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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
FROM JULY 1, 2002 TO DECEMBER 31, 2002
Commission file number 0-25596
SUMMIT AMERICA TELEVISION, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1282758
(State of incorporation) (IRS EIN)
400 Fifth Avenue South, Suite 203
Naples, Florida 34102
(Address of principal executive offices)
Registrant's telephone number, including area code: (786) 206-0047
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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No ____
The registrant estimates that the aggregate market value of the Common Stock
held by non-affiliates of the registrant on March 27, 2003, was $91,754,372.
Number of shares of Common Stock outstanding as of March 27, 2003 was
42,394,097.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held June 2, 2003, are incorporated by reference into Part
III hereof.
- --------------------------------------------------------------------------------
SUMMIT AMERICA TELEVISION, INC.
FORM 10-K
FOR THE TRANSITION PERIOD FROM
JULY 1, 2002, THROUGH DECEMBER 31, 2002
INDEX
PART I Page
----
Item 1. Business 4
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Summit America Television's Common Stock 6
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Company 48
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management 49
Item 13. Certain Relationships and Related Transactions 49
Item 14. Controls and Procedures 49
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 50
SIGNATURES 56
CERTIFICATIONS 57
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, contained
within this report constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
In some cases you can identify forward-looking statements by terms such as
"may," "intend," "might," "will," "should," "could," "would," "expect,"
"believe," "estimate," "potential," "expect," "plan" or the negative of these
terms, as well as similar expressions intended to identify forward-looking
looking statements.
Summit America Television, Inc. (NASDAQ: SATH), which was formerly
known as Shop At Home, Inc. (also referred to as the "Company," "Summit
America," "we," or "us"), 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 present our estimates and assumptions only as of the date of this
report and are subject to a number of risks, uncertainties and assumptions about
Summit America, including, among other things:
o general economic and business conditions, both nationally and in our
markets;
o our expectations and estimates concerning future financial performance
and financing plans, including the revenue expectations and
risks associated with our joint venture with The E.W. Scripps
Company;
o the successful implementation of our business strategy;
o restrictions imposed by the terms of our indebtedness; and
o fluctuations in our operating results;
o continued employment of key personnel and our ability to hire qualified
personnel;
o existing and future regulations affecting our business operations and
profitability;
o the consistent and reliable operation of our broadcasting equipment and
the satellite transponders we lease;
o technological changes in the television industry; and
o anticipated business trends in the television industry generally.
Except for our ongoing obligation to disclose material information as
required by federal securities laws, we do not intend to publicly update you or
revise any forward-looking statements resulting from 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.
PART I
ITEM 1. BUSINESS
Company Overview
The Company owns and operates five television stations and holds a 30%
interest in Shop At Home Network LLC, a nationally televised home shopping
channel (the "Network"). The television stations are located in San Francisco
(KCNS, Channel 38), Boston (WMFP, Channel 62), Cleveland (WOAC, Channel 67),
Raleigh-Durham (WRAY, Channel 30) and Bridgeport, Connecticut (WSAH, Channel
43). Four of these television stations are positioned in the top 20 television
markets in the United States, including the Bridgeport, Connecticut station,
which serves a portion of the New York City market.
The Network is a retail seller of a variety of consumer products
through interactive electronic media including broadcast, cable and satellite
television and the internet. The Network produces programming at its facilities
in Nashville, Tennessee. The programming is transmitted by satellite to cable
television systems, direct broadcast satellite systems and television
broadcasting stations across the country.
On October 31, 2002, the Company sold 70% of the Network (including the
assignment of all rights the Company had in the name "Shop At Home") to a
subsidiary of The E.W. Scripps Company ("Scripps"). From the second to the fifth
anniversary of the sale date, the Company has the right to require Scripps to
purchase its 30% ownership in the Network for cash equal to the fair market
value. The Company has also entered into an affiliation agreement with the
Network under which the Company's television stations will carry the Network's
programming for three years. Under the terms of this affiliation agreement, the
Company's television stations are required to broadcast all programming provided
by the Network on an exclusive basis (subject to FCC-mandated programming
requirements), and the Company is presently dependent upon the Network as the
Company's principal source of revenue. The Network has agreed to provide 24-hour
over-the-air programming seven days per week. The Company retains the right to
terminate this affiliation agreement after 15 months under certain conditions.
On October 31, 2002, the Company changed its corporate name from "Shop
At Home, Inc." to "Summit America Television, Inc.," reflecting the change in
the Company's business focus.
The Federal Communications Commission ("FCC") has initiated proceedings
to make decisions on a possible auction of 700 MHz spectrum rights. This auction
could result in band-clearing proposals from which the Company's stations in
Boston and Cleveland, and a former Company station in Houston, might receive
economic proposals to relocate the incumbent broadcast stations owned by the
Company. The Company retained a 50% interest in any economic benefit that might
accrue to the Houston station.
The Company was incorporated in June 1986 under the laws of Tennessee,
and its principal place of business and executive offices are located at 400
Fifth Avenue South, Suite 203, Naples, Florida 34102. The Company's telephone
number is (786) 206-0047, and its internet address is www.summitamericatv.com.
The following table sets forth certain information regarding each of
the broadcast stations owned by the Company:
Designated License
Call Sign Market Area Expiration Rank of
(DMA) Date DMA
---------- --------------- ------------ ---------
WSAH New York (1) 6/2007 1
KCNS San Francisco 12/2006 5
WMFP Boston 4/2007 6
WOAC Cleveland 10/2005 17
WRAY Raleigh 12/2004 29
(1) While WSAH, Bridgeport, Connecticut, is inside the New York DMA, the
station only covers a portion of the market.
Employees
As of December 31, 2002, the Company employed approximately 15 people,
and approximately 11 were full-time employees. Management believes it maintains
a good relationship with its employees. Presently, no collective bargaining
agreements exist between the Company and its employees.
Available Information
The Company's internet website, www.summitamericatv.com, provides a
broad range of information to investors and the interested public, regarding the
five owned and operated broadcast television stations, the Company's asset
profile, and its directors and executive leadership. It also provides full
access to all of the Company's news releases. The Company has not yet
implemented public access via its website to its periodic reports filed with the
Securities and Exchange Commission, including the Form 8-K, Form 10-Q, and Form
10-K. Electronic copies are available free of charge, via e-mail, upon request
by writing or telephoning the Company, or by sending an e-mail message to
summitamerica@earthlink.net.
ITEM 2. PROPERTIES
The Company leases all of its office and television station real
estate, including all of the towers, with the exception of the television
transmitter tower serving WOAC (Cleveland), which is owned.
Management believes that its leased and owned properties are in good
working condition.
ITEM 3. LEGAL PROCEEDINGS
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 certain
orders, that certain amounts it paid to the Company under a written agreement
should be refunded, and that certain amounts were left owing on the account. The
vendor also claims entitlement to alleged lost profits of approximately $2
million, asserting the Company did not provide an amount of broadcast network
time in 1999 that the vendor alleges was orally promised in connection with the
written agreement. The Company has filed its answer and has vigorously pursued
its defense against Classic Collectibles, LLC. The case was initially set for a
jury trial in November 2002 but has been postponed by the court until September
2003.
On September 27, 2002, Dixie Health, Inc. ("Dixie") sued the Company,
later adding the Network as a defendant, in the United States District Court for
the Middle District of Tennessee at Nashville. Dixie asserts causes of action
based upon Summit's alleged use of trade dress owned by Dixie, arising from
events occurring after the Company's termination of Dixie as a vendor.
Dixie asserted causes of actionable violation of the Lanham Act, unfair
competition and false advertising, and unfair or deceptive acts or practices,
and claims entitlement to $69,221.82 for goods sold to the Company. The Company
has filed its answer and counterclaim and intends to vigorously pursue its
defense.
In addition, the Company is subject to routine litigation arising from
the normal and ordinary operation of its business. The Company believes that
such litigation is not likely to have a material adverse effect on its financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 31, 2002, the Company's Board of Directors called a special
meeting of shareholders to consider two matters related to the Company's
transaction with Scripps. Shareholders present in person or by proxy,
representing 27,502,370 shares of Common Stock of the 41,958,247 shares
outstanding on the record date, voted on the following matters:
The shareholders voted to approve the indirect sale to a subsidiary of
Scripps of a 70% interest in the operating assets and liabilities and business
operations of the Company's television and internet home shopping network.
Votes Cast Abstentions and
Votes Cast For Against Broker Non-Votes
-------------- ------- ----------------
27,039,706 353,151 109,513
As part of the Scripps transaction, in which the Company assigned
all rights it had in the name "Shop At Home" to the Network, the Board of
Directors submitted for shareholder vote an amendment to the charter of the
Company changing the Company's corporate name from "Shop At Home, Inc." to
"Summit America Television, Inc." The shareholders approved the amendment to the
Company's charter, and, effective on October 31, 2002, the Company changed its
corporate name. (The Company's common stock trading symbol, "SATH," remained the
same.)
Votes Cast Abstentions and
Votes Cast For Against Broker Non-Votes
-------------- ------- ----------------
26,936,068 478,874 87,428
PART II
ITEM 5. MARKET FOR SUMMIT AMERICA TELEVISION'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Trading History
The Company's Common Stock is 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 years, as reported by the high and low closing prices on the
National Market, are as follows.
HIGH LOW
2001
First Quarter $5.19 $2.44
Second Quarter 2.94 0.97
Third Quarter 2.03 1.28
Fourth Quarter 3.21 1.44
2002
First Quarter $3.38 $1.91
Second Quarter 3.05 1.85
Third Quarter 3.65 2.50
Fourth Quarter 3.22 2.00
TRANSITION PERIOD
Third Quarter $2.79 $1.44
Fourth Quarter 2.80 2.19
Equity Holders
As of December 31, 2002, there were approximately 622 owners of the
Company's Common Stock on record.
Payment of Dividends
The Company has not declared or paid any dividends on its Common Stock
in the last two years and did not declare or pay any dividends during the six
months ended December 31, 2002. The Company 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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2002,
regarding the options outstanding and available under the Company's 1999
Employee Stock Option Plan and under the stock incentive plan adopted for
eligible employees in 1991.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities to be Weighted-average exercise Number of securities
remaining available for
future issuance under equity
issued upon exercise of compensation plans (excluding
Plan Category outstanding options, warrants price of outstanding options, securities reflected in
and rights warrants and rights column (a))
Equity compensation plans 6,250,234 $3.23 2,339,166
approved by security holders
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 as Item 8. 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, and as of and for the six months ended December 31, 2002 are
derived from the audited financial statements of the Company. The statement of
operations and balance sheet data as of and for the six months ended December
31, 2001 are derived from unaudited financial information prepared by the
Company.
For factors affecting the comparability of Selected Financial Data, refer to
Item 7 and the footnotes below.
Six Months Ended
December 31, Years Ended June 30,
2002 2001 2002 2001 2000 1999 1998
unaudited
(in thousands, except per share data)
Statements of Operations Data:
Net revenues $ 68,220 $ 92,623 $195,840 $ 177,615 $ 201,556 $ 150,399 $ 100,906
Cost of goods sold 44,506 59,877 127,260 122,353 133,751 93,396 60,410
Other operating expenses 37,318 43,353 90,685 98,448 79,153 53,726 36,099
Non-recurring expenses (1) - - 837 - - 986 -
Other (income) expense (4) (43,396) 4 12 (48,992) 154 46 (900)
Loss on extinguishment of debt 7,440 - - - - - -
Loss on unconsolidated subsidiary 1,044 - - - - - -
Interest income 196 271 552 906 749 656 564
Interest expense 4,924 5,441 10,878 11,875 9,663 8,932 2,693
-------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 16,580 (15,781) (33,280) (5,163) (20,416) (6,031) 3,168
Income tax expense (benefit) 6,058 (5,365) (10,652) 262 (7,709) (2,492) 1,204
-------------------------------------------------------------------------------------
Income (loss) from continuing
Operations 10,522 (10,416) (22,628) (5,425) (12,707) 1,964
(3,539)
Income (loss) from discontinued operations
of CET (3) - - - (598) (786) 235 (451)
Loss on disposal of CET (3) - - - (2,864) - - -
-------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change 10,522 (10,416) (22,628) (8,887) - - -
Cumulative effect of accounting change - - - (1,359) - - -
-------------------------------------------------------------------------------------
Net income (loss) 10,522 (10,416) (22,628) (10,246) (13,493) 1,513
(3,304)
Preferred stock accretion and dividends 68 - - 8,156 6 14 14
-------------------------------------------------------------------------------------
Net income (loss) available for common
Shareholders $ 10,454 $(10,416) $(22,628) $(18,402) $ (13,499) $ (3,318) $ 1,499
=====================================================================================
Weighted average common
shares - basic 42,014 41,832 41,861 36,311 30,490 23,771 14,511
Weighted average common
shares - dilutive 42,345 41,832 41,861 36,311 30,490 23,771 17,496
Basic earnings (loss) per share from
continuing operations (2) $ 0.25 $ (0.25) $ (0.54) $ (0.37) $ (0.42) $ (0.15) $ 0.13
Diluted earnings (loss) per share from
continuing operations (2) $ 0.25 $ (0.25) $ (0.54) $ (0.37) $ (0.42) $ (0.15) $ 0.11
Cash dividends per share of
common stock $ - $ - $ - $ - $ - $ - $ -
Balance Sheet Data:
Working capital $ 244 $15,332 $ 944 $ 8,579 $ 16,806 $(17,646) $ 11,568
Total assets 117,129 187,835 178,080 180,017 227,294 170,697 143,770
Current liabilities 2,435 29,726 32,247 28,785 45,468 48,364 19,212
Long-term debt and capital leases, less
current portion 47,500 92,705 92,596 75,484 84,336 75,893 75,254
Redeemable preferred stock 3,037 161 145 161 12,504 834 1,393
Stockholders' equity 64,157 65,243 53,092 75,587 84,986 45,297 44,360
(1) These expenses relate to debt offering expenses of an offering not
completed (2002) and the grand opening of the Company's Nashville
headquarters (1999).
(2) For details of the calculation of basic and dilutive earnings per share,
see Note 13 to the consolidated financial statements.
(3) CET is an abbreviation for "Collector's Edge of Tennessee, Inc."
(4) Other income for the six months ended December 31, 2002 includes a gain of
$43,396 on the sale of 70% of the Shop At Home Network.
See Note 1 to the consolidated financial statements. Other income for
2001 includes a gain of $48,929 related to the sale of the
Company's Houston television station, KZJL(TV). See Note 18 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
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 periods. Management continually
evaluates its estimates and assumptions. Management bases its estimates and
assumptions on historical information and on various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates. Management believes the following critical accounting
policies affect the more significant assumptions and estimates used in the
preparation of its consolidated financial statements:
The carrying value of the Company's goodwill and television station
licenses is tested for impairment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. If
an impairment test indicates that the carrying value of goodwill is impaired,
the carrying value of goodwill is reduced by the amount by which the carrying
value exceeds the implied fair value of that goodwill. If an impairment test
indicates that the carrying value of the television station licenses is
impaired, the carrying value of the television station licenses is reduced by
the amount by which the carrying value exceeds the fair value of the television
station licenses. Both the implied fair value of goodwill and the fair value of
the television station licenses are based upon assumptions which may prove to be
untrue in the future.
The Company records a valuation allowance to reduce its net deferred
tax assets to the amount that is more likely than not to be realized. While
management has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for its valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in an amount in excess of the net recorded
amount, an adjustment to the valuation allowance would decrease income tax
expense in the period such determination was made. Likewise, should the Company
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to its valuation allowance would
increase income tax expense in the period such determination was made.
Overview
Seeking to reduce operating losses and to improve shareholder value,
management completed the sale of 70% of the Network to Scripps on October 31,
2002. The sale substantially reduced the size of the Company's operations.
Results after October 31, 2002 are therefore not easily comparable with those
previously reported.
