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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[x] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File number 0-25596
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SHOP AT HOME, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
TENNESSEE 62-1282758
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<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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5210 Schubert Road
P.O. Box 12600
Knoxville, Tennessee 37912
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(Address of principal executive offices)
Registrant's telephone number, including area code: (423)688-0300
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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COMMON STOCK, $.0025 par value
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the Common Stock held by non-affiliates of
the registrant on September 22,1997 was: $43,633,191
Number of shares of Common Stock outstanding as of October 1, 1997:
11,074,414
Documents Incorporated by Reference
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The Registrant's definitive Proxy Statement in connection with the
1997 Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission within 120 days after the end of the Registrant's fiscal
year ended June 30, 1997 is incorporated by reference in Part III of this
Annual Report on Form 10-K
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SHOP AT HOME, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
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Shop at Home, Inc. ("Company"), a Tennessee corporation, is
headquartered in Knoxville, Tennessee and was incorporated in 1986. The
Company's principal business is the sale and distribution of merchandise and
retail products through televised programs broadcast to cable television system
subscribers, television station viewers and owners of satellite dish receivers.
The Company originates twenty-four hours of live programming each day and
broadcasts that programming by satellite. It is viewable by up to 30 million
households as of June 30, 1997 and recently as of mid-September, 1997, the
Company has added an additional 11 million part-time households through its
programming on the Inspirational Network. The Company's programming is
currently viewable by a total of 41 million (estimated) households throughout
North America during all or a portion of each day. This same programming (and
occasionally other programs also produced live or on tape) is provided to the
Company's owned and operated television stations in Boston and in Houston, and
to an "ad hoc" network of over 70 independently owned television stations and
cable systems throughout the country for all or a portion of each broadcast
day.
The Company's business offices, broadcast studios, inbound call
center, and fulfillment operations are headquartered in Knoxville, Tennessee.
In addition to its Tennessee office, the Company owns and operates television
stations in Boston (WMFP), and in Houston (KZJL), maintains a corporate and
investor relations office in Nashville, Tennessee, a cable affiliate
development office in Denver, Colorado, and the offices of its subsidiary,
Collector's Edge of Tennessee, Inc. in Denver, Colorado.
The Company's programming features a variety of consumer products,
including jewelry, sports collectibles, electronics, health and beauty,
personal care, household and lifestyle, and other select merchandise and
collectibles such as estate jewelry, knives, coins, dolls, and figurines, etc.
The Company seeks to offer its products at competitive prices generally below
the price for which the consumer could purchase the goods at a retail outlet or
through a catalog. The Company's programming uses a show host approach whereby
the Company's information is conveyed about the products with a demonstration
of the use of the products to the television audience. The Company receives
customer orders at its own call center and ships orders through its own
fulfillment center or through its affiliated vendors. The viewer may purchase
any product the Company offers at any time after the product is offered,
subject to availability.
The Company seeks to differentiate itself from the other televised
home shopping programmers by utilizing a friendly, personal style of
programming and by offering unique types of products and high quality goods
such as rare coins, collectible sports items, jewelry and other
limited-availability items with prices up to $40,000. The Company has also
successfully developed and utilized proprietary products and brand names in its
jewelry and cosmetic lines.
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The Company intends to continue providing viewers with upscale
alternatives to the products offered on other home shopping television
programming including a large mix of sports related products. Many items in
the Company's line are targeted to its predominantly male-oriented audience.
BUSINESS STRATEGY
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The Company's primary mission is to achieve positive earnings per
share by attaining accelerated revenue growth, controlling expenses and
therefore increasing the level of profitability. A key factor in achieving
these objectives is the Company's marketing strategy of establishing dominance
in niche markets that are underserved by other television home shopping and
retail competitors. The Company constantly strives to broaden its niche
product categories, offer unique items, and improve its level of customer
service.
Management has focused internal emphasis on revenue growth,
improvement in gross margins, expense control, cable distribution growth, and
building its infrastructure to maintain its fast growth pace. The Company has
recently increased the capacity of the organization in systems, finance,
physical distribution, planning, customer service, and affiliate relations.
