made on and as of the First Amendment Effective Date (except where
such representations and warranties expressly relate to an earlier date, in
which case such representations and warranties were true and correct in all
material respects as of such earlier date); provided that each reference to the
Credit Agreement therein shall be deemed to be a reference to the Credit
Agreement after giving effect to this Amendment. The Borrower represents and
warrants that, as of the date hereof, no Default or Event of Default has
occurred and is continuing.
Continuing Effect of Loan Documents. This Amendment shall not constitute a
waiver or amendment of any other provision of the Credit Agreement or any other
Loan Document not expressly referred to herein and shall not be construed as a
waiver or consent to any further or future action on the part of the Borrower
that would require a waiver or consent of the Administrative Agent or the
Lenders. Except as expressly amended hereby, the provisions of the Credit
Agreement and the other Loan Documents are and shall remain in full force and
effect.
Payment of Expenses. The Borrower and the Guarantors agree, jointly and
severally, to pay or reimburse the Administrative Agent for all of its
reasonable out-of-pocket costs and expenses incurred in connection with the
development, preparation and execution of this Amendment and any other documents
prepared in connection herewith, and the consummation and administration of the
transactions contemplated hereby, including, without limitation, the reasonable
fees and disbursements of counsel to the Administrative Agent.
Counterparts. This Amendment may be executed by the parties hereto in any number
of counterparts (including by facsimile transmission), and all of such
counterparts taken together shall be deemed to constitute one and the same
instrument.
GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
officers as of the date first above written.
SHOP AT HOME, INC.
By: /s/ Arthur D. Tek
Name: Arthur D. Tek
Title: E.V.P. & C.F.O.
UNION BANK OF CALIFORNIA, N.A., as Administrative Agent
By: /s/ Craig Cappai
Name: Craig Cappai
Title: Asst. V.P.
Each of the undersigned Guarantors
hereby consents to the foregoing
Amendment:
SHOP AT HOME, INC.
By: /s/ Arthur D. Tek
Name: Arthur D. Tek
Title: E.V.P. & C.F.O.
SAH-HOUSTON CORPORATION
By: /s/ George J. Phillips
Name: George J. Phillips
Title: Secretary
SAH-HOUSTON LICENSE CORP.
By: /s/ George J. Phillips
Name: George J. Phillips
Title: Secretary
COLLECTOR'S EDGE OF TENNESSEE, INC.
By: /s/ George J. Phillips
Name: George J. Phillips
Title: Secretary
SAH-NORTHEAST CORPORATION
By: /s/ George J. Phillips
Name: George J. Phillips
Title: Secretary
SAH-BOSTON LICENSE CORP.
By: /s/ George J. Phillips
Name: George J. Phillips
Title: Secretary
SAH-NEW YORK LICENSE CORP.
By: /s/ George J. Phillips
Name: George J. Phillips
Title: Secretary
EXHIBIT A
Schedule 1.1
COMMITMENTS AND NOTICE ADDRESS
1. Name of Lender: Union Bank of California, N.A.
Notice Address: 445 S. Figueroa Street, 16th Floor
Los Angeles, California 90071
Attention: Craig Cappai
Telephone: (213) 236-7517
Facsimile: (213) 236-5747
2. Commitment: $14,000,000
EXHIBIT B
CASH COLLATERAL AGREEMENT
CASH COLLATERAL AGREEMENT dated as of August 31, 2000 (the
"Agreement"), between Shop At Home, Inc., a Tennessee corporation (the
"Borrower"), and Union Bank of California, N.A., as Administrative Agent (in
such capacity, the "Administrative Agent") for the Lenders parties to the Credit
Agreement, dated as of December 15, 1999 (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement"), among the Borrower, the
Administrative Agent and such Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Administrative
Agent are parties to the Credit Agreement;
WHEREAS, the Borrower, the Lenders and the Administrative
Agent have entered into the First Amendment and Waiver, dated as of the date
hereof, to the Credit Agreement and the First Amendment, dated as of the date
hereof, to the Guarantee and Collateral Agreement (the "First Amendment"); and
WHEREAS, it is a condition precedent to the effectiveness of
the First Amendment that the Borrower shall have executed and delivered to the
Administrative Agent this Agreement;
NOW, THEREFORE, in consideration of the premises contained
herein and to induce the Administrative Agent and the Lenders to enter into the
First Amendment, the Borrower hereby agrees with the Administrative Agent for
the benefit of the Lenders as follows:
1. Defined Terms. (a) Unless otherwise defined herein,
terms defined in the Credit Agreement and used herein
shall have the meanings given to them in the Credit Agreement.