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:
Six Months Ended
December 31, Years Ended June 30,
------------ --------------------
2002 2001 2002 2001 2000
---- ---- ---- ---- ----
Net revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 65.2 64.6 65.0 68.9 66.4
Salaries and wages 11.7 9.5 9.0 12.5 7.7
Transponder and affiliate charges 24.6 20.9 21.1 22.4 17.2
General and administrative expenses 12.8 10.2 10.2 12.6 10.2
Depreciation and amortization 5.7 6.3 6.0 7.9 4.1
Loss on extinguishment of debt 10.9 - - - -
Offering expenses - - 0.4 - -
------------ ----------- ----------- ----------- -----------
Total operating expenses 130.9 111.5 111.7 124.3 105.6
Interest income 0.3 0.3 0.3 0.5 0.4
Interest expense (7.2) (5.9) (5.6) (6.7) (4.8)
Gain on sale of Network/Station 63.6 - - 27.6 -
Income (loss) on unconsolidated subsidiary (1.5) - - - -
------------ ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes 24.3 (17.0) (17.0) (2.9) (10.1)
Income tax expense (benefit) 8.9 (5.8) (5.4) 0.1 (3.8)
------------ ----------- ----------- ----------- -----------
Income (loss) before discontinued operations 15.4 (11.2) (11.6) (3.0) (6.3)
Discontinued operations, net of tax - - - (2.0) (0.4)
------------ ----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change 15.4 (11.2) (11.6) (5.0) (6.7)
Cumulative effect of accounting change - - - (0.8) -
------------ ----------- ----------- ----------- -----------
Net income (loss) 15.4 (11.2) (11.6) (5.8) (6.7)
============ =========== =========== =========== ===========
Results of Operations
Six Months Ended December 31, 2002 compared with Six Months Ended
December 31, 2001
Net Revenues. The Company's net revenues for the six months ended
December 31, 2002, were $68.2 million, a decrease of 26.3% over net revenues of
$92.6 million for the period ended December 31, 2001. This decrease is
attributable to the sale of 70% of the Network to Scripps completed on October
31, 2002. Retail sales through the television network accounted for 88.0% of net
revenues. Affiliate fee income from the Company's owned television stations
contributed 1.6% of net revenues. The remaining 10.4% of net revenues was
derived from shopathometv.com. Returns of merchandise increased to a rate of
22.3% of gross sales from 18.1% in the prior year. Affiliate fee income became
the Company's chief revenue source effective October 31, 2002, with the sale of
the Network assets.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and freight. For the six months ended December 31, 2002, the cost of
goods sold as a percentage of net revenues increased to 65.2% from 64.6% for the
six months ended December 31, 2001. Cost of goods expense included a markdown of
$1.1 million on sports inventory.
Salaries and Wages. Salaries and wages for the six months ended
December 31, 2002, were $8.0 million, a decrease of 9.5% compared to the six
months ended December 31, 2001. The decrease in salaries is primarily due to the
sale of Network assets, partially offset by $1.3 million of compensation expense
caused by the sale of the Network due to change in control termination
provisions of executive employment agreements.
Transponder and Affiliate. Transponder and affiliate costs for the six
months ended December 31, 2002, were $16.8 million, a decrease of $2.6 million
or 13.3% compared to the six months ended December 31, 2001. The decrease in
transponder and affiliate fees is primarily due to the sale of Network assets.
General and Administrative. General and administrative expenses for the
six months ended December 31, 2002, were $8.7 million, a decrease of $0.7
million or 7.5% compared to the six months ended December 31, 2001. The decrease
in general and administrative expenses is primarily due to the sale of Network
assets.
Depreciation and Amortization. Depreciation and amortization for the
six-months ended December 31, 2002, was $3.9 million, a decrease of $1.9 million
or 33.0% compared to the six months ended December 31, 2001. The decrease in
depreciation and amortization is primarily due to the sale of Network assets.
Interest Expense. Interest expense for the six months ended December
31, 2002, was $4.9 million, a decrease of $0.5 million over the six months ended
December 31, 2001. The decrease was due to the retirement of $75 million in
Senior Secured Notes and $17.5 million Senior Credit Facility associated with
the sale of Network assets.
Gain on sale of Network. Gain on sale of the Network resulted from the
sale, on October 31, 2002, of 70% of the Network to Scripps. After October 31,
2002, the Company reports its share of the operations of the Network utilizing
the equity method of accounting rather than consolidating the results of the
Network in the Company's financial statements.
Loss on unconsolidated subsidiary. Loss on unconsolidated subsidiary
represents the Company's 30% share of the operational results after the sale of
70% of the Network to Scripps on October 31, 2002.
Interest Income. Interest income from cash and cash equivalents for the
six months ended December 31, 2002, was $0.2 million compared to $0.3 million in
six months ended December 31, 2001. The decrease in interest income was due to
lower average cash balances and interest rates.
Year 2002 compared with Year 2001
Net Revenues. The Company's net revenues for the year ended June 30,
2002, were $195.8 million, an increase of 10.3% over net revenues of $177.6
million for the year ended June 30, 2001. The core business of retail sales
through the television network accounted for 89.9% of net revenues. The
remaining 10.1% of net revenues were derived from shopathometv.com. Returns of
merchandise decreased to a rate of 18.3% of gross sales from 25.6% in the prior
year. The increase in net revenues is attributable to a greater number of
television households reached as well as more informative, precise on-air
presentations resulting in fewer returns of merchandise.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and freight. For the year ended June 30, 2002, the cost of goods
sold as a percentage of net revenues decreased to 65.0% from 68.9% for the year
ended June 30, 2001. The improvement was due to better merchandise planning and
price negotiations with suppliers.
Salaries and Wages. Salaries and wages for the year ended June 30,
2002, were $17.7 million, a decrease of 19.9% compared to the year ended June
30, 2001. Salaries and wages as a percent of revenues decreased to 9.0% from
12.5%. The improvement was due to the absence of any significant severance
payments (in the prior year, the Company made a $3.2 million severance payment
to its former CEO) as well as this year's reduction in average headcount.
Average headcount declined due to various cost containment initiatives
implemented by the Company through the year.
Transponder and Affiliate. Transponder and affiliate costs for the year
ended June 30, 2002, were $41.2 million, an increase of $1.4 million or 3.6%
compared to the year ended June 30, 2001. The increase was due to the addition
of new affiliates and homes reached.
General and Administrative. General and administrative expenses for the
year ended June 30, 2002, were $20.0 million, a decrease of $2.6 million or
11.4% compared to the year ended June 30, 2001. The improvement was due to
reduction of bad debt expense of $1.5 million, reflective of improved credit
approval and collection procedures, and a variety of cost containment and
renegotiation efforts.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 2002, was $11.7 million, a decrease of $2.2 million or 15.9%
compared to the year ended June 30, 2001. The decrease was primarily due to the
elimination of $2.7 million of amortization of television station license costs
as a result of the adoption of SFAS No. 142, Goodwill and Other Intangible
Assets.
Offering Costs. During the year ended June 30, 2002, the Company
pursued the private placement of $135 million of senior secured notes to
refinance its existing indebtedness and provide additional working capital. The
private placement was not completed and, consequently, the Company expensed $0.8
million of costs related to the offering.
Interest Expense. Interest expense for the year ended June 30, 2002,
was $10.9 million, a decrease of $1.0 million over the year ended June 30, 2001.
The decrease was due to lower interest rates.
Interest Income. Interest income from cash and cash equivalents for the
year ended June 30, 2002, was $0.6 million compared to $0.9 million in 2001. The
decrease in interest income was due to lower average cash balances and interest
rates.
Income Tax (Benefit) Expense. Income tax benefit from continuing
operations was $10.7 million for the year ended June 30, 2002, versus a tax
expense of $0.3 million in 2001. The expense in 2001 was the result of a full
valuation allowance being recorded against the Company's state net operating
loss carry forward. Due to the length of time until the expiration date of the
federal net operating loss carryforwards and the value of the Company's
commercial television stations, management does not deem it necessary to provide
a valuation allowance against its federal net operating loss carryforwards.
Other Income. On March 20, 2001, the Company sold its Houston
television station KZJL for $57.0 million. The gain recognized on the sale was
the result of the proceeds less $6.8 million for the net book value of fixed
assets and license cost and $1.3 million in closing costs. There were no sales
of stations in 2002.
Discontinued Operations. In December 2000, the Company discontinued the
operations of its subsidiary, Collector's Edge of Tennessee, Inc. ("CET"). This
resulted in a loss of $3.5 million, net of applicable tax benefits, for the year
ended June 30, 2001.
Cumulative Effect of Accounting Change. In accordance with SEC Staff
Accounting Bulletin ("SAB") No. 101, the Company changed its method of recording
sales to customers in 2001. Beginning in 2001, the Company recognized sales at
the point of delivery rather than at the point of shipment. As a result, the
Company reduced revenue for the products which were shipped at the end of the
period but not received by the customer by recording a cumulative effect of an
accounting change of $1.4 million (net of a tax benefit of $0.8 million) for the
effects through June 30, 2000.
Year 2001 vs. Year 2000
Net Revenues. The Company's net revenues for the year ended June 30,
2001, were $177.6 million, a decrease of 11.9% over net revenues of $201.6
million for the year ended June 30, 2000. The core business of retail sales
through the television network accounted for 89.5% of net revenues. The
remaining 10.5% of net revenues were derived from shopathometv.com. Returns of
merchandise increased to a rate of 25.6% of total revenue from 23.0% in the
prior year. Net revenues decreased primarily due to a decline in the sports
memorabilia and collectible toys categories and a lack of popular new products
in other categories.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and freight. For the year ended June 30, 2001, the cost of goods
sold as a percentage of net revenues increased to 68.9% from 66.4% for the year
ended June 30, 2000. This increase was primarily due to a greater percentage of
sales of lower-margin products as well as margin reductions in most of the
Company's merchandise categories.
Salaries and Wages. Salaries and wages for the year ended June 30,
2001, were $22.1 million, an increase of 43.4% compared to the year ended June
30, 2000. Salaries and wages as a percent of revenues increased to 12.5% from
7.7%. Included in salaries and wages for 2001 was severance compensation for the
Company's former CEO totaling $3.2 million. Salaries and wages in the prior year
were reduced by the capitalization of $1.9 million of expenditures allocated to
the website launch and the installation of an enterprise-wide computer system.
Adjusting for the former CEO's severance and the capitalization, salaries and
wages increased 9.6%. This increase was primarily due to enhanced staffing needs
associated with the enterprise-wide computer systems.
Transponder and Affiliate Charges. Transponder and affiliate costs for
the year ended June 30, 2001, were $39.8 million, an increase of $5.1 million or
14.8% compared to the year ended June 30, 2000. The increase was primarily due
to the addition of new affiliates and homes reached.
General and Administrative. General and administrative expenses for the
year ended June 30, 2001, were $22.6 million, an increase of $1.9 million or
9.3% compared to the year ended June 30, 2000. As a percentage of net revenues,
this constituted an increase to 12.6% in 2001 from 10.2% in 2000. The increase
was primarily due to $2.5 million in additional provision for bad debt offset by
a variety of cost reduction improvements implemented in 2001. The increased bad
debt reserve reflected management's view that credit card collections became
increasingly more difficult as consumer indebtedness increased and the economy
weakened.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 2001, was $13.9 million, an increase of $5.5 million or
66.4% compared to the year ended June 30, 2000. The increase was primarily due
to the installation of an enterprise-wide information system and the launch of
the Company's website. Additionally, a $1.1 million increase in depreciation
expense was related to the reduction of the useful life of certain computer
hardware and software from five years to three years to better reflect the
expected utility of these assets.
Interest Expense. Interest expense for the year ended June 30, 2001,
was $11.9 million, an increase of $2.2 million over the year ended June 30,
2000. The increase was due primarily to the interest on the Company's $20.0
million line of credit.
Interest Income. Interest income, from cash and cash equivalents, for
the year ended June 30, 2001, was $0.9 million compared to $0.7 million in 2000.
Average cash balances were similar year to year.
Income Tax (Benefit) Expense. Income tax expense from continuing
operations was $0.3 million for the year ended June 30, 2001 versus a tax
benefit of $7.7 million in 2000 even though the Company incurred losses in both
years. The change in the effective tax rate was primarily due to a full
valuation allowance provided against the Company's state net operating loss
carry forwards in 2001.
Gain on Sale of Station. On March 20, 2001 the Company sold its Houston
television station KZJL for $57.0 million. The gain recognized on the sale is
the result of the proceeds less $6.8 million for the net book value of fixed
assets and license cost and $1.3 million in closing costs.
Discontinued Operations. In December 2000, the Company discontinued the
operations of its subsidiary, CET. This resulted in a loss of $3.5 million, net
of applicable tax benefits.
Cumulative Effect of Accounting Change. In accordance with SAB No. 101,
the Company changed its method of recording sales to customers in 2001.
Beginning in 2001, the Company recognized sales at the point of delivery rather
than at the point of shipment. As a result, the Company reduced revenue for the
products which were shipped at the end of the period but not received by the
customer by recording a cumulative effect of an accounting change of $1.4
million (net of a tax benefit of $0.8 million) for the effects through June 30,
2000.
Sale of Network Assets to Scripps
On October 31, 2002, the Company closed the sale of a 70% interest
in the Network to Scripps. The Company retains a 30% interest in the Network and
also retains ownership of its five full-power television stations, certain
wireless spectrum assets and tax-loss carry-forward benefits.
The closing was completed in accord with the terms of a Share
Purchase Agreement (the "Purchase Agreement") entered into by the parties dated
August 14, 2002, and approved by the Company's shareholders on October 30, 2002.
Under the Purchase Agreement, the Company transferred the business operations of
its television and internet home shopping network to an operating company (which
is frequently referred to in this transition report as the "Network") in a
two-tier holding company structure. The Network received substantially all the
assets of the television and internet home shopping network and assumed certain
of its current liabilities, as well. As part of the transaction, the Company
retired its obligations under a $17.5 million senior credit facility and its
$75.0 million of 11% Senior Secured Notes due 2005, but retained certain
liabilities associated with pending litigation and certain other contractual
obligations. The Company sold to Scripps a 70% interest in the Network for a
cash purchase price of $49.5 million, and the Company retained $3.0 million in
cash.
The Company has the right to require Scripps to purchase the
Company's 30% interest in the Network, during the period beginning on the second
anniversary of the closing and ending on the fifth anniversary, at a cash
purchase price equal to the fair market value of the 30% interest. After five
years, Scripps has the right to require the Company to sell the 30% interest to
Scripps at a price equal to fair market value. Scripps also has the right to
require the Company to sell its 30% interest upon the occurrence of certain
other events, including (i) a change of control of the Company, (ii) the
Company's breach of certain obligations to Scripps or (iii) the Company's
insolvency. The Company is restricted in its ability to sell its 30% interest to
a third party without first offering to sell the 30% interest to Scripps.
Scripps is restricted in its ability to sell all or a part of its 70% interest
to a third party, if such transfer would result in a change of control of the
Network, unless the purchaser also agrees to purchase the Company's 30% interest
at the same time. If the Company declines to sell its 30% interest, Scripps has
the right, but not the obligation, to require the Company to sell its interest
at the same pricing.
In addition, Scripps has loaned $47.5 million to the Company payable
in three years. The loan accrues interest at the fixed annual rate of 6%,
payable quarterly. The payment and performance of the loan is secured by the
Company's assignment of its 30% interest in the Network and a security interest
in the assets of the Company's television stations located in the Boston, San
Francisco and Cleveland markets.
The Network is governed by a five member board, three members of
which are selected by Scripps and two by the Company. Scripps has agreed to loan
up to $35.0 million to the Network to be used for working capital purposes.
The Company has entered into a three year affiliation agreement with
the Network, under which the Company agrees to carry the Network's programming
on its five television stations. The Company retains the right to terminate the
affiliation agreement after 15 months.