Areas of emphasis during the upcoming fiscal year include wider merchandising,
and a continuation of the expansion into TV and cable carriage distribution.
The Company also plans to continue to focus on major television markets in
which its programming is not at present readily accessible through part-time
coverage on its ad hoc network of independently owned television stations and
cable systems.
RECENT DEVELOPMENTS
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In August 1997, the Company submitted an offer to the bankruptcy court
in New York to acquire the assets of Global Shopping Network. If successful,
this could permanently retain the approximately 1.3 million full-time
equivalent households (FTEs) on the Company's existing base of viewers and
would be a significant step in adding to its owned and operated stations. The
Company has escrowed $1,000,000 as a good faith deposit for its offer. If
accepted, the Company will be required to raise additional capital to finance
this transaction.
On February 25, 1997, Collectors Edge of Tennessee, Inc.
("Collectors") was formed. Collectors is a trading card manufacturer whose
principal assets are licenses from the National Football League Properties and
the NFL Players, Inc. Collectors was initially funded through the purchase by
the Company of $750,000 of Preferred Stock and a working capital loan of
$400,000.
In September 1996, the Company purchased the remaining 51% interest in
Urban Broadcast Systems, Inc. (Urban), which it did not own, for the purchase
price of $1,400,000. Urban's main asset is the license for Television Station
KZJL, Houston, Texas. Houston is the nation's 11th largest television market
with approximately 1.6 million television households and approximately 900,000
cable households.
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The Company has successfully completed two agreements with
TeleCommunications, Inc. (TCI), the first of which added approximately 4.5
million households with the potential to increase to 10 million cable
households on a part-time basis. The second agreement gives the Company the
right to solicit and negotiate with each of the individual cable systems in
TCI's network of over 12 million cable households. To date, the Company has
not signed any households under this second agreement.
A priority for the Company over the past four years has been the
attainment of higher gross margins. Internal programs focused on improved
buying techniques, stronger vendor partnerships, and a more favorable
merchandise mix have enabled the Company to improve its gross margin percentage
to 40.1% in fiscal 1997, from 38.7% and 36.1% in fiscal 1996, and 1995
respectively.
The Company has recently created its first interactional Internet
Website, under the URL of www.ishopathome.com. Given that a significant
portion of the Company's revenues are derived from the sale of collectible
merchandise, especially to male consumers (who are primary users of personal
computers and the Internet), the Company sees this as an opportunity to extend
and promote its products to a completely new audience who cannot currently view
the Company's programming as well as an opportunity to cross-promote this site
through its 40 million household network. Although the Company anticipates a
modest revenue contribution by the Website during fiscal 1998, it does
represent the first step in a natural market progression from the main mode of
traditional TV.
The Company expects to continue a rapid growth rate which is taxing
the limits of its current facility in Knoxville, Tennessee. Accordingly, the
Company is working with architects to advise on site location, facility
requirements, and transition planning as the Company evaluates its physical
facility needs for the next several years. Although no new site has as yet
been selected, the Company anticipates that it will complete its move during
the 1998 calendar year and that the first part of the move will be initiated
during the 1998 fiscal year.
"MUST CARRY" REGULATIONS
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Television station ownership allows the Company to take advantage of
the "must carry" rules of the Federal Communications Commission ("FCC") under
the Communications Act of 1934, as amended ("the Act"). Generally, the "must
carry" rules require most cable systems (with the exception of some small
systems) to set aside up to one-third of their channels to carry the broadcast
signals of local, full power television stations, including those which
broadcast predominantly home shopping programming. These signals must be
carried on a continuous, uninterrupted basis and must be placed in the same
numerical channel position as when broadcast over-the-air, or on a mutually
agreeable channel.
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In April 1997, the United States Supreme Court rendered a decision
upholding these "must carry" provisions. This decision has had the effect of
increasing the potential value of broadcast stations since they now have some
assurance of coverage in the cable markets served in their broadcast area,
referred to as the ADI (Area of Dominant Influence).
Under the Act, however, the FCC is also directed to consider changes
in ADI areas, including the exclusion of communities from a television
station's market. These changes are considered on a case by case basis, acting
on specific written requests for market modifications. The Act provides that
the FCC will consider a number of factors in ruling on such requests, including
whether or not the station in question provides coverage to the community and
evidence of the viewing patterns in cable and noncable households in that
community. In recent months, the FCC has ruled on several such requests and in
many of these cases has ruled to exclude particular communities from an ADI.