(b) The following terms shall have the following meanings:
"Agreement": this Cash Collateral Agreement, as the same may
be amended, modified or otherwise supplemented from time to time.
"Cash Collateral": the collective reference to:
(i) all cash, instruments, securities and funds
deposited from time to time in the Cash Collateral Account;
(ii) all investments of funds in the Cash Collateral
Account and all instruments and securities evidencing such
investments; and
(iii) all interest, dividends, cash, instruments,
securities and other property received in respect of, or as
proceeds of, or in substitution or exchange for, any of the
foregoing.
"Cash Collateral Account": an account established at the
office of Union Bank of California, N.A., Domestic Customer Service, at
445 South Figueroa Street, Los Angeles, California 90071, designated
"UBOC--Shop At Home".
"Cash Equivalents": (a) marketable direct obligations issued
by, or unconditionally guaranteed by, the United States Government or
issued by any agency thereof and backed by the full faith and credit of
the United States, in each case maturing within one year from the date
of acquisition; (b) certificates of deposit, time deposits, eurodollar
time deposits or overnight bank deposits having maturities of six
months or less from the date of acquisition issued by any Lender or by
any commercial bank organized under the laws of the United States or
any state thereof having combined capital and surplus of not less than
$500,000; or (c) commercial paper of an issuer rated at least A-1 by
Standard & Poor's Ratings Services or P-1 by Moody's Investors Service,
Inc.
"Code": the Uniform Commercial Code from time to time in
effect in the State of New York.
"Collateral": the collective reference to the Cash Collateral
and the Cash Collateral Account.
(c) The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section and
paragraph references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
2. Grant of Security Interest. As collateral security for the
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of the Obligations, the Borrower hereby
grants to the Agent for the benefit of the Lenders a security interest in the
Collateral.
3. Maintenance of Cash Collateral Account. (a) The Cash
Collateral Account shall be maintained until the Obligations have been paid and
performed in full and the Commitments are terminated.
(b) The Collateral shall be subject to the exclusive dominion
and control of the Administrative Agent, which shall hold the Cash Collateral
and administer the Cash Collateral Account subject to the terms and conditions
of this Agreement. The Borrower shall have no right of withdrawal from the Cash
Collateral Account or any other right or power with respect to the Collateral,
except as expressly provided herein.
4. Deposit of Funds. The Borrower shall deposit the amounts
required to be deposited into the Cash Collateral Account pursuant to Section
5.12 of the Credit Agreement on the dates specified therein.
5. Representation and Warranty. The Borrower represents and
warrants to the Administrative Agent that this Agreement creates in favor of the
Administrative Agent a perfected, first priority security interest in the
Collateral, enforceable in accordance with its terms, except as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
6. Covenants. The Borrower covenants and agrees with the
Administrative Agent that:
(a) The Borrower will not (i) sell, assign, transfer,
exchange, or otherwise dispose of, or grant any option with respect to,
the Collateral, or (ii) create, incur or permit to exist any Lien or
option in favor of, or any claim of any Person with respect to, any of
the Collateral, or any interest therein, except for the security
interest created by this Agreement.