In addition, on August 15, 2002, Scripps purchased from the Company
its newly authorized Series D Senior Redeemable Preferred Stock for an aggregate
purchase price of $3,000,000. The Series D shares will mature on April 15, 2005,
at which time the Company will be obligated to redeem the shares for a price
equal to their original purchase price plus accrued and unpaid dividends.
Dividends of 6% are payable quarterly, and the Company has the right to defer
payment of the dividends until maturity. The Series D shares are not convertible
to any other shares of capital stock of the Company and have no voting rights
(except any rights or privileges conveyed by statute). The Series D shares also
carry a liquidation preference to the Company's Common Stock and are on parity
with the Company's outstanding shares of Series A Preferred Stock. Other than
the Series A and Series D shares, the Company has no other series of preferred
stock outstanding.
Liquidity and Capital Resources
The Company had $1.6 million of cash on hand at December 31, 2002.
Management believes that the affiliate fee income from its owned stations will
be sufficient to fund operating expenses and interest payments. The Company may
be required to borrow, however, up to $5 million for general corporate purposes
and to fund the construction of new digital transmission facilities for three of
its stations. Management believes that such funding will be reasonably
obtainable.
The Company's future contractual obligations and commitments at
December 31, 2002 consist of the following:
PAYMENTS DUE BY PERIOD
LESS THAN OVER
TOTAL 1 YEAR 1 - 2 YEARS 3 - 4 YEARS 4 YEARS
(In thousands)
Long-term debt $ 47,500 $ - $ - $ 47,500 $ -
Redeemable
preferred stock 3,000 - - 3,000 -
Operating lease
obligations 3,253 759 764 404 1,326
----------------- --------------- ---------------- ---------------- ----------------
$ 53,753 $ 759 $ 764 $ 50,904 $ 1,326
================= =============== ================ ================ ================
In addition to the above commitments, the Company has 3,718 shares of
redeemable preferred stock outstanding at December 31, 2002. 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 the Company's common stock at a ratio of
one share of common stock for one share of Series A Preferred Stock. Holders of
the Series A Preferred Stock are entitled to receive, but only when declared by
the Board of Directors, cash dividends at the rate of $0.10 per share per annum.
Capital Expenditures
The Company projects capital expenditures during 2003 of approximately
$0.4 million, primarily for digital transmission facilities.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The principal
difference between this Statement and EITF Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for all exit or disposal activities after December 31,
2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The initial recognition and measurement provision of
FIN 45 are applicable to the guarantees issued or modified after December 31,
2002. The disclosure requirements of FIN 45 are effective for the Company as of
December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
The Company does not expect adoption of this standard to have a material effect
on its consolidated financial position or consolidated results of operations.
For variable rate entities in which an interest was held prior to February 1,
2003, FIN 46 applies in the first fiscal year beginning after June 15, 2003.
In December 2002, the FASB issues SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for annual and interim periods beginning after December 15, 2002.
As the Company has elected not to change to the fair-value-based method of
accounting for stock-based employee compensation, the adoption of SFAS No. 148
will not have an impact on the Company's consolidated financial position or
consolidated results of operation. The Company has included the disclosures in
accordance with SFAS No. 148 in Note 2 to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may affect 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 $1.6 million as of December 31, 2002. These funds are generally
invested in highly liquid 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 potential interest
rate fluctuation on its $47.5 million of long-term debt, because interest
accrues on this debt at the fixed rate of 6%.
The Company has no activities related to derivative financial
instruments or derivative commodity instruments.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Reports of Independent Accountants 20-21
Consolidated Balance Sheets 22-23
Consolidated Statements of Operations for the six months ended
December 31, 2002, and years ended June 30, 2002, 2001 and 2000 24
Consolidated Statements of Stockholders' Equity for the six months ended
December 31, 2002, and years ended June 30, 2002, 2001 and 2000 25
Consolidated Statements of Cash Flows for the six months ended
December 31, 2002, and years ended June 30, 2002, 2001 and 2000 26-27
Notes to Consolidated Financial Statements 28-47
Report of Independent Accountants
To the Board of Directors and Stockholders of
Summit America Television, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of Summit America
Television, Inc. (formerly known as Shop At Home, Inc.) and subsidiaries as of
December 31, 2002 and June 30, 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the six months ended
December 31, 2002 and for the year ended June 30, 2002. Our audits also included
the financial statement schedule listed in the Index at Item 15. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Summit America Television, Inc. and
subsidiaries as of December 31, 2002, and June 30, 2002, and the results of
their operations and their cash flows for the six months ended December 31,
2002, and for the year ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 4 to the consolidated financial statements, effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," which resulted in the Company
changing the method in which it accounts for goodwill and other intangible
assets.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 28, 2003
Report of Independent Accountants
Board of Directors and Stockholders
Shop At Home, Inc.
In our opinion, the consolidated balance sheet as of June 30, 2001 and the
related consolidated statements of operations, stockholders' equity and cash
flows listed in the Index to Consolidated Financial Statements present fairly,
in all material respects, the financial position, results of operations and cash
flows of Shop At Home, Inc. at June 30, 2001 and for each of the two years in
the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule for the two years ended June 30, 2001, listed
in the Index appearing under Item 15 (a)(3) 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 of America,
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 our opinion expressed above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
September 12, 2001
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31, June 30,
2002 2002 2001
------------------------------ --------------------------- -------------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,634 $ 11,563 $ 19,557
Restricted cash - 4 -
Accounts receivable - net 125 5,575 3,103
Inventories, net - 13,117 9,953
Prepaid expenses 502 626 884
Deferred tax assets 418 2,306 3,177
Note receivable - - 380
Income tax receivable - - 310
------------------------------ --------------------------- -------------------------
Total current assets 2,679 33,191 37,364
Property and equipment, net 6,254 30,468 39,171
Deferred tax asset 16,947 20,891 9,418
Television station licenses 89,251 89,251 89,251
Goodwill 528 528 528
Other assets 1,470 3,751 4,285
------------------------------ --------------------------- -------------------------
Total assets $ 117,129 $ 178,080 $ 180,017
============================== =========================== ==========================
The accompanying notes are an integral part of these
consolidated financial statements
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
-----------------------------------------------------------
2002 2002 2001
------------------ ----------------- -----------------
CURRENT LIABILITIES
Current portion - capital leases $ - $ 330 $ 877
Accounts payable - trade 168 13,790 9,998
Credits due to customers - 4,523 3,443
Other payables and accrued expenses 2,267 12,248 12,343
Deferred revenue - 1,356 2,124
------------------ ----------------- -----------------
Total current liabilities 2,435 32,247 28,785
LONG-TERM LIABILITIES
Capital leases - 96 484
Long-term debt 47,500 92,500 75,000
COMMITMENTS & CONTINGENCIES
(NOTES 6, 7, 8, 9, 10, 11, 12, 14 and 16)
REDEEMABLE PREFERRED STOCK
Series A - $10 par value, 1,000,000 shares
authorized; 3,718, 14,480 and 16,088 issued and
outstanding,respectively-redeemable at $10 per
share plus unpaid dividends accrued 37 145 161
Series B - $10 par value, 2,000 shares
authorized, 0 issued and outstanding - - -
Series C - $10 par value, 10,000 shares
authorized, 0 issued and outstanding - - -
Series D - $10 par value, 10,000 shares
Authorized; 3,000, 0 and 0 issued
and outstanding, respectively 3,000 - -
STOCKHOLDERS' EQUITY
Common stock - $.0025 par value,
100,000,000 shares authorized;
42,258,097 , 41,953,747 and 41,815,831 shares
issued and outstanding, respectively 106 105 105
Non-voting common stock - $.0025 par
value, 30,000,000 shares authorized,
0 issued and outstanding - - -
Additional paid in capital 111,707 111,228 110,904
Accumulated deficit (43,926) (54,448) (31,820)
Notes receivable from related party (Note 11) (3,730) (3,793) (3,602)
------------------ ----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 117,129 $ 178,080 $ 180,017
================== =====================================
The accompanying notes are an integral part of these
consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six Months Ended Years Ended June 30,
--------------------------------------------
December 31,
2002 2002 2001 2000
------------------- -------------- ------------ -------------
Net revenues $ 68,220 $ 195,840 $177,615 $201,556
Cost of goods sold 44,506 127,260 122,353 133,751
Salaries and wages 7,952 17,727 22,120 15,427
Transponder and affiliate charges 16,759 41,240 39,812 34,688
General and administrative 8,707 19,998 22,581 20,665
Depreciation and amortization 3,900 11,720 13,935 8,373
Loss on extinguishment of debt 7,440 - - -
Offering costs - 837 - -
------------------- -------------- ------------ -------------
Total operating expenses 89,264 218,782 220,801 212,904
------------------- -------------- ------------ -------------
Loss from operations (21,044) (22,942) (43,186) (11,348)
Interest income 196 552 906 749
Interest expense (4,924) (10,878) (11,875) (9,663)
Gain on sale of Network/station (Notes 1 and 18) 43,396 - 48,929 -
Loss on unconsolidated subsidiary (1,044) - - -
Other income (expense) - (12) 63 (154)
------------------- -------------- ------------ -------------
Income (loss) from continuing operations before 16,580 (33,280) (5,163) (20,416)
income taxes
Income tax expense (benefit) 6,058 (10,652) 262 (7,709)
------------------- -------------- ------------ -------------
Income (loss) from continuing operations 10,522 (22,628) (5,425) (12,707)
Loss from discontinued operations of CET to December 29, 2000, plus applicable
income tax benefit of $0, $0, $368 and $481, respectively
(Note 17) - - (598) (786)
Loss on disposal of CET, plus applicable income tax
benefit of $1,754 (Note 17) - - (2,864) -
------------------- -------------- ------------ -------------
Loss before cumulative effect of accounting
change 10,522 (22,628) (8,887) (13,493)
Cumulative effect of accounting change plus applicable
income tax benefit of $832 (Note 2) - - (1,359) -
------------------- -------------- ------------ -------------
Net income (loss) 10,522 (22,628) (10,246) (13,493)
Preferred stock accretion and dividends (Note 8) (68) - (8,156) (6)
------------------- -------------- ------------ -------------
Net income (loss) available for common shareholders $ 10,454 $ (22,628) $(18,402) $(13,499)
=================== ============== ============ =============
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ 0.25 $ (0.54) $ (0.37) $ (0.42)
Loss from continuing operations $ 0.26 $ (0.54) $ (0.37) $ (0.42)
Earnings (loss) from discontinued operations - - (0.10) (0.02)
Cumulative effect of accounting change - - (0.04) -
------------------- -------------- ------------ -------------
Basic income (loss) per share $ 0.25 $ $ (0.51) $ (0.44)
(0.54)
=================== ============== ============ =============
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ 0.25 $ (0.54) $ (0.37) $ (0.42)
Loss from continuing operations $ 0.26 $ $ $
(0.54) (0.37) (0.42)
Earnings (loss) from discontinued operations - - (0.10) (0.02)
Cumulative effect of accounting change - - (0.04) -
------------------- -------------- ------------ -------------
Diluted income (loss) per share $ 0.25 $ (0.54) $ (0.51) $ (0.44)
=================== ============== ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months ended December 31, 2002 and years
ended June 30, 2002, 2001 and 2000
(In thousands, except share data)
Additional Shareholder
Common Paid-In Accumulated Notes
Stock Capital Deficit Receivable
--------------- ------------- ---------------- ---------------
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 (19,913 shares) - 199 - -
Reversal of prior conversion of preferred stock (31,820 shares) - (318) - -
Net loss - - (13,493) -
--------------- ------------- ---------------- ---------------
Balance, June 30, 2000 (31,264,772 shares) 78 106,482 (21,574) -
Shareholder option note (Note 10) - - - (3,602)
Preferred stock conversion (7,874,506 shares) 22 4,100 - -
Preferred stock dividend paid in common shares (362,348 shares) - (489) - -
Accretion of beneficial conversion feature related to
Series B preferred stock - (3,810) - -
Loss on repurchase of Series B preferred stock
treated as a dividend - (3,643) - -
Cumulative effect of adoption of EITF 00-27 - 4,699 - -
Preferred stock dividend paid in cash - (220) - -
Exercise of 2,170,066 warrants 5 3,597 - -
Exercise of 33,400 employee stock options - 56 - -
Tax benefit of nonqualified stock options exercised - 9 - -
Issuance of 401(k) stock (110,724 shares) - 123 - -
Net loss - - (10,246) -
--------------- ------------- ---------------- ---------------
Balance, June 30, 2001 (41,815,831 shares) 105 110,904 (31,820) (3,602)
Shareholder note interest - - - (191)
Preferred stock dividends paid in cash - (1) - -
Issuance of 401(k) stock (42,166 shares) - 115 - -
Exercise of 95,750 employee stock options - 165 - -
Tax benefit of nonqualified stock options exercised - 45 - -
Net loss - - (22,628) -
--------------- ------------- ---------------- ---------------
Balance, June 30, 2002 (41,953,747 shares) $ 105 $ 111,228 $ (54,448) $ (3,793)
Shareholder note interest - - (84)
-
Shareholder payment of note - - - 147
Preferred stock dividend - (68) - -
Exercise of 304,350 employee stock options 1 453 - -
Tax benefit of nonqualified stock options exercised - 94 - -
Net income - - 10,522 -
--------------- ------------- ---------------- ---------------
Balance, December 31, 2002 (42,258,097 shares) $ 106 $ 111,707 $ (43,926) $ (3,730)
=============== ============= ================ ===============
The accompanying notes are an integral part of these
consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Six Months Ended
December 31, Years Ended June 30,
-------------------------------------------------------------------------
2002 2002 2001 2000
----------------- --------------- ------------------ -----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,522 $ (22,628) $ (10,246) $ (13,493)
Non-cash expenses/(income) included in net loss:
Depreciation and amortization 3,900 11,720 13,935 9,405
Discontinued operations - - 3,462 -
Loss on disposal of property and equipment - 8 15 193
Note receivable forgiven - - 703 -
Interest accrued on shareholder notes (84) - - -
401(k) stock issuance - 115 123 -
Debt extinguishment 2,838 - - -
Amortization of debt issue costs 557 1,178 399 222
Provision for bad debt 287 1,266 2,517 1,816
Provision for inventory obsolescence - 799 3,587 855
Loss on unconsolidated subsidiary 1,044 - - -
Deferred tax expense (benefit) 5,927 (10,557) (2,643) (8,190)
Gain on sale of Network/station assets (43,396) - (48,929) -
Changes in assets and liabilities:
Accounts and notes receivable 1,451 (3,358) 10,059 (8,738)
Inventories (1,303) (3,963) (412) (9,449)
Prepaid expenses (425) 258 20 (295)
Income tax receivable - 310 - -
Accounts payable and accrued expenses 744 4,812 (6,265) 4,307
Deferred revenue 1,899 (768) 1,646 142
----------------- --------------- ------------------ -----------------
Net cash used by operations (16,039) (20,808) (32,029) (23,225)
----------------- --------------- ------------------ -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (817) (3,024) (2,727) (17,671)
Purchase of licenses - - (525) (2,349)
Sale of Network/station assets, net of closing 48,617 - 55,681 -
costs
Net change in restricted cash 4 (4) 5,058 375
Net change in other assets - (251) 21 -
----------------- --------------- ------------------ -----------------
Net cash provided (used) by investing 47,804 (3,279) 57,508 (19,645)
activities
----------------- --------------- ------------------ -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 47,500 17,500 - 20,000
Repayment of debt (92,500) - (20,000) (20,000)
Repayment of capital leases (186) (935) (1,110) (667)
Payment of debt issuance costs - (429) - (956)
Payment of debt consent fees - - (1,872) -
Proceeds from exercise of stock options/warrants 453 165 3,648 1,500
Proceeds from issuance of common stock - - 56 46,624
Payment of stock issuance costs - - - (3,161)
Preferred stock redemption (108) (16) (11,457) -
Proceeds from issuance of Preferred Stock 3,000 - - 20,000
Payment of preferred stock dividends - (1) (220) (21)
Issuance of shareholder notes - (191) (3,602) -
Reduction in note receivable 147 - 1,120 -
----------------- --------------- ------------------ -----------------
Net cash (used) provided by financing activities (41,694) 16,093 (33,437) 63,319
----------------- --------------- ------------------ -----------------
NET (DECREASE)/INCREASE IN CASH (9,929) (7,994) (7,958) 20,449
Cash and cash equivalents beginning of period 11,563 19,557 27,515 7,066
----------------- --------------- ------------------ -----------------
Cash and cash equivalents end of period $ 1,634 $ 11,563 $ 19,557 $ 27,515
================= =============== ================== =================
The accompanying notes are an integral part of these
consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, except share data)
Six Months Ended Years Ended June 30,
-----------------------------------------------------------
December 31,
2002 2002 2001 2000
----------------- ------------- ------------ -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash (received) paid for taxes $ - $ (310) $ 364 $ -
----------------- ------------- ------------ -----------
Cash paid for interest $ 4,488 $ 9,580 $ 10,178 $ 9,094
----------------- ------------- ------------ -----------
SCHEDULE OF NONCASH ACTIVITIES
Tax effect of non-qualified stock options $ 94 $ 45 $ 9 $ 973
----------------- ------------- ------------ -----------
Reversal of conversion of preferred stock
into shares of common stock (31,820 shares) $ - $ - $ - $ (318)
----------------- ------------- ------------ -----------
Property and equipment acquired through capital leases $ - $ - $ 360 $ 1,667
----------------- ------------- ------------ -----------
Conversion of 0, 0, 519 and 19,879 shares, respectively,
of Series A preferred stock into common $ - $ - $ 5 $ 199
----------------- ------------- ------------ -----------
Accrued Series A preferred stock dividend $ - $ - $ 1 $ 6
----------------- ------------- ------------ -----------
Conversion of 1,000 shares of Series B preferred stock
into common stock $ - $ - $ 4,100 $ -
----------------- ------------- ------------ -----------
Dividend on Series B preferred stock paid in common stock $ - $ - $ 489 $ -
----------------- ------------- ------------ -----------
Accretion and loss on repurchase of Series B preferred stock $ - $ - $ 7,453 $ -
----------------- ------------- ------------ -----------
Accrued Series D preferred stock dividend $ 68 $ - $ - $ -
----------------- ------------- ------------ -----------
The accompanying notes are an integral part of these
consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, JUNE 30, 2002, 2001 and 2000
NOTE 1 - BASIS OF PRESENTATION AND SALE OF ASSETS
Basis of Presentation. All dollar values have been expressed in
thousands (000s) unless otherwise noted except for per share data. The
information reflects all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of the Company, necessary for a fair
presentation of financial condition and results of operations of the periods.