To its knowledge, there are no pending requests at the FCC seeking to exclude
any station carrying the Company's programming from the designated ADI, which
would, if negatively decided, have a material adverse effect on the Company.
It is not expected, in any event, such request would negatively affect the
Company's owned and operated stations.
OWNED AND OPERATED STATIONS
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In the pursuit of its strategy to build full-time distribution, the
Company purchased its first television station in February of 1995, WMFP,
Channel 62, licensed to Lawrence, Massachusetts and serving the greater Boston
area. The station broadcasts at maximum FCC allowable power from atop the 35th
floor of #1 Beacon Street, in downtown Boston. Boston is the 6th largest
television market in the country with 2,105,110 television households, and
1,664,810 cable households, according to Nielsen Media Research (January 1997).
Metropolitan Boston's 5,717,000 residents spend in excess of $53 billion on
total annual retail sales.
Total consideration for the purchase of WMFP was $7,000,000 comprised
of cash, long term debt, common stock, and series A preferred stock.
In fiscal 1995, the Company also purchased a 49% interest and an
option to acquire the remaining 51% of television station KZJL, Channel 61,
licensed to Houston, Texas. On September 5, 1996, the Company acquired this 51%
interest. The station signed on the air on June 3, 1995 and broadcasts from a
1500 foot tower in the Houston "antenna farm". Houston is the 11th largest
Designated Marketing Area with 1,595,350 television households and 894,120
cable households, according to Nielson Media research (June 1997). Houston is
ranked 8th in the United States Buying Power Index and has total retail sales
of over $35 billion. The Company's programming runs exclusively on the station
for the majority of each broadcast day.
Total consideration for the entire interest in KZJL was $3,900,000
comprised of cash, long term debt and common stock. In addition, the cost to
the Company to construct the station was approximately $2.2 million.
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CABLE CARRIAGE AFFILIATIONS
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The business planning of the Company for future revenue growth and the
general expansion of the opportunities for the Company center upon carriage.
Carriage is the distribution of the Company's programming into television homes
in the United States and some coverage into other North American homes. A
Company priority is to achieve an increase in the number of cable homes and the
number of hours those homes receive the programming of the Company.
In mid-1993, an aggressive strategy was launched to build cable
distribution for the Company's programming. Since that time, the Company has
been successful in continuously increasing its cable distribution and
in building strong ties to major cable Multiple System Operators. The
Company's programming is now viewed in more than 70 cable markets, including
eight of the country's top ten Designated Market Areas.
In fiscal 1997, the Company added over 25 new cable markets on either
a full-time or part-time basis. In addition, the Company secured coverage on
WWOR, New York, which gives the Company access to more than 7 million
households for some portion of each day.
On June 30, 1997, a time brokerage agreement with the licensee of
KLDT (TV), which serves the Dallas, Texas market, under which the Company's
programming was broadcast on substantially a full-time basis by that station,
expired according to its terms. The licensee of the station elected not to
enter into an agreement with the Company to extend the term of the agreement.
The Company has also entered into two carriage agreements with
TeleCommunications, Inc. (TCI), one of which added at least 4.5 million
part-time households in November 1996, and which can grow to a total of 10
million households. The second agreement gives the Company the right to solicit
and negotiate with the individual cable systems in TCI's system of over 12
million cable households.
BROADCAST OPERATIONS
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The Company's programming is distributed to television stations, cable
television systems and satellite dish owners, from the Company's studios in
Knoxville, Tennessee. The programming is transmitted by means of the Company's
satellite uplink facilities to transponders leased or subleased by the Company
on domestic communications satellites. The transponders then re-transmit the
signals received from the Company to satellite dish receivers located
throughout the United States and parts of Canada and Mexico. Owners of home
satellite dish receivers, the Company's principal market of customers prior to
mid-1993, are generally able to receive programming directly from the
satellite. The signal is also received by affiliated cable television systems
and television stations which re-broadcast the Company's signal.