(b) The Borrower will maintain the security interest created
by this Agreement as a first, perfected security interest and defend
the right, title and interest of the Administrative Agent and the
Lenders in and to the Collateral against the claims and demands of all
Persons whomsoever. At any time and from time to time, upon the written
request of the Administrative Agent, and at the sole expense of the
Borrower, the Borrower will promptly and duly execute and deliver such
further instruments and documents and take such further actions as the
Administrative Agent reasonably may request for the purposes of
obtaining or preserving the full benefits of this Agreement and of the
rights and powers herein granted, including, without limitation, of
financing statements under the Code.
7. Investment of Cash Collateral. (a) Subject to the
provisions of Subsection 7(b), collected funds on deposit in the Cash Collateral
Account shall be invested by the Administrative Agent from time to time in Cash
Equivalents; provided, however, that so long as no Default or Event of Default
shall have occurred and be continuing, the Administrative Agent shall make such
investments at the direction of the Borrower. All investments shall be made in
the name of the Administrative Agent or a nominee of the Administrative Agent
and in a manner, determined by the Administrative Agent in its sole discretion,
that preserves the Administrative Agent's perfected, first priority security
interest in such investments.
(b) The Administrative Agent shall have no obligation to
invest collected funds during the first night after their collection.
(c) The Administrative Agent shall have no responsibility to
the Borrower for any loss or liability arising in respect of such investments of
the Cash Collateral (including, without limitation, as a result of the
liquidation of any thereof before maturity), except to the extent that such loss
or liability arises from the Administrative Agent's gross negligence or willful
misconduct.
(d) The Borrower will pay or reimburse the Administrative
Agent for any and all costs, expenses and liabilities of the Administrative
Agent incurred in connection with this Agreement, the reasonable maintenance and
operation of the Cash Collateral Account and the investment of the Cash
Collateral, including, without limitation, any investment, brokerage or
placement commissions and fees incurred by the Administrative Agent in
connection with the investment or reinvestment of Cash Collateral, which prior
to the occurrence and continuance of a Default or Event of Default shall be
agreed to by the Borrower and the Administrative Agent.
8. Release of Cash Collateral. Cash Collateral shall be
released by the Administrative Agent to pay to the Lenders scheduled payments of
principal, fees and interest under Sections 2.3, 2.4 and 2.9 of the Credit
Agreement at any time such amounts are due and payable thereunder.
9 Remedies. (a) Upon the occurrence of an Event of Default and
upon any amount becoming due and payable by the Borrower under the Credit
Agreement (whether at the stated maturity, by acceleration or otherwise), the
Administrative Agent may, without notice of any kind, except for notices
required by law which may not be waived, apply the Collateral, after deducting
all reasonable costs and expenses of every kind incurred in respect thereof or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Administrative Agent and the
Lenders hereunder, including, without limitation, reasonable attorneys' fees and
disbursements of counsel to the Administrative Agent, to the payment in whole or
in part of the Obligations, in such order as the Administrative Agent in its
sole discretion may elect, and only after such application and after the payment
by the Administrative Agent of any other amount required by any provision of
law, including, without limitation, Section 9-504(1)(c) of the Code, need the
Administrative Agent account for the surplus, if any, to the Borrower. In
addition to the rights, powers and remedies granted to it under this Agreement
and in any other agreement securing, evidencing or relating to the Obligations,
the Administrative Agent shall have all the rights, powers and remedies
available at law, including, without limitation, the rights and remedies of a
secured party under the Code. To the extent permitted by law, the Borrower
waives presentment, demand, protest and all notices of any kind and all claims,
damages and demands it may acquire against the Administrative Agent or any
Lender arising out of the exercise by them of any rights hereunder.
(b) The Borrower shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are insufficient to
pay the Obligations and the fees and disbursements of any attorneys employed by
the Administrative Agent or any Lender to collect such deficiency.
10 Administrative Agent's Appointment as Attorney-in-Fact. (a)
The Borrower hereby irrevocably constitutes and appoints the Administrative
Agent and any officer or agent of the Administrative Agent, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of the Borrower and in the name of
the Borrower or in the Administrative Agent's own name, from time to time in the
Administrative Agent's discretion, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to accomplish
the purposes of this Agreement, including, without limitation, any financing
statements, endorsements, assignments or other instruments of transfer.