Sale of Assets. On October 31, 2002, Summit America Television Inc.
("the Company") (formerly Shop At Home, Inc.) closed the sale of a 70% interest
in its television and internet home shopping network, Shop At Home Network LLC
("the Network") to a subsidiary of The E.W. Scripps Company ("Scripps"). The
Company retains a 30% interest in the Network and also retains ownership of its
five full-power television stations, certain wireless spectrum assets and
tax-loss carry-forward benefits. In conjunction with the sale, the Company
formally changed it name from Shop At Home, Inc. to Summit America Television,
Inc.
The closing was completed on the basis of a Share Purchase Agreement
(the "Agreement") entered into by the parties dated August 14, 2002 and approved
by the Company's shareholders on October 30, 2002. Under the Agreement, the
Company transferred substantially all the assets of the television and internet
home shopping network as well as certain of its current liabilities to a
subsidiary in a two-tier holding company structure. Using proceeds from the
sale, the Company retired its obligations under a $17,500 senior credit facility
and its $75,000 of 11% Senior Secured Notes due 2005, but retained certain
liabilities associated with pending litigation and certain other contractual
obligations. The Company sold a 70% interest in the Network for a cash
purchase price of $49,500, resulting in a gain in the amount of $43,396.
The Company has the right to require Scripps to purchase its 30%
interest in the Network during the period beginning on the second anniversary of
the closing and ending on the fifth anniversary, at a cash purchase price equal
to the fair market value of the 30% interest. After five years, Scripps has the
right to require the Company to sell the 30% interest to Scripps at a price
equal to fair market value. Scripps also has the right to require the Company to
sell its 30% interest in certain other events, including a change of control of
the Company, the Company's breach of certain obligations to Scripps or the
Company's insolvency. The Company is restricted in its ability to sell its 30%
interest to a third party without first offering to sell the interest to
Scripps. Scripps is restricted in its ability to sell all or a part of its 70%
interest to a third party, if such transfer would result in a change of control
of the Network, unless the purchaser also agrees to purchase the Company's
interest. If the Company declines to sell its interest, Scripps has the right,
but not the obligation, to require the Company to sell its interest at the same
pricing.
Scripps has also loaned $47,500 to the Company payable in three
years. The loan bears interest at 6%, payable quarterly, and is secured by an
assignment of the Company's 30% interest in the Network and the encumbrance of
the assets of the Company's television stations located in the Boston, San
Francisco and Cleveland markets. The Company used the purchase price and these
loan proceeds to retire debt and for working capital purposes.
The Network is governed by a five member board, three members of
which are selected by Scripps and two selected by the Company. Scripps has
agreed to loan up to $35,000 to the Network to be used for working capital
purposes.
The Company has entered into a three year affiliation agreement with
the Network, under which the Company agrees to carry the Network programming on
its five television stations, located in the Boston, San Francisco, Cleveland,
Raleigh and Bridgeport, Connecticut, markets. The Company retains the right to
terminate the affiliation agreement after 15 months.
In addition, on August 15, 2002, Scripps purchased $3,000 aggregate
amount of newly authorized Series D Senior Redeemable Preferred Stock from the
Company. The shares of Preferred Stock will mature on April 15, 2005, at which
time the Company will be obligated to redeem the shares for a price equal to
their original purchase price plus accrued and unpaid dividends. Dividends of 6%
are payable quarterly, with the Company having the right to defer payment of the
dividends until maturity.
The shares of Preferred Stock are not convertible to any other shares
of capital stock of the Company and do not vote (unless granted that right by
statute). The shares of Preferred Stock carry a liquidation preference to the
Company's Common Stock and are on parity with the Company's outstanding shares
of Series A Preferred Stock. Other than the Series A and D Preferred Stock, the
Company has no other series of preferred stock outstanding.
The Company has elected to change its year to December 31 from June 30.
The six-month period ended December 31, 2002 is a transition period.
The table below summarizes the statement of operations data for the six
months ended December 31, 2002 and December 31, 2001.
Six Months Ended
December 31,
2001 2002
unaudited
Net revenues $ 68,220 $ 92,623
Cost of goods sold 44,506 59,877
Income (loss) from continuing operations
before income taxes 16,580 (15,781)
Net income (loss) 10,522 (10,416)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of Summit America Television, Inc. and its 100%
directly and indirectly owned subsidiaries, KCNS, Inc. ("KCNS"), WOAC, Inc.
("WOAC"), WRAY, Inc. ("WRAY"), WMFP, Inc. ("WMFP"), WSAH, Inc. ("WSAH"), KCNS
License, Inc. ("KCNS License"), WOAC License, Inc. ("WOAC License"), WRAY
License, Inc. ("WRAY License"), WMFP License, Inc. (WMFP License"), WSAH
License, Inc. ("WSAH License"), SAH Acquisition Corporation ("SAH AQ"),
(collectively the "Company"). Additionally, the Company owns 30% of the Network.
All material intercompany balances and transactions have been eliminated in
consolidation.
Operations. The Company has a 30% interest in Shop at Home Network which
markets various consumer products through a televised "Shop At Home" service and
over the internet through its website shopathometv.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.
The Company owns and operates commercial television stations, WMFP,
Channel 62, serving the Boston television market area; WSAH, channel 43, serving
a portion of the New York City market area; 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. Effective October 31, 2002, the Company's television
stations are required to broadcast all programming provided by the Network on an
exclusive basis (subject to FCC-mandated programming requirements.).
Cash and cash equivalents. The Company considers all highly liquid
investments that are readily convertible to known amounts of cash or purchased
with original maturities of three months or less to be cash equivalents. The
carrying value of cash and cash equivalents approximates fair value due to the
short maturity of those instruments.
Accounts receivable. The Company has reduced accounts receivable as a
result of the sale of the Network. At December 31, 2002, the Company had
recorded an allowance of $0 and at June 30, 2002 and 2001, the Company had
recorded allowances of $406 and $2,639, 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. As of December 31,
2002 the Company had no inventory due to the sale of the Network assets.
Allowances are provided for carrying costs in excess of estimated market value.
At December 31, 2002 and at June 30, 2002 and 2001, the Company had recorded
allowances of $0, $684 and $1,717, respectively.
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.
Depreciation is computed under the straight-line method over the
estimated useful lives of the assets as reflected in the following table:
Furniture and fixtures 7 Years
Computer hardware and software 3 Years
Operating equipment 5-15 Years
Leasehold improvements 3-15 Years
Building 40 Years
Television station licenses. The Company owns five full-power
television stations. The licenses are granted by the Federal Communications
Commission for eight-year periods and are regularly renewed absent serious
violations of the law. Beginning July 1, 2001, the television station licenses
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. Prior to July 1, 2001,
the television station licenses were accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 17, Intangible Assets. See Note 4.
Goodwill. Beginning July 1, 2001, goodwill has been accounted for in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Prior to
July 1, 2001, goodwill was accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 17, Intangible Assets. See Note 4.
Investments. Investments are accounted for using the equity method of
accounting if the investment gives the Company the ability to exercise
significant influence, but not control, over an investee. Significant influence
is generally deemed to exist if the Company has an ownership interest in the
voting stock of the investee of between 20% and 50%, although other factors,
such as representation on the investee's Board of Directors and the impact of
commercial arrangements, are considered in determining whether the equity method
of accounting is appropriate. The Company records its equity in the income or
losses of investees using the same period as reported in the Company's
consolidated results of operations. The Company records its investments in
equity-method investees on the consolidated balance sheets in other assets and
its share of the investees' earnings or losses as income or loss on
unconsolidated subsidiary within the consolidated statements of operations. As
of December 31, 2002, the Company had one equity method investee. The carrying
value is included in other assets. See Note 5.
Debt issue costs. As of December 31, 2002 the Company had $0 and as of
June 30, 2002 and 2001 the Company had $3,274 and $3,798, respectively, of debt
issuance costs recorded as other assets. Debt issuance costs are amortized on a
straight-line basis over the life of the related debt, which approximates the
effective interest rate implicit in the borrowing transaction. In accordance
with the early extinguishment of the Company's long-term debt obligations, as
discussed further in Note 7, debt issuance costs of $7,440 were charged to loss
on extinguishment of debt in the accompanying statement of operations. The
amortization of $557, for the six-month period ended December 31, 2002, and the
amortization of $1,178, $653 and $579 for the years ended June 30, 2002, 2001
and 2000, 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.
At December 31, 2002, June 30, 2002 and 2001, the Company had recorded credits
due to customers of $0, $4,523 and $3,443, respectively for actual and estimated
returns.
Revenue recognition. Product sales are recognized upon delivery of the
merchandise to the customer. List rental income is recognized over time as the
lists are utilized. Deferred revenue consists of sales related to in transit
merchandise. Station revenue is recorded as affiliate fee revenue earned for
lease back of airtime to the Network.
Cost of goods sold. Cost of goods sold represents the purchase price of
merchandise and inbound and outbound freight costs.
Advertising. Advertising is expensed as incurred.
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. 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 accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
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. Through June 30, 2002, the Company
followed SFAS No. 121, Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to Be Disposed Of, which required recognition of
impairment losses for long-lived assets with finite lives 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 was based on the
difference between the fair values and the carrying amounts of the assets. SFAS
No. 121 also required that long-lived assets held for sale be reported at the
lower of carrying amount or fair value less cost to sell. The Company did not
experience such losses. Effective July 1, 2002 the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This Statement develops one accounting
model for long-lived assets to be disposed of by sale and requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. This Statement also modifies the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
ongoing operations in a disposal transaction. The adoption of SFAS No. 144 did
not have a material effect on the consolidated financial position, results of
operations or cash flows of the Company.
Stock-based compensation. The Company follows the provisions of APB No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options. Under APB No. 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.
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 No. 123, the Company's net loss and net income (loss) per
share would have been adjusted to the pro forma amounts indicated in the
following table.
December 31, June 30, June 30, June 30,
2002 2002 2001 2000
-------------- ------------- ------------- -------------
Net earnings available to common shareholders:
As reported $10,454 $(22,628) $(18,402) $(13,499)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of related
tax effects (2,522) (433) (3,005) (2,004)
-------------- ------------- ------------- -------------
Pro forma $7,932 $(23,061) $(21,407) $(15,503)
============== ============= ============= =============
Basic earnings per share available to common shareholders
As reported $0.25 $(0.54) $(0.51) $(0.44)
Pro Forma $0.19 $(0.55) $(0.58) $(0.51)
Diluted earnings per share available to common
shareholders: $0.25 $(0.54) $(0.51) $(0.44)
As reported $0.19 $(0.55) $(0.58) $(0.51)
Pro forma
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 six months ended December 31,
2002 and years ended June 30, 2002, 2001 and 2000, respectively: dividend yield
of 0%; expected volatility of 46%, 61%, 90% and 77%; risk-free interest rate of
3.75%, 4.76%, 5.47% and 6.05%; and expected life of 7.5 years.
Cumulative effect of accounting change. Pursuant to Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, the
Company changed its method of recognizing revenue on products it ships to its
customers in 2001. Prior to the adoption of SAB No. 101, the Company recognized
revenue when the products were shipped to the customers, as the products were
shipped FOB shipping point. Pursuant to the new guidance in SAB No. 101 the
Company now recognizes the revenue from shipments once the product is received
by the customer. This change was necessitated since the Company routinely
maintains risk of loss, covered by insurance, while the products are in transit.
In accordance with SAB No. 101, the Company has reduced revenue for the products
which were shipped at the end of the period but not received by the customer by
recording a cumulative effect of an accounting change of $1,359 (net of a tax
benefit of $832) for the effects through June 30, 2000.
Recent accounting pronouncements. In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. An entity shall
subsequently allocate that asset retirement cost to expense using a systematic
and rational method over its useful life. This Statement applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company adopted
SFAS No. 143 on July 1, 2002. The adoption of SFAS No. 143 did not have a
material effect on the consolidated financial position, results of operations or
cash flows of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. The two most significant aspects of this pronouncement, with
respect to the Company, is the elimination of SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and the amendment to SFAS No. 13, Accounting
for Leases. As a result of the elimination of SFAS No. 4, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB No. 30, Reporting the Results of
Operations--Discontinued Events and Extraordinary Items. The amendment to SFAS
No. 13 changes the accounting treatment of certain lease modifications that have
economic effects similar to sale-leaseback transactions to require those lease
modifications to be accounted for in the same manner as sale-leaseback
transactions. The adoption of SFAS No. 145 did not have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company. The loss on the early extinguishment of the Company's long-term debt is
classified in operations rather than an extraordinary item in the accompanying
consolidated statement of operations as a result of the requirements of this
standard.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The principal
difference between this Statement and EITF Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for all exit or disposal activities after December 31,
2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The initial recognition and measurement provision of
FIN 45 are applicable to the guarantees issued or modified after December 31,
2002. The disclosure requirements of FIN 45 are effective for the Company as of
December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
The Company does not expect adoption of this standard to have a material effect
on its consolidated financial position or consolidated results of operations.