Since December 1, 1995, the Company commenced broadcasting on
transponder 4C of AT&T's state-of-the-art satellite 402R, and thereby
terminating its use of the S3-18 transponder. It is the Company's intention to
extend this agreement beyond its original three year term for at least an
additional two years.
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PRODUCT ASSORTMENT
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The Company offers a variety of consumer products including jewelry,
gemstones, opals, sports cards and memorabilia, rare coins and currency,
collectible knives and swords, electronics, fitness equipment, health and
beauty products, and home related items. The Company seeks to offer high
quality products that are not readily available or are differentiated from its
competitors. From time to time, the Company also offers exceptional values
when it is able to take advantage of close-out merchandise and pricing from
selected vendors.
The Company has multiple sources of products and believes its
relationships with most of its vendors are excellent. The Company believes
certain products which it sells are available through multiple suppliers. The
Company also acquires unique products from a select group of vendors (some of
whom are shareholders) and believes it will be able to continue to identify
sources of specialty products. The Company believes these unique products help
differentiate it from its competitors.
The Company's programs use a show host approach whereby information is
conveyed about the products with a demonstration of the use of the products to
the television audience. The viewer may purchase any product the Company
offers at any time after such product's offering, subject to availability.
Thus a viewer is not limited to purchasing a product only during that
particular product's air time. The Company continually monitors product sales
and revises its product offerings in an effort to maintain a productive and
profitable product mix.
The Company is continuously evaluating new products and vendors as it
seeks to broaden its merchandise selection.
PROGRAMMING
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The Company segments most of its programming into product or theme
categories. The Company often provides multiple broadcasts (two or more) during
peak viewing times. The Company provides one full-time live broadcast and
part-time live, taped, or simulcast broadcasts on two satellite transponders
that the Company leases from ESPN. The Company has studio and broadcasting
capacity to produce two live shows simultaneously.
The Company seeks to differentiate itself from other televised home
shopping programmers by utilizing an informal, personal style of presentation
and by offering unique and more "upscale" types of products with a heavy
emphasis on sports and sports related products. Rare coins, collectible sports
items, and other limited-availability items provide viewers with alternatives
to the products offered on other home shopping programming. Specialized
products are presented and described by knowledgeable on-air hosts. The
Company believes that continued use of such "niche" programming is important to
the future growth of the Company.
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CUSTOMER RELATIONS
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The Company maintains its own call center and customer service
operations at its headquarters in Knoxville, Tennessee. Customers can place
orders with the Company 24 hours a day, seven days a week, via the Company's
toll-free 800 number. The Company uses both customer sales representatives and
an automated touch-tone ordering system to accept customer orders. A majority
of the Company's customers pay for their purchases by credit card, and the
Company also accepts payment by money order, personal check, certified check,
debit cards and wire transfers. The Company has developed and implemented a
new in house training program in order for its operators to be more proficient
and product knowledgeable and to further raise the service to its customers and
productivity levels.
The Company ships customer orders as quickly as possible utilizing
UPS, Federal Express, and Parcel Post for the majority of its shipments. To
increase speed of service, the Company ships both from its warehouse facility
in Knoxville and directly to the customer from selected vendors with whom it
has arranged "drop ship" agreements. The Company also operates a separate
customer service department to facilitate and handle customer inquiries about
ship dates, product, and billing information.
The Company offers a full 30 day return policy to insure customer
satisfaction and to promote the purchase of its merchandise. Mechanical,
electronic, and other items may be covered by manufacturer warranties, however,
the Company does not offer additional warranties on the products it sells. The
Company strives to continuously improve its customer service and utilizes
outside agencies to conduct objective comparisons with other TV home shopping
competitors. Additionally, the Company periodically surveys and researches its
customers to solicit ideas for better products, programming, and service.
From time to time the Company conducts promotional campaigns to launch
new shows and products, increase its revenue per household, and introduce new
viewers to its programming. Multiple media are used to communicate these
events including on-air promotion, show host emphasis, package stuffers, direct
response mailers and cable commercials.