(b) The Borrower hereby ratifies all that said attorneys shall
lawfully do or cause to be done pursuant to the power of attorney granted in
Subsection 10(a). All powers, authorizations and agencies contained in this
Agreement are coupled with an interest and are irrevocable until this Agreement
is terminated and the security interests created hereby are released.
11. Duty of Administrative Agent. The Administrative Agent's
sole duty with respect to the custody, safekeeping and physical preservation of
the Collateral in its possession, under Section 9-207 of the Code or otherwise,
shall be to comply with the specific duties and responsibilities set forth
herein. The powers conferred on the Administrative Agent in this Agreement are
solely for the protection of the Administrative Agent's and the Lenders'
interests in the Collateral and shall not impose any duty upon the
Administrative Agent or any Lender to exercise any such powers. Neither the
Administrative Agent nor any Lender nor its or their directors, officers,
employees or agents shall be liable for any action lawfully taken or omitted to
be taken by any of them under or in connection with the Collateral or this
Agreement, except for its or their gross negligence or willful misconduct.
12. Execution of Financing Statements. Pursuant to Section
9-402 of the Code, the Borrower authorizes the Administrative Agent to file
financing statements with respect to the Collateral without the signature of the
Borrower in such form and in such filing offices as the Administrative Agent
reasonably determines appropriate to perfect the security interests of the
Administrative Agent under this Agreement. A carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement for
filing in any jurisdiction.
13. Authority of Administrative Agent. The Borrower
acknowledges that the rights and responsibilities of the Administrative Agent
under this Agreement with respect to any action taken by the Administrative
Agent or the exercise or non-exercise by the Administrative Agent of any option,
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Agreement shall, as between the Administrative
Agent and the Lenders, be governed by the Credit Agreement and by such other
agreements with respect thereto as may exist from time to time among them, but,
as between the Administrative Agent and the Borrower, the Administrative Agent
shall be conclusively presumed to be acting as agent for the Lenders with full
and valid authority so to act or refrain from acting, and the Borrower shall not
be under any obligation, or entitlement, to make any inquiry respecting such
authority.
14. Notices. All notices, requests and demands to or upon the
Administrative Agent or the Borrower to be effective shall be provided in
accordance with Section 8.2 of the Credit Agreement.
15. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. Amendments in Writing; No Waiver; Cumulative Remedies. (a)
None of the terms or provisions of this Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the Borrower and the Administrative Agent, provided that any provision of this
Agreement may be waived by the Administrative Agent and the Lenders in a letter
or agreement executed by the Administrative Agent.
(b) Neither the Administrative Agent nor any Lender shall by
any act (except by a written instrument pursuant to Subsection 6(a) hereof),
delay, indulgence, omission or otherwise be deemed to have waived any right or
remedy hereunder or to have acquiesced in any Default or Event of Default or in
any breach of any of the terms and conditions hereof. No failure to exercise,
nor any delay in exercising, on the part of the Administrative Agent or any
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Administrative Agent or
any Lender of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Administrative Agent or such
Lender would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any other
rights or remedies provided by law.
17. Section Headings. The section headings used in this
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
18. Successors and Assigns. This Agreement shall be binding
upon the successors and assigns of the Borrower and shall inure to the benefit
of the Administrative Agent and the Lenders and their successors and assigns.
19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the Borrower and the Administrative Agent
have caused this Cash Collateral Agreement to be duly executed and delivered as
of the date first above written.
SHOP AT HOME, INC.
By: /s/ Arthur D. Tek
Name: Arthur D. Tek
Title: E.V.P. & C.F.O.
UNION BANK OF CALIFORNIA, N.A., as Administrative Agent
By: /s/ Craig Cappai
Name: Craig Cappai
Title: Asst. V.P.