For variable rate entities in which an interest was held prior to February 1,
2003, FIN 46 applies in the first fiscal year beginning after June 15, 2003.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation. To provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for annual and interim periods beginning after December 15, 2002.
As the Company has elected not to change to the fair-value-based method of
accounting for stock-based employee compensation, the adoption of SFAS No. 148
will not have an impact on the Company's consolidated financial position or
consolidated results of operation. The Company has included the disclosures in
accordance with SFAS No. 148.
Reclassifications. Certain amounts in the prior years' consolidated
financial statements have been reclassified for comparative purposes to conform
with the current year presentation.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following major classifications:
December 31, June 30,
2002 2002 2001
---- ---- ----
Leasehold improvements $ 270 $ 807 $ 626
Building - 11,912 11,908
Operating equipment 8,574 21,036 19,786
Software - 21,496 20,828
Furniture and fixtures 4 3,226 3,168
Land - 1,250 1,250
------------------ ----------------- -----------------------
8,848 59,727 57,566
Accumulated depreciation (2,594) (29,259) (18,395)
------------------ ----------------- -----------------------
Property and equipment, net $ 6,254 $ 30,468 $ 39,171
================== ================= =======================
Depreciation expense totaled $3,885 for the six-month period ended
December 31, 2002 and $11,720, $11,079 and $5,736 for the years ended June 30,
2002, 2001 and 2000, respectively. Of the $11,079 depreciation expense in the
year ended June 30, 2001, $1,161 relates to the reduction of lives of certain
computer hardware and software from five years to three years to better reflect
the expected utility of these assets.
NOTE 4 - TELEVISION STATION LICENSES AND GOODWILL
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 primarily
addresses the accounting for the cost of an acquired business (i.e. the purchase
price allocation), including any subsequent adjustments to its cost. SFAS No.
141 supercedes APB No. 16, Business Combinations. The most significant changes
made by SFAS No. 141 are to eliminate the use of the pooling-of-interests method
and to provide new criteria for determining whether intangible assets in a
business combination should be recognized separately from goodwill. SFAS No. 141
is effective for all business combinations initiated after June 30, 2001 and
for all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The Company adopted SFAS No. 141 effective
July 1, 2001. The adoption of SFAS No. 141 did not have any impact on the
Company's financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets after their acquisition and supercedes APB No. 17, Intangible
Assets. The most significant changes made by SFAS No. 142 are to eliminate the
amortization of goodwill and indefinite-life intangible assets, to require that
goodwill and indefinite-life intangibles be tested for impairment at least
annually and to remove the forty year limitation on the amortization period of
intangible assets. SFAS No. 142 is effective for years beginning after December
15, 2001, with early adoption allowed for entities with years beginning after
March 15, 2001.
The Company adopted SFAS No. 142 effective July 1, 2001. The effect of
such adoption was to discontinue amortization of the Company's television
station licenses ("FCC Licenses") and goodwill. Prior to the adoption of SFAS
No. 142, the Company amortized the television station licenses and goodwill on a
straight-line basis over 40 years. The FCC licenses are granted by the Federal
Communications Commission, stipulating each station's operating parameters as
defined by channels, effective radiated power and antenna height. In the past,
these licenses have become valuable intangible assets, appreciating in value.
The Company believes these intangible assets have an indefinite useful life
because they are expected to generate cash flow indefinitely. Thus, the Company
ceased to amortize these licenses on July 1, 2001. As of December 31, 2002 the
carrying value of the FCC licenses was $89,251.
The Company's carrying value of goodwill of $528 at December 31, 2002,
June 30, 2002 and 2001 is attributable to its television stations. The Company
completed the first step of the transitional goodwill impairment test during the
quarter ended December 31, 2001 and determined that no potential impairment
exists. As a result, the Company has recognized no transitional impairment loss
in connection with the adoption of SFAS No. 142.
The Company has chosen June 30 of each year as its annual impairment
testing date for intangible assets not subject to amortization and goodwill. As
of December 31, 2002, the Company has recorded no impairment loss in connection
with these assets.
The following pro forma information reconciles the net income (loss)
and net income (loss) per share reported for the six-month period ended December
31, 2002, and for the years ended June 30, 2002, 2001 and 2000, to the adjusted
net loss and loss per share which reflect the adoption of SFAS No. 142, and
compares the adjusted information to the reported results:
December 31 June 30 June 30 June 30
2002 2002 2001 2000
-------------- ----------------- ----------------- -------------------
Reported net income (loss) $ 10,454 $ (22,628) $ (18,402) $ (13,499)
Add back FCC licenses and goodwill
amortization, net of tax - - 1,922 1,724
-------------- ----------------- ----------------- -------------------
Adjusted net income (loss) $ 10,454 $ (22,628) $ (16,480) $ (11,775)
============== ================= ================= ===================
Basic income (loss) per share:
Reported net income (loss) $ 0.25 $ (0.54) $ (0.51) $ (0.44)
FCC licenses and goodwill amortization - - 0.06 0.05
-------------- ----------------- ----------------- -------------------
Adjusted net income (loss) $ 0.25 $ (0.54) $ (0.45) $ (0.39)
============== ================= ================= ===================
Diluted income (loss) per share:
Reported net income (loss) $ 0.25 $ (0.54) $ (0.51) $ (0.44)
FCC licenses and goodwill amortization - - 0.06 0.05
-------------- ----------------- ----------------- -------------------
Adjusted net income (loss) $ 0.25 $ (0.54) $ (0.45) $ (0.39)
============== ================= ================= ===================
NOTE 5 -- INVESTMENTS
As a result of the sale of the Network as discussed in Note 1, the
Company has retained an equity method investment in 30% of the Network
operations. The carrying value of this equity method investment is included in
other assets in the accompanying consolidated balance sheets.
Summarized balance sheet information of the Company's equity-method investee is
as follows:
December 31, 2002
Current Assets $ 25,145
Noncurrent Assets $ 20,173
Current Liabilities $ 35,451
Noncurrent liabilities $ 16
Summarized statement of operations information of the Company's equity-method
investee, calculated for the period during which the Company had the equity
method investment, is as follows:
For the Two Months Ended
December 31, 2002
Net sales $42,345
Gross profit $14,792
Net loss $(3,479)
NOTE 6 -- CAPITAL LEASES
Property and equipment includes $0, $2,392 and $3,111 of various
equipment acquired pursuant to long term capital leases at December 31, 2002,
June 30, 2002 and 2001, respectively. All remaining lease liabilities were
included in the Company's sale of Network assets.
NOTE 7 - INDEBTEDNESS
$47,500, 6% Secured Note
Concurrent with its purchase of the Network assets discussed in Note 1,
Scripps loaned $47,500 to the Company payable in full on or before October 31,
2005. Interest accrues on the loan at the rate of 6% and is payable quarterly.
Payment and performance of the loan obligation are secured by assignment of the
Company's 30% interest in Shop At Home, LLC and a security interest in the
Company's television stations located in Boston, San Francisco and Cleveland
markets and a security interest in the stock of the Company's subsidiaries that
own the assets. The Company's carrying value of the television station licenses
used to secure the loan is $61,563 at December 31, 2002. As required by the loan
agreement, the Company must adhere to various non-financial covenants and is
prohibited from encumbering further any secured assets, redeeming or issuing
outstanding stock or issuing additional shares of common or preferred stock.
Based on interest rates the Company believes it could obtain to secure similar
debt, the fair value of the Company's debt at December 31, 2002 is $43,717.
$75,000 of 11% Senior Secured Notes
In March 1998, the Company issued $75,000 of 11% Senior Secured Notes
Due 2005 (the "Notes"). Interest on the Notes was payable semi-annually on April
1 and October 1 of each year.
The Senior Secured Notes were redeemed in full with the proceeds
received from the sale of Network assets as discussed in Note 1. The loss on
extinguishment of debt recorded in the consolidated statement of income includes
$4,125 in early repayments fees and the write off of remaining debt cost of
$2,640 the Company had been amortizing over the term of the debt.
Senior Credit Facility
During the year ended June 30, 2001, the Company used a portion of the
proceeds from the sale of its Houston television station (see Note 18) to repay
its then existing $20,000 senior bank facility. The senior bank facility bore
interest at a margin above LIBOR. On August 1, 2001, the Company obtained a new
$17,500 revolving line of credit from a financial institution. The facility
requires that interest be paid at least quarterly at a variable rate (6.875% at
June 30, 2002) based on LIBOR or prime rate.
The Senior Credit Facility was paid in full on October 31, 2002 with
the proceeds received from the sale of Network assets as discussed in Note 1.
The loss on extinguishment of debt recorded in the consolidated statement of
income includes $112 in early repayment fees and the write off of remaining debt
cost of $563 the Company had been amortizing over the term of the debt.
NOTE 8 -- REDEEMABLE PREFERRED STOCK
Series A Convertible Preferred Stock
The Company is authorized to issue 1,000,000 shares of Series A
Preferred Stock, of which 3,718 shares were outstanding as of December 31, 2002.
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 $0.10 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 the Company's 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 stated value per share, in consideration of a
payment of $20,000. Of the original 2,000 shares issued on June 30, 2000, 1,000
were redeemed for $10,682 cash and the balance was converted into 7,874,506
shares of common stock during the year ended June 30, 2001.
Included in the preferred stock accretion and dividends for the year
ended June 30, 2001 are $703 for dividends paid in cash and common stock, $3,810
for the beneficial conversion feature accretion, and $3,643 loss on repurchase
of preferred stock treated as a dividend.
The Company adopted certain provisions of EITF Issue No. 00-27,
Application of EITF Issue No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to
Certain Convertible Securities", in the second quarter of 2001. EITF Issue No.
00-27 changed the approach of calculating the conversion price used in
determining the value of the beneficial conversion feature from using the
conversion price stated in the preferred stock certificate to using the
accounting conversion price. The adoption of this EITF increased the original
value of the beneficial conversion feature from $3,596 to $7,796. In accordance
with EITF Issue No. 00-27, the adoption was treated as a cumulative effect of an
accounting change, which resulted in a cumulative adjustment to dividends of
$499 which was recorded in the second quarter of 2001.
Series D Preferred Stock
In addition, on August 15, 2002, Scripps purchased $3,000 aggregate
amount of newly authorized Series D Senior Redeemable Preferred Stock from the
Company. The shares of Preferred Stock will mature on April 15, 2005, at which
time the Company will be obligated to redeem the shares for a price equal to
their original purchase price plus accrued and unpaid dividends. Dividends of 6%
are payable quarterly, with the Company having the right to defer payment of the
dividends until maturity.
The shares of Preferred Stock are not convertible to any other shares of
capital stock of the Company and do not vote (unless granted that right by
statute). The shares of Preferred Stock carry a liquidation preference to the
Company's Common Stock and are on parity with the Company's outstanding shares
of Series A Preferred Stock. Other than the Series A and D Preferred Stock, the
Company has no other series of preferred stock outstanding.
NOTE 9 -- INCOME TAXES
The components of deferred taxes and the approximate tax effects at
December 31, 2002 and June 30, 2002 and 2001, are as follows:
December 31, June 30,
2002 2002 2001
---- ---- ----
--------------------- -------------------- ---------------------
Deferred tax assets:
Net operating loss carryforwards
Investment in partnership $ 27,375 $ 35,066 $ 21,624
4,870 - -
Accruals 418 2,306 3,177
Valuation allowance (3,529) (3,476) (2,400)
--------------------- -------------------- ---------------------
Total deferred tax assets 29,134 33,896 22,401
--------------------- -------------------- ---------------------
Deferred tax liabilities:
Licenses and intangibles 10,268 1,876 6,676
Depreciation 1,501 8,823 3,130
--------------------- -------------------- ---------------------
Total deferred tax 11,769 10,699 9,806
liabilities
--------------------- -------------------- ---------------------
Net deferred tax assets $ 17,365 $ 23,197 $ 12,595
===================== ==================== =====================
Current deferred tax assets $ 418 $ 2,306 $ 3,177
Long-term deferred tax assets, net 16,947 20,891 9,418
--------------------- -------------------- ---------------------
Net deferred tax assets $ 17,365 $ 23,197 $ 12,595
===================== ==================== =====================
At December 31, 2002 and June 30, 2002 and 2001 the Company had
approximately $70,135, $92,910 and $56,260, respectively, of federal net
operating loss carryforwards in addition to $0, $0 and $95, respectively, of AMT
credits available to offset taxable income in future periods. Of these amounts,
$70,135 of the net operating loss carryforwards expire between 2019 and 2021.
Due to the length of time until the expiration date of the federal net operating
loss carryforwards and the value of the Company's commercial television
stations, the Company did not deem it necessary to provide a valuation allowance
at December 31, 2002 and June 30, 2002 and 2001 against its federal net
operating loss carryforwards. However, the Company did provide a full valuation
allowance against its state net operating loss carryforwards as these
carryforwards primarily relate to states in which no commercial television
stations are present.
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:
December 31, Years Ended June 30,
2002 2002 2001 2000
---- ---- ---- ----
Computed "expected" income tax expense
(benefit) from continuing operations $ 5,637 $ (11,315) $ (1,755) $ (6,941)
Increase (decrease) in income taxes
resulting from:
State income tax benefit, net
of federal effect 33 (126) (204) (859)
Nondeductible expenses 20 10 94 64
Change in valuation allowance 53 1,076 2,400 -
Other 315 (297) (273) 27
------------------ ----------------- ------------------- -----------------
Actual income tax expense (benefit) $ 6,058 $ (10,652) $ 262 $ (7,709)
================== ================= =================== =================
The components of income tax expense (benefit) for the six months ended
December 31, 2002 and the years ended June 30, 2002, 2001 and 2000, are as
follows:
December 31, Years Ended June 30,
------------ -------------------
2002 2002 2001 2000
---- ---- ---- ----
Current:
State $ 131 $ 8 $ 54 $ -
Federal - - - -
------------------ ----------------- ------------------ ---------------
131 8 54
------------------ ----------------- ------------------ ---------------
Deferred:
State (1) (200) 2,325 (794)
Federal 5,928 (10,460) (2,117) (6,915)
------------------ ----------------- ------------------ ---------------
5,927 (10,660) 208 (7,709)
------------------ ----------------- ------------------ ---------------
Total expense (benefit) $ 6,058 $ (10,652) $ 262 $ (7,709)
================== ================= ================== ===============
The Company has allocated deferred tax benefits directly to additional
paid in capital for the six month period ended December 31, 2002 and for the
years ended June 30, 2002, 2001 and 2000 of $94, $45, $9 and $973, respectively.
These amounts reflect the tax benefit received from the exercise of nonqualified
stock options and disqualifying dispositions by employees of qualified stock
options.
NOTE 10 - COMMITMENTS
Rental expense for office, studio and miscellaneous equipment was
$1,054, $2,975, $3,086 and $3,194 for the six months ended December 31, 2002 and
the years ended June 30, 2002, 2001 and 2000 respectively. Certain of these
leases contain renewal options.
Future minimum lease payments of noncancelable operating leases are as
follows at December 31, 2002:
2003 $ 759
2004 764
2005 404
2006 345
2007 257
Future 724
-----------------------
Total $ 3,253
=======================
NOTE 11 -- RELATED PARTY TRANSACTIONS
During the six months ended December 31, 2002 and years ended June 30,
2002, 2001 and 2000, the Company engaged in some related party transactions in
the normal course of business.
The Company recorded $1,115 in affiliate fee revenue from the Network
for the period ending December 31, 2002.
An entity affiliated with Frank A. Woods, a director of the Company,
was paid in October 2000 a finder's fee of $200 in connection with the Company's
$20,000 senior bank facility.
In May 2001, Charles W. Bone was added to the Board of Directors. During
2001 and part of 2002, Mr. Bone was a partner in the firm Wyatt, Tarrant &
Combs, LLP that represents the Company in various legal issues. For the period
ended June 30, 2002 and 2001, the Company paid $307 and $432 in fees to Wyatt,
Tarrant & Combs, LLP, respectively. During the six months ended December 31,
2002 and the year ended June 30, 2002 the Company paid $568 and $88 in fees to
Mr. Bone's new firm, Bone McAllester Norton PLLC.