FEDERAL REGULATION AND LEGISLATION
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Each of the Company's owned television stations operate pursuant to a
license issued by the FCC. Television broadcast licenses are issued for a
period of five (5) years. The license for KZJL will expire in 1998 and the
license for WMFP will expire in 1999. The Company may apply to renew these
licenses, and third parties may challenge those applications or file competing
applications. Although the Company has no reason to believe its licenses will
not be renewed in the ordinary course, there can be no assurance that the
licenses will be renewed.
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The television broadcast industry is subject to extensive and changing
regulation. The Act and FCC rules require the FCC to approve assignments
of FCC licenses or the transfer of control of FCC licensees. FCC regulations
also require broadcast stations to maintain certain records for public
inspection and to submit periodic reports to the FCC, including reports
concerning the ownership of the licensee, the employment practices of the
station, and other matters. While the Company has no reason to believe that it
is not in full compliance with all applicable regulations, it is subject to
periodic inspections by the FCC and there can be no assurance of full
compliance. The FCC has the power to assess monetary penalties for violations
of applicable law and regulations, and it can, in particularly egregious cases,
seek to revoke the station's license or to decline to renew the license.
The FCC grants licenses to construct and operate uplink equipment,
which transmits signals to satellites. These licenses are generally issued
without a hearing if suitable frequencies are available. Presently, the
Company has licenses issued by the FCC for the operation of two domestic fixed
satellite service earth stations that are renewable on a one (1) year basis.
In the event, the FCC fails to renew or terminates the licenses for one or both
of these stations, the Company's ability to provide programming will be
significantly affected. The Company does not have any agreements for backup
transmission of its programming to satellites, but it believes it could obtain
such services, although it might incur substantial additional costs in entering
into new arrangements. In addition, the Company's ability to expand its
programming capability is limited by the requirement that it obtain licenses
for additional uplink facilities
COMPETITION
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The television home shopping industry is highly competitive and is
dominated by two companies, Home Shopping Network and QVC Network. The
Company's programming competes directly with Home Shopping Network, QVC, or
other home shopping networks in almost all of the Company's markets. Home
Shopping Network and QVC are well-established and significantly better
capitalized than the Company, and each network reaches a significantly larger
percentage of U.S. television households. The Company is at a competitive
disadvantage in attracting viewers for a number of reasons, including the fact
that the Company's programming is often not carried by cable systems on a
full-time basis and the Company may have less desirable television channel
placement on cable systems. The Company expects the home shopping industry to
grow and expand. As a result, the Company expects increased competition for
viewers, personnel, and television station carriage from present competitors,
as well as new entries into the market. New companies that announced or
launched competitive services during the last year were largely unsuccessful
including Global Shopping Network, Outlet Mall Network, and Hollywood Showcase.
The Company believes that there is substantial value in its 11 year
operating history and the fact that it is one of only four broadly distributed
electronic retailers in the U.S.
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As a seller of merchandise at retail, the Company competes for
consumer expenditures with other types of retail businesses, including
department, discount, warehouse, jewelry and specialty stores, mail order, and
catalog companies and other direct sellers.
SEASONALITY
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Although the television home shopping business in general is seasonal,
with the major selling season occurring during the last quarter of the calendar
year, the Company has not experienced the usual seasonality primarily because
it has, over the past three years, significantly increased its carriage and
therefore, each quarter has increased over the sales of the previous quarter.
The home shopping industry is also sensitive to general economic conditions and
business conditions affecting consumer spending. The Company's product lines
include jewelry, sports cards, sports memorabilia, collectibles, and other
unique items that may make it more sensitive to economic conditions. Over the
last five years, the Company's revenues in the last quarter of the calendar
year were approximately 26% of total revenues for the year.
EMPLOYEES
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The Company had approximately 280 paid employees as of June 30, 1997,
most of whom are full-time. The Company believes its relationship with its
employees is good. Presently no collective bargaining agreements exist between
the Company and its employees.
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ITEM 2. PROPERTIES
Until August 1997, the Company leased office space in Atlanta, Georgia
primarily to house its investor and affiliate relations departments. The
Company currently leases approximately 17,000 square feet of studio, office,
and warehouse space in Knoxville, Tennessee from a corporation controlled by W.