In May 2001, the Board of Directors appointed A.E. Jolley and J. Daniel
Sullivan, as a committee of Independent Directors, to set compensation for the
members of the Office of the Chair consisting of J.D. Clinton, Chairman, Charles
W. Bone, George R. Ditomassi, Jr. and Frank Woods. Compensation was set at $7.5
monthly for Charles W. Bone and Frank Woods. In addition to an initial grant of
options to purchase 12,500 shares of stock made by the Board of Directors for
the service of these Directors on an Executive Committee charged with running
the Company after the Chief Executive Officer's termination, the committee
decided that for their service as the Office of the Chair to grant additional
options to purchase 25,000 shares to Charles Bone and Frank Woods. The committee
also allowed Mr. Bone to exercise his outstanding warrants using a three year
note. The committee also granted options to purchase 50,000 shares to George R.
Ditomassi. The Company recognized no compensation expense related to the stock
options as they were granted at the then current market price. In addition, J.D.
Clinton was loaned, by the Company, the exercise price for all of his remaining
warrants. The loan matures on December 31, 2004 (see discussion of loan below).
The Office of the Chair was dissolved on October 1, 2001.
On June 30, 2001, Mr. Clinton exercised warrants to purchase 1,545,066
shares of common stock through an affiliated entity, SAH Holdings, Ltd., for a
total purchase price of $2,565 and exercised warrants to purchase 542,500 shares
of common stock through another affiliated entity, Clinton Investments, Ltd.,
for a total purchase price of $900. Mr. Bone, on the same date, exercised
warrants to purchase 82,500 shares of common stock through an affiliated entity,
Caleb Investments, LP, for a total purchase price of $137. The Company loaned
these entities the funds to make this purchase and each of these entities
executed a non-recourse promissory note to the issuer payable in full on June
30, 2004. The notes carry interest at the prime rate, also payable at maturity.
The Company recognized $84 and $191 of interest income on these notes for the
six months ended December 31, 2002 and the year ended June 30, 2002. The loans
are non-recourse to the entities but are collateralized by the underlying shares
purchased. On December 31, 2002, Mr. Bone paid in full to the Company the
outstanding balance of his loan.
In connection with the relocation of the primary residence of Kent E.
Lillie, former 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. This note was forgiven as part of Mr.
Lillie's severance agreement during the year ended June 30, 2002.
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 Company paid INSOUTH Bank $57, $172, $163 and $101 for the six
months ended December 31, 2002 and years ended June 30, 2002, 2001 and 2000,
respectively.
NOTE 12 -- STOCK OPTIONS AND WARRANTS
In 1999 the Company's Board of Directors adopted the 1999 Employee Stock
Option Plan (the "1999 Plan") which provides for the issuance of options to
purchase up to 6,000,000 shares of the Company's 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
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 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. Due to the sale of the Network assets, which
triggered a change of control of the Company, participants were able to vest in
part of their remaining unvested options. Under the 1999 Plan, participants have
ninety days to exercise options when termination has occurred due to a change in
control of the Company. At December 31, 2002 there were 2,173,200 of remaining
shares available for grant under the 1999 Plan.
In 1991, the Company adopted a stock incentive plan for eligible
employees (the "1991 Plan"). 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.
A summary of the status of the Company's options as of December 31, and
June 30, 2002, 2001 and 2000 and changes during the periods ending on those
dates is presented below:
December 31, June 30,
2002 2002 2001 2000
--------------------- ------------------------- ------------------------ ---------------------
--------------------- ------------------------- ------------------------ ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
--------- ---------- ----------- ------------ ----------- ----------- ---------- ----------
Outstanding at beginning of
Period 4,845,150 $ 3.46 3,488,850 $ 4.21 2,821,600 $ 7.62 2,449,200 $ 6.14
Granted 368,500 2.66 2,147,500 2.52 1,797,350 2.24 1,007,000 9.18
Exercised (304,350) 1.51 (95,750) 1.51 (33,400) 1.53 (400,600) 2.00
Forfeited/expired (659,066) 4.14 (695,450) 4.29 (1,096,700) 10.27 (234,000) 7.75
--------- ----------- ----------- ----------
Outstanding at end of period 4,250,234 4,845,150 3,488,850 2,821,600
3.43 3.46 4.21 7.62
========= =========== =========== ==========
Options exercisable at period
end 4,138,434 2,437,452 1,507,100 987,500
Weighted average fair value
of options granted during
the year $ 1.43 $ 1.68 $ 1.85 $7.08
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/02 Life Price at 12/31/02 Price
- -------------------------------- -------------- --------------- ------------ --------------- ------------
$0.00 - $1.99 416,000 4.93 years $ 1.50 312,200 $ 1.49
$2.00 - $2.99 3,060,434 5.30 years 2.58 3,060,434 2.58
$3.00 - $3.99 263,700 2.39 years 3.51 263,700 3.51
$4.00 - $5.99 83,000 .08 years 4.68 83,000 4.68
$6.00 - $7.99 86,700 3.54 years 6.83 86,700 6.83
$8.00 - $9.99 51,100 .08 years 8.86 51,100 8.86
$10.00 - $10.99 12,500 .08 years 10.75 12,500 10.75
$11.00 - $11.99 9,100 .08 years 11.25 9,100 11.25
$12.00 - $12.99 91,800 1.57 years 12.51 83,800 12.50
$13.00 - $13.99 175,900 .08 years 13.08 175,900 13.08
-------------- ---------------
4,250,234 4,138,434
============== ===============
At December 31, 2002, warrants to purchase 2,000,000 shares of common
stock were outstanding. The warrants' exercise price is $2.82 per common share.
The warrants expire on June 30, 2003.
NOTE 13 - INCOME (LOSS) PER SHARE
The following table sets forth for the periods indicated the calculation
of net income (loss) per share included in the Company's Consolidated Statements
of Operations:
For the six
months ended
December 31, Years Ended June 30,
(shares in thousands)
2002 2002 2001 2000
---- ---- ---- ----
Numerator:
Income (loss) from continuing operations $ 10,522 $(22,628) $(5,425) $(12,707)
Preferred stock accretion and dividends (68) - (8,156) (6)
------------------ ----------------- ---------------- ----------------
Numerator for basic earnings per
share-income (loss) available to
common stockholders $ 10,454 $(22,628) $(13,581) $(12,713)
================== ================= ================ ================
Denominator:
Denominator for basic earnings per
share-weighted-average shares 42,014 41,861 36,311 30,490
Effect of dilutive securities 331 - - -
------------------ ----------------- ---------------- ----------------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 42,345 41,861 36,311 30,490
================== ================= ================ ================
Basic loss from continuing operations per share $ 0.25 $ (0.54) $ (0.37) $ (0.42)
================== ================= ================ ================
Diluted loss from continuing operations per share $ 0.25 $ (0.54) $ (0.37) $ (0.42)
================== ================= ================ ================
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 (in thousands):
Employee stock options 2,532 4,845 3,489 1,007
Warrants 2,000 2,000 2,000 2,035
Convertible preferred stock - 14 16 94
NOTE 14 -- EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all full-time
employees who have attained one year of service and are age 21 or older.
Participants are permitted to make contributions in an amount equal to 1% to 15%
of their compensation actually paid. 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. Beginning as of
July 1, 1999, the Company elected to match a portion of the employee's
contribution up to a maximum of 50% of the employee's annual contribution in the
form of Company stock. The Company's match on the 401(k) plan during the years
ended June 30, 2002, 2001 and 2000 was 42, 100 and 10 shares of common stock
with related expense of $115, $122 and $98, respectively. During the fiscal year
ended June 30, 2002, the Board of Directors decided to change the Company match
from common stock to a cash match. As a result, the Company expensed an
additional $65 for the year ended June 30, 2002. For the six months ended
December 31, 2002, the Company's match was $115.
Following the closing of the sale of the 70% interest in the Network to
Scripps on October 31, 2002, the Company partially terminated the 401(k) plan
with respect to the employees of the Network who became employees of Scripps. In
order to effect this partial termination, shares of common stock of the Company
were sold by the plan and the proceeds distributed to the plan participants for
which the plan was terminated.
NOTE 15 - 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, ultimately, 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.
For periods subsequent to the sale of 70% of the Company's Network,
substantially all of the Company's revenues will be derived from the affiliate
fees charged to the Network.
NOTE 16 -- CONTINGENCIES
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 certain
orders, that certain amounts it paid to the Company under a written agreement
should be refunded, and that certain amounts were left owing on the account. The
vendor also claims entitlement to alleged lost profits of approximately $2
million, asserting the Company did not provide an amount of broadcast network
time in 1999 that the vendor alleges was orally promised in connection with the
written agreement. The Company has filed its answer and has vigorously pursued
its defense against Classic Collectibles, LLC. The case was initially set for a
jury trial in November 2002 but has been postponed by the court until September
2003.
In addition, the Company is subject to routine litigation arising from
the normal and ordinary operation of its business. The Company believes that
such litigation is not likely to have a material adverse effect on its financial
position, results of operations or cash flows.
NOTE 17 -- DISCONTINUANCE OF COLLECTOR'S EDGE
The Company discontinued the operations of its subsidiary and segment,
Collector's Edge of Tennessee, Inc. ("CET"), which formerly manufactured and
distributed football trading cards, at the end of December 2000. The Company
sold CET's assets on February 19, 2001, for $1,500, $500 in cash and a note for
$1,000 due in six equal installments which was paid in full on August 15, 2001.
Revenues from CET were as follows:
Six Months Ended Twelve Months Ended
June 30,
December 31,
-------------------------------------------------
2002 2002 2001 2000
--------------- --------------- -------------- ---------------
$0 $0 $2,519 $9,700
NOTE 18 -- SALE OF HOUSTON TELEVISION STATION KZJL
On March 20, 2001, the Company sold its Houston television station KZJL
for $57,000. In addition to the cash received, the Company retained rights to
50% of any profits from any sale of the station's Channel 60 - 69 spectrum. The
gain recognized on the sale is the result of the proceeds less $6,752 for the
net book value of fixed assets and license cost and $1,319 in closing costs.
NOTE 19 -- OPERATING SEGMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires reporting segment information that is consistent with the
way in which management operates the Company. Until October 31, 2002, the
Company operated principally in two segments: Shop At Home Network and
shopathometv.com. The Company operated 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
Six Months Ended Years Ended June 30
December 31
2002 2002 2001 2000
---- ---- ---- ----
Revenue:
Summit/Network $ 59,996 $176,086 $ 161,589 $ 198,114
shopathometv.com 7,109 19,754 18,686 4,675
Affiliate fees 1,115 - - -
Intersegment eliminations - - (2,660) (1,233)
--------------------- ---------------- ---------------- ---------------
$ 68,220 $195,840 $ 177,615 $ 201,556
===================== ================ ================ ===============
Operating loss:
Summit/Network $ (22,090) $(22,356) $ (33,594) $ (4,447)
shopathometv.com 1,046 (586) (9,592) (6,901)
--------------------- ---------------- ---------------- ---------------
$ (21,044) $(22,942) $ (43,186) $(11,348)
===================== ================ ================ ===============
Depreciation and amortization:
Summit/Network $ 3,149 $ 9,453 $ 11,854 $ 7,761
shopathometv.com 751 2,267 2,081 612
--------------------- ---------------- ---------------- ---------------
$ 3,900 $ 11,720 $ 13,935 $ 8,373
===================== ================ ================ ===============
Interest income:
Summit/Network $ 196 $ 552 $ 906 $ 749
shopathometv.com - - - -
--------------------- ---------------- ---------------- ---------------
$ 196 $ 552 $ 906 $ 749
===================== ================ ================ ===============
Interest expense:
Summit/Network $ 4,924 $ 10,878 $ 11,875 $ 9,490
shopathometv.com - - - 173
--------------------- ---------------- ---------------- ---------------
$ 4,924 $ 10,878 $ 11,875 $ 9,663
===================== ================ ================ ===============
Income (loss) before taxes:
Summit/Network $ 16,540 $ (32,692) $ 4,429 $(13,342)
shopathometv.com 40 (588) (9,592) (7,074)
--------------------- ---------------- ---------------- ---------------
$ 16,580 $(33,280) $ (5,163) $(20,416)
===================== ================ ================ ===============
Income taxes:
Summit/Network $ 6,044 $(10,452) $ 3,907 $ (5,035)
shopathometv.com 14 (200) (3,645) (2,674)
--------------------- ---------------- ---------------- ---------------
$ 6,058 $(10,652) $ 262 $ (7,709)
===================== ================ ================ ===============
Total assets:
Summit/Network $ 117,129 $167,726 $ 169,624 $ 211,433
shopathometv.com - 10,354 10,393 8,830
Collector's Edge - - - 8,331
Intersegment eliminations - - - (1,300)
--------------------- ---------------- ---------------- ---------------
$ 117,129 $178,080 $ 180,017 $ 227,294
===================== ================ ================ ===============
Capital expenditures:
Summit/Network $ 768 $ 3,011 $ 2,664 $ 11,133
shopathometv.com - 13 63 6,617
--------------------- ---------------- ---------------- ---------------
$ 768 $ 3,024 $ 2,727 $ 17,750
===================== ================ ================ ===============
NOTE 20 - QUARTERLY FINANCIAL INFORMATION - (UNAUDITED)
Six months ended December 31, 2002
---------------------------------------------------------------------
Quarter Ending
September 30 December 31 TOTAL
---------------------------------------------------------------------
Net Revenues $ 53,141 $ 15,079 $ 68,220
Loss From Operations (6,369) (14,675) (21,044)
Income (Loss) From Continuing Operations
before taxes (9,229) 25,809 16,580
Net Income (Loss) (6,091) 16,613 10,522
Preferred Stock Dividends - (68) (68)
Net Income (Loss) Available for Common
Shareholders (6,091) 16,545 10,454
Net Income (Loss) per Basic and Diluted
Share (0.15) 0.40 0.25
Year Ended June 30, 2002
--------------------------------------------------------------------
Quarter Ending
September 30 December 31 March 31 June 30 TOTAL
--------------------------------------------------------------------
Net Revenues $ 43,410 $ 49,213 $ 49,745 $ 53,472 $ 195,840
Loss From Operations (4,854) (5,753) (6,695) (5,640) (22,942)
Income (Loss) From Continuing Operations
before taxes (7,321) (8,460) (9,368) (8,131) (33,280)
Net Income (Loss) (4,832) (5,584) (6,183) (6,029) (22,628)
Preferred Stock Dividends - - - - -
Net Loss Available for Common Shareholders (4,832) (5,584) (6,183) (6,029) (22,628)
Net Income (Loss) per Basic and Diluted
Share (0.12) (0.13) (0.15) (0.14) (0.54)
Year Ended June 30, 2001
--------------------------------------------------------------------
Quarter Ending
September 30 December 31 March 31 June 30 TOTAL
--------------------------------------------------------------------
Net Revenues $40,779 $ 46,515 $ 50,402 $ 39,919 $177,615
Loss From Operations (8,848) (5,508) (13,497) (15,333) (43,186)
Income (Loss) From Continuing Operations
before taxes (11,385) (8,389) 31,976 (17,365) (5,163)
Discontinued Operations (398) (2,949) (115) - (3,462)
Loss Before Cumulative Effect of
Accounting Change (7,455) (8,152) 19,710 (12,990) (8,887)
Cumulative Effect of Accounting Change (1,359) - - - (1,359)
Net Income (Loss) (8,814) (8,152) 19,710 (12,990) (10,246)
Preferred Stock Dividends (1,207) (4,227) (2,722) - (8,156)
Net Loss Available for Common Shareholders (10,021) (12,379) 16,988 (12,990) (18,402)
Net Income (Loss) per Basic and Diluted
Share (0.32) (0.35) 0.43 (0.27) (0.51)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 7, 2001, the Company dismissed its independent public
accountants, PricewaterhouseCoopers LLP, and retained Deloitte & Touche LLP as
its new independent public accountants effective as of the same day. The change
in accountants was ratified and approved by the Company's Board of Directors,
upon the recommendation of the Audit Committee of the Board of Directors. The
decision to change independent public accountants was prompted when the Company
was notified that the office of PricewaterhouseCoopers, LLP in Nashville would
be closing.
During the Company's 2001 year, and the subsequent interim periods
through December 31, 2001, there were no disagreements between the Company and
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which if not
resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused
PricewaterhouseCoopers LLP to make reference to the subject matter of the
disagreement in connection with its reports on the Company's financial
statements for those periods. None of the reportable events described under Item
304(a)(1)(v) of Regulation S-K occurred during the Company's two most recent
years ended June 30, 2001, or during any subsequent interim period through
December 31, 2001.
The audit reports issued by PricewaterhouseCoopers LLP on the Company's
consolidated financial statements as of and for the years ended June 30, 2000,
and June 30, 2001, neither contained any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. The Company provided PricewaterhouseCoopers LLP with a
copy of the foregoing disclosures, and a letter from PricewaterhouseCoopers LLP
confirming its agreement with these disclosures was filed as an exhibit to the
Current Report filed with the SEC on Form 8-K on November 9, 2001.
During the Company's two most recent years ended June 30, 2001, and
through December 31, 2001, the Company did not consult with Deloitte & Touche
LLP with respect to the application of accounting principles to a specified
transaction or regarding any of the other matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information relating to directors and executive officers required
by this item will be contained in a definitive Proxy Statement, which the
registrant will file with the Securities and Exchange Commission not later than
120 days after December 31, 2002 (the "Proxy Statement"), and such information
is incorporated herein by reference.
The information required pursuant to Item 405 of Regulation S-K will be
contained under the caption "Compliance with Section 16(a) of the Exchange Act"
in the Company's Proxy Statement, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained under the
caption "Remuneration of Directors and Officers" in the Company's Proxy
Statement, and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item will be contained under the
caption "Security Ownership of Certain Beneficial Owners" in the Company's Proxy
Statement, and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption
"Certain Transactions" in the Proxy Statement, and such information is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
The Company's management, including the Chief Executive Officer,
George R. Ditomassi (who functions as the principal executive officer and
principal financial officer), has evaluated the effectiveness of the Company's
"disclosure controls and procedures," as such term is defined in Rules 13a-14
and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this transition report on Form 10-K. Based
upon management's evaluation, the Chief Executive Officer concluded that the
Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls since the date on which the controls
were evaluated.
PART IV
ITEM 15. 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
Reports of Independent Accountants
Consolidated Balance Sheets as of December 31, 2002
and June 30, 2002 and 2001 Consolidated Statements of
Operations for the periods ended December 31,2002 and
June 30, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for
the periods ended December 31, 2002 and June
30, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the periods
ended December 31, 2002 and June 30, 2002, 2001 and
2000
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
Schedules not listed above are omitted because they are
not required or because the required information is
included in our consolidated financial statements or
notes thereto.
3. Exhibits
The Index to Exhibits begins on page 53.
(b) Reports on Form 8-K
The following current report on Form 8-K has been filed during
the last quarter (October 1, 2002 through December 31, 2002) of
the period covered by this transition report:
On November 15, 2002, the Company filed a current report on Form
8-K, Item 2 (Acquisition or Disposition of Assets) reporting the
terms of the sale to a subsidiary of The E.W. Scripps Company of
a 70% interest in the Company's television and internet home
shopping network. The Company also reported the terms of
financing received by the Company from The E.W. Scripps Company
in connection with the transaction.
(c) We hereby file as part of this Form 10-K the Exhibits referenced in
Item 15(a)(3) above.
(d) The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Agreements
Schedules not listed above are omitted because they are not
required or because the required information is included in our
consolidated financial statements or notes thereto.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
SIX MONTHS ENDED DECEMBER 31, 2002 AND YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(Thousands of Dollars)
Balance at Charged to Balance
beginning Returns and at end
of period Allowances Deductions(1) of period(2)
--------------- ---------------- ---------------- --------------
Six Months ended December 31, 2002
Estimated credits
due to customers $ 4,523 $ 18,011 $ 22,534 $ 0
=============== ================ ================ ==============
Year ended June 30, 2002
Estimated credits
due to customers $ 3,443 $ 40,832 $ 39,752 $ 4,523
=============== ================ ================ ==============
Year ended June 30, 2001
Estimated credits
due to customers $ 2,711 $ 58,734 $ 58,002 $ 3,443
=============== ================ ================ ==============
Year ended June 30, 2000
Estimated credits
due to customers $ 3,069 $ 58,582 $ 58,940 $ 2,711
=============== ================ ================ ==============
Balance at Balance
beginning Additional at end
of period provisions Reduction of period(2)
--------------- ---------------- -------------- --------------
Six Months ended December 31, 2002
Accounts receivable
Reserves $ 406 $ 287 $ 693 $ 0
=============== ================ ============== ==============
Year ended June 30, 2002
Accounts receivable
Reserves $ 2,489 $ 1,266 $ 3,349 $ 406
=============== ================ ============== ==============
Year ended June 30, 2001
Accounts receivable
Reserves $ 1,595 $ 2,517 $ 1,623 $ 2,489
=============== ================ ============== ==============
Year ended June 30, 2000
Accounts receivable
Reserves $ 543 $ 1,816 $ 764 $ 1,595
=============== ================ ============== ==============
Balance at Balance
beginning Additional at end
of period provisions Deductions of period(2)
--------------- ---------------- --------------- -------------
Six Months ended December 31, 2002
Inventory reserves $ 684 $ 0 $ 684 $ 0
=============== ================ ============== ==============
Year ended June 30, 2002
Inventory reserves $ 1,717 $ 799 $ 1,832 $ 684
=============== ================ ============== ==============
Year ended June 30, 2001
Inventory reserves $ 669 $ 3,587 $ 2,539 $ 1,717
=============== ================ ============== ==============
Year ended June 30, 2000
Inventory reserves $ 304 $ 855 $ 490 $ 669
=============== ================ ============== ==============
(1) Merchandise returned
(2) Balance transferred with sale of Network assets on October 31, 2002
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, 2000, 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(i).7 Amendment to Amended and Restated Charter, filed as Exhibit
3.1 to the Current Report on Form 8-K, filed
June 1, 2001, and incorporated by this reference.
3(i).8 Amendment to Amended and Restated Charter, recorded August 15,
2002, filed as Exhibit 3(i).8 to the Annual Report on Form
10-K, filed on September 6, 2002, and incorporated herein by
this reference.
3(i).9 Amendment to Amended and Restated Charter, recorded October
31, 2002, filed as Exhibit 3(i).9 to the Quarterly Report on
Form 10-Q, filed on November 4, 2002, and incorporated herein
by this 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 January 20, 1995, and incorporated herein by this
reference.
4.12 Rights Agreement, adopted by the Board of Directors of the
Company, dated June 1, 2001, filed as Exhibit 4.1 to the
Current Report on Form 8-K, filed June 1, 2001, and
incorporated by this reference.
4.13 Preferred Share Purchase Agreement, dated August 14, 2002,
between the Registrant and Scripps Networks,
Inc, filed as Exhibit 4.13 to the Annual Report on Form 10-K
filed September 6, 2002 and incorporated 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 year
ended December 31, 1992, 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.
10.49 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 year ended December 31, 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.
10.53 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.
10.57 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 December 31, 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.
10.61 Waiver and Agreement, between the Company and the holders of
the Series B Convertible Preferred Stock, dated September 21,
2000, filed as Exhibit 10.1 to the Current Report on Form 8-K,
filed September 22, 2000, and incorporated by this reference.
10.63 Asset Purchase Agreement, between the Company and its
affiliates and LBI Holdings II, Inc., and its affiliates,
regarding KZJL (TV) Houston, Texas, dated November 10, 2000,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q,
filed November 4, 2000, and incorporated by this reference.
10.64 Redemption and Waiver Agreement, between the Company and the
holders of the Series B Convertible Preferred
Stock, dated December 22, 2000, filed as Exhibit 10.1 to the
Current Report on Form 8-K, filed January 2,
2001, and incorporated by this reference.
10.66 Severance Agreement, between the Company and Kent E. Lillie,
dated May 16, 2001, filed as Exhibit 10.1.1 to the Current
Report on From 8-K, filed May 16, 2001, and incorporated by
this reference.
10.67 Notice of Company to the holders of the Series B Convertible
Preferred Stock, dated July 3, 2001, filed as Exhibit 99.1 to
the Current Report on Form 8-K, filed July 5, 2001, and
incorporated by this reference.
10.68 Loan and Security Agreement, between the Company and Foothill
Capital Corporation, dated August 1, 2001, filed as Exhibit
10.68 to the Annual Report on Form 10-K/A, filed on October
23, 2002, and incorporated by this reference.
10.69 Employment Agreement between Thomas N. Merrihew and Shop At
Home, Inc., dated July 20, 2001, filed as
Exhibit 10.69 to the Quarterly Report on Form 10-Q, filed
October 25, 2001, and incorporated by this reference.
10.70 Employment Agreement between Bennett Scott Smith and Shop At
Home, Inc., dated November 22, 2001, filed as
Exhibit 10.70 to the Quarterly Report on Form 10-Q, filed
February 14, 2002, and incorporated by this reference.
10.71 Employment Agreement between Frank A. Woods and Shop At Home,
Inc., dated March 20, 2002, filed as
Exhibit 10.71 to the Quarterly Report on Form 10-Q, filed
April 19, 2002, and incorporated by this reference.
10.72 Employment Agreement between George R. Ditomassi and Shop At
Home, Inc., dated March 20, 2002, filed as
Exhibit 10.72 to the Quarterly Report on Form 10-Q, filed
April 19, 2002, and incorporated by this reference.
10.73 Share Purchase Agreement, dated August 14, 2002, between Shop
At Home, Inc. and Scripps Networks, Inc.,
filed as an appendix to the Preliminary Proxy Statement on
Form 14A, filed September 24, 2002, and
incorporated by this reference.
10.74 Loan and Security Agreement between the Registrant and The
E.W. Scripps Company, dated October 31, 2002,
filed as Exhibit 10.74 to the Quarterly Report on Form 10-Q,
filed November 4, 2002, and incorporated by
this reference.
10.75 Severance Agreement between the Registrant and Frank A. Woods,
filed as Exhibit 10.75 to the Quarterly Report on Form 10-Q,
filed November 4, 2002, and incorporated by this reference.
10.76 Severance Agreement between the Registrant and Arthur D. Tek,
filed as Exhibit 10.76 to the Quarterly
Report on Form 10-Q, filed November 4, 2002, and incorporated
by this reference.
10.77 Severance Agreement between the Registrant and Thomas
Merrihew, filed as Exhibit 10.77 to the Quarterly
Report on Form 10-Q, filed November 4, 2002, and incorporated
by this reference.
10.78 Severance Agreement between the Registrant and Bennett Smith,
filed as Exhibit 10.78 to the Quarterly
Report on Form 10-Q, filed November 4, 2002, and incorporated
by this reference.
10.79* Affiliation Agreement, dated October 31, 2002, between the
Registrant and Shop At Home Network, LLC.
11 Schedule of Computation of Net Income Per Share (in Note 12 to
Consolidated Financial Statements of the
Company for the period ended December 31, 2000, included
herein).
21 Subsidiaries of the Company.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of PricewaterhouseCoopers LLP.
99.1* Certificate of the Chief Executive Officer and Principal
Financial Officer under 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-0xley Act
of 2002.
99.2* Affiliation agreement
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUMMIT AMERICA TELEVISION, INC.
By: /s/ George R. Ditomassi Date: March 28, 2003
-----------------------------------
George R. Ditomassi
Chief Executive Officer
(in his capacities as Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Transition 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: March 28, 2003
-----------------------------------
J.D. Clinton, Chairman of the Board
By: /s/ Charles W. Bone Date: March 28, 2003
-----------------------------------
Charles W. Bone, Director
By: /s/ George R. Ditomassi Date: March 28, 2003
-----------------------------------
George R. Ditomassi
By: /s/ A.E. Jolley Date: March 28, 2003
-----------------------------------
A.E. Jolley, Director
By: /s/ Joseph I. Overholt Date: March 28, 2003
-----------------------------------
Joseph I. Overholt, Director
By: /s/ Don C. Stansberry, Jr. Date: March 28, 2003
-----------------------------------
Don C. Stansberry, Jr., Director
By: /s/ Frank A. Woods Date: March 28, 2003
-----------------------------------
Frank A. Woods, Director
CERTIFICATION
I, George R. Ditomassi, certify that:
1. I have reviewed this transition report on Form 10-K of Summit America
Television, Inc.;
2. Based on my knowledge, this transition report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this transition
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this transition report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this transition report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this transition
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this transition report (the "Evaluation Date"); and
c) presented in this transition report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
transition report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/George R. Ditomassi
George R. Ditomassi
Chief Executive Officer
and Principal Financial Officer
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement Nos.
333-15033, 333-34680 and 333-100227 of Summit America Television, Inc. (formerly
Shop At Home, Inc.) on Form S-8 and Amendment No. 1 to Registration Statement
No. 333-42258 of Summit America Television, Inc. on Form S-3 of our report dated
March 28, 2003 (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to the Company changing its method of accounting
for goodwill and other intangible assets), appearing in this Transition Report
on Form 10-K of Summit America Television, Inc. for the six months ended
December 31, 2002.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 28, 2003
Exhibit 23.2
Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-3/A (No. 333-42258) and S-8 (No. 333-15033, 333-34680 and
333-100227) of Summit America Television, Inc. (formerly known as Shop At Home,
Inc.) of our report dated September 12, 2001 relating to the financial
statements and financial statement schedule, which appears in the Annual Report
to Shareholders, which is incorporated in this Transition Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Knoxville, Tennessee
March 31, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Transition Report of Summit America Television, Inc. (the
"Company") on Form 10-K for the period beginning July 1, 2002, and ending
December 31, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, George R. Ditomassi, Chief Executive Officer and
Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge:
1. The Report fully complies with the requirements of 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Date: March 28, 2003
/s/ George R. Ditomassi
George R. Ditomassi
Chief Executive Officer and
Principal Financial Officer
Exhibit 99.2
Shop At Home Network, LLC
5388 Hickory Hollow Parkway
Nashville, Tennessee 37013
October 31, 2002
Summit America Television, Inc.
5388 Hickory Hollow Parkway
Nashville, Tennessee 37013
Ladies and Gentlemen:
The following shall comprise the agreement (the "Agreement") among
Summit America Television, Inc. (formerly known as Shop at Home, Inc.) and its
subsidiaries listed on Exhibit A, attached hereto and made part hereof
(collectively, "SATH"), and Shop At Home Network, LLC (the "Company") for the
affiliation of SATH's television broadcasting stations set forth on Exhibit A
(each respective station and the holder of the FCC license therefor being
referred to herein as a "Station" and collectively as, the "Stations"), with the
Company's Shop at Home Network (the "Network") and shall supersede and replace
all prior agreements between SATH and the Company or its predecessor with
respect to the Network, which agreements are hereby terminated and of no further
force or effect.
1. Term and Termination.
(a) This Agreement shall become effective at 12:01 a.m.,
central time on October 31, 2002 (the "Effective Date") and, unless sooner
terminated as provided herein, shall remain in effect until 12:01 a.m., central
time on November 1, 2005 (the "Term").
(b) This Agreement may be terminated by SATH with respect to any Station,
provided that such termination shall not be effective (i) prior to the day
following the last day of the fifteenth (15th) month following the Effective
Date; (ii) unless SATH provides the Company written notice of such termination
no later than six (6) months prior to the date of such termination; and (iii) so
long as SATH does not enter into any other affiliation or limited marketing
agreement with any television home shopping network.