Paul Cowell, a director. As the Company grows, it may need additional office,
studio, and warehouse space. Although no additional space is available at the
Company's current location in Knoxville, management believes the Company can
obtain suitable large facilities at other locations, if needed. The Company's
Knoxville lease is currently on a term lease which has been extended through
March 1999. The Company also maintains a corporate and investor relations
office in Nashville, Tennessee and an affiliate relations office in Denver,
Colorado.
In addition, the Company through its subsidiaries leases space to
house the transmitters for WMFP in Boston and KZJL in Houston and the offices
of Collector's Edge of Tennessee, Inc. in Denver, Colorado.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation which arises in the normal course
of its business. Except as may be indicated below, the Company is not
currently a party to any litigation which, if adversely determined, would have
a materially adverse effect on the Company, its liquidity or its operations.
In February, 1995, the Company was named as a co-defendant in a case
in United States District Court for the Southern District of California brought
by Upper Deck Authenticated. That complaint, as amended, alleges that the
Company violated the Plaintiff's rights by selling sports memorabilia featuring
certain named athletes, who are alleged to be under exclusive contract with one
of the Upper Deck entities. Upper Deck also alleges that the Company sold
merchandise without compliance with the requirements of California law that
requires a certificate of authenticity accompany each item. The Plaintiff also
alleges that the autographs on two specific items are counterfeit. Upper Deck
requests compensatory damages, restitution, punitive damages, reasonable
attorney's fees, prejudgment interest and costs, all in an unspecified amount.
The Company believes that the case can be successfully defended.
As a result of recent negotiations, the terms of a settlement
agreement resolving this matter has been agreed upon by the parties. The
settlement agreement is subject to certain formalities prior to being fully
effective which the Company anticipates will be accomplished in the next few
weeks.
In May, 1997, Signature Financial/Marketing, Inc. filed a Complaint
for Declaratory Judgment in the U.S. District Court for the Northern District
of Illinois seeking a judgment of its non-violation of the Lanham Act (the
federal law governing trademerks) with respect to its use of the designation
"SHOP AT HOME" in connection with the promotion and sale of goods. This case
was precipitated by letters to Signature from Shop at Home, Inc., asserting
that the use of this mark by Signature in connection with catalogue sales and
sales on the Internet infringed on Shop at Home's right to that designation and
was creating confusion in the marketplace.
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In response to the filing of this action, the Company has filed an
answer and counterclaim alleging that the use of the name "SHOP AT HOME" by
Signature infringes on the trademark of the Company and requests compensatory
and injunctive relief. Plaintiff has also filed an amendment to its original
complaint alleging that the use of the name by the Company infringes on the
trademark of Signature, and also requests compensatory and injunctive relief.
Counsel to the Company has indicated that based upon its initial
review of the matter, the likelihood of Signature preventing the Company from
using the designation of "SHOP AT HOME" for its television programming is
remote.
In July, 1997, NBA Properties, Inc., the licensing affiliate of the
National Basketball Association, filed a complaint in the U.S. District Court
for the Southern District of Florida, alleging that a number of defendants,
including the Company, have committed trademark infringement and
counterfeiting, false designation of origin, dilution and unfair competition,
alleging that the defendants fraudulently manufactured, promoted, distributed
and sold unlicensed basketball trading cards depicting the plaintiff's
trademarks. The plaintiff is seeking injunctive relief, an accounting of
profits, compensatory damages, treble damages, punitive damages, statutory
damages in the amount of $1,000,000 from each defendant, interest, costs and
fees.
This case relates to a particular series of basketball trading cards.
At the present time, Shop at Home has voluntarily agreed to a temporary
injunction with the plaintiff whereby it has agreed not to sell any additional
cards of that series of trading cards pending the resolution of this case. If
the trading cards are in fact counterfeit, it is probable that Shop at Home can
assert a successful cross-claim against the other defendants who produced the
cards or who sold them to Shop at Home. There may also be a possibility of
recovery of a portion or all of any loss from the insurance carriers for Shop
at Home, and Shop at Home has notified its carriers of this litigation.