(c) Provided SATH is not in breach of its obligations under this Agreement, SATH
may terminate this Agreement with respect to any Station upon written notice to
the Company if the Company breaches any of its obligations under this Agreement
with respect to such Station and the Company fails within thirty (30) days after
its receipt of notice of such breach from SATH to cure such breach.
(d) The Company may terminate this Agreement as to all Stations without
liability upon six (6) months prior written notice if the Company shall by
action of its members elect to cease the business of the Network.
2. Programming.
(a) The Company commits to supply to SATH network programming
for free over-the-air television broadcasting by each Station twenty-four (24)
hours a day, seven (7) days a week for the term of this Agreement (the
"Programming Period"). SATH agrees that, subject only to Section 3 below, each
Station shall clear and broadcast all programming supplied to Station hereunder
for broadcast during the Programming Period.
(b) All programming furnished to SATH for the Stations
pursuant to this Agreement shall be referred to herein as "Network Programming,"
and any one program of Network Programming shall be referred to as a "Network
Program." The selection, scheduling, substitution and withdrawal of any Network
Program or other portion of Network Programming shall at all times remain within
the sole discretion and control of the Company.
(c) SATH shall be solely responsible for all costs and
expenses incurred by SATH or any Station hereunder in connection with SATH's
ownership, operation, maintenance and facility upgrades of each Station,
including, without limitation, timely compliance with the FCC's requirements for
transition to digital television broadcasting. Notwithstanding the foregoing,
any costs and expenses incurred by SATH or any Station in connection with the
expansion of any Station facilities beyond the FCC's requirements or any other
non-essential capital improvement, in either case expressly requested by the
Company, shall be paid by the Company.
(d) Notwithstanding anything to the contrary in this
Agreement, the Company shall not have any obligation to supply Network
Programming to any Station if the Company reasonably believes that such
Station's airing of Network Programming could result in the violation by the
Company or any parent, subsidiary or affiliated company of the Company of any
policy, rule or regulation of the FCC, including but not limited to, Section
73.3555(b) of the FCC's rules (the local television multiple ownership rule).
3. FCC Mandated Programming Requirements.
(a) SATH shall be responsible for all material broadcast over
its facilities and reserves the right to substitute programming other than
Network Programming as necessary in its good faith discretion to comply with its
licensee obligations under the FCC's rules and policies. During the past year,
Stations each have devoted less than 3.5 hours per week (the "Programming
Allowance") to programming other than Network Programming. SATH does not
presently foresee that any Station's licensee obligations will require that it
present a greater amount of programming other than Network Programming during
the Programming Period or significantly alter the time periods during which such
programming other than Network Programming is presented.
(b) SATH shall immediately notify the Company in the event
that any Station broadcasts more than 3.5 hours of programming other than
Network Programming in any calendar week and shall provide the Company with a
complete schedule of that week's programming other than Network Programming
within one week. SATH agrees that the next Network Payment for a month that
includes the last day of a calendar week in which any Station aired more than
3.5 hours of programming other than Network Programming shall be reduced by an
amount equal to $.0001461 for every hour of programming other than Network
Programming broadcast in excess of the Programming Allowance multiplied by the
number of Network Households reached by the Station. Further, should any Station
broadcast more than 3.5 hours per calendar week of programming other than
Network Programming during any four calendar weeks per calendar year, the
Company, in addition to any other remedies it may have under this Agreement or
otherwise, may immediately terminate the Agreement with respect to that Station.
The remedies set forth in this Section 3 shall not apply if (i) SATH's failure
to broadcast Network Programming on any Station is a direct result of an event
of force majeure as provided in Section 6 of this Agreement; or (ii) SATH
reasonably believes that such Network Programming is unsatisfactory, unsuitable,
or contrary to the public interest as described below.
(c) While a Station may decline to air Network Programming
that it reasonably deems to be unsatisfactory, unsuitable, or contrary to the
public interest, SATH shall not fail to broadcast any Network Programming as a
result of commercial motivation; that is, programming shall not be deemed to be
unsatisfactory, unsuitable or contrary to the public interest based on
performance, ratings, or the availability of alternative programming which SATH
believes to be more profitable or more attractive.
4. Payments. In consideration of SATH entering into this Agreement and the
Stations' performance of their obligations hereunder, the Company shall pay SATH
an amount calculated by dividing the product of $1.25 and the average number of
Network Households (as hereinafter defined) by twelve (the "Network Payment").
For purposes of this Section 4, "Network Households" shall mean the number of
cable households reached by the Network calculated by averaging the total number
of cable households reached by the Network on the first and last day of each
month during the Term. The Network Payment shall be due and payable to SATH in
arrears on a monthly basis on the fifteenth (15th) day of each month during the
Term. If any Network Payment is not made within ten (10) days after the due date
thereof, then such Network Payment will bear a penalty equal to 1% of the amount
of such Network Payment per month. The number of Network Households shall be
computed by SATH according to its normal historical practices based on available
information which it believes to be reliable and according to the agreed upon
procedures set forth on Exhibit B. Each Network Payment shall be accompanied by
a certification of SATH's Chief Executive Officer, Chief Operating Officer or
Chief Financial Officer that such amount has been determined in compliance with
this Section 4. The Company shall have the right, exercisable no more often than
once per year, to conduct an audit of SATH's calculations of the number of
Network Households. If, as a result of the audit, the Company concludes that
SATH's calculations are overstated by a factor of more than 5% for any Station,
the resulting overpayments made during the period of the audit shall be
immediately paid to the Company by SATH. Notwithstanding this payment
obligation, SATH may object to the audit determination made by the Company, and
in that event the parties will mutually agree upon an independent third party to
conduct an audit of such calculations, and the results of such audit shall be
binding for the period covered by the audit. If, as a result of the audit by the
third party, it is determined that SATH overstated the number of Network
Households during the audit period by more than 5% for any Station, the cost of
the audit shall be paid by SATH. Otherwise, the cost of the audit shall be paid
by the Company.
5. Conditions of Station's Broadcast. As a condition to SATH's broadcast of
Network Programming on any Station, SATH shall not make any deletions from, or
additions or modifications to, any Network Program or any commercial, Network
identification, program promotional or production credit announcements or other
interstitial material contained therein, nor broadcast any commercial or other
announcements (except emergency bulletins) during any such program, without the
Company's prior written authorization. SATH shall broadcast each Network Program
on the Stations from the commencement of network origination until the
commencement of the next program.
6. Force Majeure. Neither SATH nor the Company shall incur any liability to the
other party hereunder because of the Company's failure to deliver, or the
failure of a Station to broadcast, any or all Network Programs due to failure of
facilities, labor disputes, government regulations, including, but not limited
to, applicable FCC regulations, or causes beyond the reasonable control of the
party so failing to deliver or to broadcast. Without limiting the generality of
the foregoing, the Company's failure to deliver a program due to cancellation of
that program for any reason shall be deemed to be for causes beyond the
Company's reasonable control.
7. Indemnification.
(a) The Company shall indemnify, defend and hold each Station (individually, an
"Indemnified Station"), its parent, subsidiary and affiliated companies, and
their respective directors, officers and employees, harmless from and against
all claims, damages, liabilities, costs and expenses (including reasonable
attorneys' fees) arising out of the use by the Indemnified Station, in
accordance with this Agreement, of any Network Program or other material as
furnished by the Company hereunder, provided that the Indemnified Station
promptly notifies the Company of any claim or litigation to which this indemnity
shall apply, and that the Indemnified Station cooperates fully with the Company
in the defense or settlement of such claim or litigation.
(b) SATH shall indemnify, defend and hold the Company, its parent, subsidiary
and affiliated companies, and their respective directors, officers and
employees, harmless with respect to (i) material added to or deleted from any
program by any Station; and (ii) any programming or other material broadcast by
any Station and not provided by the Company hereunder, provided that the Company
promptly notifies SATH of any claim or litigation to which this indemnity shall
apply, and that the Company cooperates fully with SATH in the defense or
settlement of such claim or litigation.
(c) These indemnities shall not apply to litigation expenses,
including attorneys' fees, which the indemnified party elects to incur on its
own behalf, provided that the indemnifying party has assumed responsibility for
the defense or settlement of the claim.
8. Change in Operations. SATH represents and warrants that it holds a valid
license granted by the FCC to operate each Station as a television broadcast
station. Such representation and warranty shall constitute a continuing
representation and warranty by SATH. In the event that at any time a Station's
transmitter location, power, frequency or operations and such change results in
a loss of 10% or more of the cable TV households which receive the Station, then
the Company may terminate this Agreement with respect to such Station or
Stations upon thirty (30) days' prior written notice to SATH.
9. Unauthorized Copying and Transmission; Retransmission Consent.
(a) SATH shall not authorize, cause, or permit, without the Company's consent,
any Network Program or other material furnished to SATH hereunder to be
recorded, duplicated, rebroadcast or otherwise transmitted or used for any
purpose other than broadcasting by SATH on each Station as provided herein.
Notwithstanding the foregoing, SATH shall not be restricted in the exercise of
its signal carriage rights pursuant to any applicable rule or regulation of the
FCC with respect to retransmission of its broadcast signal by any cable system
or multichannel video program distributor ("MVPD"), as defined in Section
76.64(d) of the FCC's rules, which (i) is located within the DMA in which each
Station is located; or (ii) was actually carrying Station's signal as of April
1, 1993; or (iii) with respect to cable systems, serving an area in which
Station is "significantly viewed" (as determined by the FCC) as of April 1,
1993; provided, however, that any such exercise pursuant to the FCC's rules with
respect to Network Programs shall not be deemed to constitute a license by the
Company.
(b) SATH shall not consent to the retransmission of its broadcast signal by any
cable television system, or, except as provided in Section (c) below, to any
other MVPD whose carriage of broadcast signals requires retransmission consent,
if such cable system or MVPD is located outside the DMA to which any Station is
assigned, unless such Station's signal was actually carried by such cable system
or MVPD as of April 1, 1993, or, with respect to such cable system, is
"significantly viewed" (as determined by the FCC) as of April 1, 1993.
(c) SATH shall not consent to the retransmission of its broadcast signal by any
MVPD that provides such signal to any home satellite dish user, unless such user
is located within any Station's own DMA.
(d) If SATH violates any of the provisions set forth in this Section 9, the
Company may, in addition to any other of its rights or remedies at law or in
equity under this Agreement or any amendment thereto, terminate this Agreement
with respect to the violating Station by written notice to SATH given at least
ninety (90) days prior to the effective date of such termination.
10. DTV Conversion. SATH acknowledges that, upon commencement of operation of
each Station's digital television signal ("DTV channel"), SATH will cause each
Station, to the same extent as this Agreement provides for carriage of Network
Programming on its analog channel, carry on such DTV channel the digital feed,
when available, of such Network Programming as and in the technical format
provided by the Company consistent with the ATSC standards and all program
related material.
11. Assignment.
(a) This Agreement may not be assigned or transferred
(including pursuant to any change in the control of SATH or any Station), except
a "short form" assignment or transfer of control made pursuant to Section
73.3540(f) of the FCC's rules, directly or indirectly, whether by operation of
law or otherwise, without the prior written consent of the Company, which
consent shall not be unreasonably withheld, and, except as permitted by Section
11(b), no permitted assignment or transfer shall relieve SATH of its obligations
hereunder. Any purported assignment or transfer by SATH or any Station without
the Company's consent as required hereby shall be null and void and not
enforceable against the Company.
(b) In the event of a transfer of control or assignment of any
Station's license, except a "short form" assignment or transfer of control made
pursuant to Section 73.3540(f) of the FCC's rules (each, a "Change in Control
Transaction"), SATH shall cause the license assignee or transferee (a "Station
Transferee") to assume SATH's obligations hereunder with respect to such
Station, provided that such Station Transferee may terminate this Agreement with
respect to such Station but such termination shall not be effective (i) prior to
the day following the last day of the fifteenth (15th) month following the
Effective Date; and (ii) unless such Station Transferee provides the Company
written notice of such termination no later than six (6) months prior to the
date of such termination.
12. Notices. Notices hereunder shall be in writing and shall be given by
personal delivery or overnight courier service: (a) to SATH at the address set
forth on the first page of this Agreement; and (b) to the Company at the address
set forth on the first page of this Agreement, or at such address or addresses
as may be specified in writing by the party to whom the notice is given. Notices
shall be deemed given when personally delivered and on the next business day
following dispatch by overnight courier service.
13. Availability of Equitable Remedies. In the event of a material breach of
this Agreement, the party not at fault, if any, shall retain and have the right
to pursue all rights and remedies available at law or in equity against the
defaulting party. Since a breach of the provisions of this Agreement could not
adequately be compensated by money damages, any party shall be entitled, in
addition to any other right or remedy available to it, to an injunction
restraining such breach or threatened breach and to specific performance of any
such provision of this Agreement. No bond or other security shall be required in
connection with any such action, and the parties consent to the issuance of such
an injunction and to the ordering of specific performance.
14. Entire Agreement/Amendments. The foregoing constitutes the entire Agreement
among the parties with respect to the affiliation of the Stations with the
Network. This Agreement may not be changed, amended, modified, renewed, extended
or discharged, except as specifically provided herein or by an agreement in
writing signed by the parties hereto.
15. Confidentiality. The parties agree to use their best efforts to preserve the
confidentiality of this Agreement and the terms and conditions set forth herein,
and the exhibits annexed hereto, to the fullest extent permissible by law.
16. Applicable Law. The obligations of SATH and the Company under this Agreement
are subject to all applicable federal, state, and local laws, rules and
regulations, including, but not limited to, the Communications Act of 1934, as
amended, and the rules and regulations of the FCC, and this Agreement and all
matters or issues collateral thereto shall be governed by the law of the State
of Ohio, without regard to applicable conflict of laws provisions.
17. Severability. If any provision of this Agreement or the application of such
provision to any circumstance is held invalid, the remainder of this Agreement,
or the application of such provision to circumstances other than those as to
which it is held invalid, will not be affected thereby.
18. Waiver. A waiver by SATH or the Company of a breach of any provision of this
Agreement shall not be deemed to constitute a waiver of any preceding or
subsequent breach of the same provision or any other provision hereof.
19. Counterparts. This Agreement may be signed in any number of counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
20. Headings. The headings contained in this Agreement are for convenience of
reference only and shall not be considered a part of, or affect the construction
or interpretation of any provision of, this Agreement.
21. Liability of SATH and Stations. Notwithstanding any provision herein, SATH
and each of its subsidiaries shall be jointly and severally liable for all
agreements, covenants, representations, warranties and indemnities of SATH
hereunder.
If the foregoing is in accordance with your understanding, please
indicate your acceptance on the copy of this Agreement enclosed for that purpose
and return that copy to us.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
Very truly yours,
SHOP AT HOME NETWORK, LLC
By: /s/ Richard A. Boehne
Name: Richard A. Boehne
Title: Chief Manager and Chief Executive Officer
AGREED:
SHOP AT HOME, INC.
By: /s/ George R. Ditomassi
Name: George R. Ditomassi
Title: President
SAH LICENSE, INC.
By: /s/ George R. Ditomassi
Name: George R. Ditomassi
Title: President
SAH ACQUISITION CORPORATION II
By: /s/ George R. Ditomassi
Name: George R. Ditomassi
Title: President
EXHIBIT A
1. SAH License, Inc. 3993 Howard Hughes Parkway, Suite 100
Las Vegas, NV 89109
Licensee of Television Stations: WSAH, Bridgeport, CT; WMFP,
Lawrence, MA
2. SAH Acquisition Corporation II P.O. Box 305249 Nashville, TN 37230
Licensee of Television Stations: KCNS, San Francisco, CA; WRAY-TV,
Wilson, NC; WOAC, Canton, OH