In August, 1997, KLDT-TV 55, Inc., the licensee of KLDT (TV), licensed
to Lake Dallas, Texas, filed a demand for arbitration concerning its
allegations that the Company defaulted in the payment of certain amounts due
under the time brokerage agreement concerning that station, and that the
Company breached the asset sale agreement with regard to the acquisition of the
asset sale agreement with regard to the acquisition of the assets of KLDT, and
committed fraud and tortious interference with contract in regard thereto. The
request for arbitration requests a payment of $577,500 in actual damages and a
payment of at least $3,750,000 for the alleged breach of the asset sale
agreement, fraud and tortious interference.
This arbitration claim arises out of a lawsuit filed in March, 1997,
in the U.S. District Court for the Eastern District of Tennessee by the Company
against Paxson Communications Corporation, Douglas Johnson, and others
regarding certain events and circumstances arising out of the proposed sale of
the assets of KLDT-TV 55, Inc., the licensee of KLDT (TV). In October, 1995, a
subsidiary of the Company entered into an
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agreement with the licensee of KLDT to purchase the assets of the station and
for the licensee to assign the FCC license for the station to the Company. At
the same time, the Company and the licensee entered into a time brokerage
agreement under which the licensee agreed to make available to the Company
substantially all of the broadcast time of the station for the Company to
broadcast its Shop at Home programming. For this programming time, the Company
agreed to make monthly payments to the licensee.
After the execution of the asset sale agreement and the time brokerage
agreement, the Company entered into an agreement with Paxson Communications
Corporation, under which the Company agreed to assign the sale agreement and
the time brokerage agreement to a Paxson related company. Under the agreement,
Paxson agreed that the Company would acquire a 49% interest in the voting stock
of the new licensee and that the Company would have certain other rights with
regard to the operation of the new licensee, including the programming of the
station. Acting under this agreement, the Company assigned the sale agreement
and the brokerage agreement to the Paxson related entity. Under the terms of
the sale agreement, the purchaser was obligated to order and to install a new
antenna for KLDT. The Company alleges in the lawsuit that Paxson did not
install such an antenna, and this fact caused material damages to the Company.
Thereafter, the licensee of the station and Paxson entered into an
agreement with Douglas Johnson under which Paxson agreed to dismiss its FCC
application to acquire the license of the station and the licensee agreed to
dismiss its pending application with the FCC to renew the license of the
station, and each agreed that Johnson would be awarded the right to own the
station.
The Company initiated the litigation seeking to recover its damages
for the failure of Paxson to install the new antenna, and for damages against
Paxson, Johnson and their related parties for their actions in causing the
Company to lose its opportunity to acquire a 49% interest in the station. The
transactions contemplated by the agreement between the licensee, Paxson and
Johnson have not closed at this time.
Recently, the District Court in Tennessee ordered that the case be
moved to the U.S. District Court in Dallas, Texas.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
In June 1995, the Company was approved by NASDAQ to be listed on the
NASDAQ SmallCap market.
The range of high and low bid quotations for the Company's Common
Stock reported by fiscal quarters during the two most recent years, as
reported by NASDAQ's SmallCap Market is shown below.
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
07/01/95 - 09/30/95 $3.00 $2.625
10/01/95 - 12/31/95 $5.19 $2.375
01/01/96 - 03/31/96 $3.25 $2.00
04/01/96 - 06/30/96 $3.875 $2.9375
07/01/96 - 09/30/96 $4.0625 $3.25
10/01/96 - 12/31/96 $3.75 $2.50
01/01/97 - 03/31/97 $3.375 $2.375
04/01/97 - 06/30/97 $3.5625 $2.25
</TABLE>
The approximate number of shareholders of the Company's Common Stock
of record on June 30, 1997 was 664.
Since the Company's inception in 1986, the Company has paid no
dividends with respect to its Common Stock. It is reasonable to project that
the Company intends to retain earnings to finance the growth and development of
the Company's business and does not expect to pay any cash dividends on its
Common Stock in the foreseeable future.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the years ended June
30, 1997, 1996, 1995, 1994, and 1993 has been derived from the consolidated
financial statements of the Company and should be read in conjunction with the
financial statements, the related notes thereto, and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
6/30/97 6/30/96 6/30/95 6/30/94 6/30/93
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Current assets $13,436,339 $5,273,163 $2,750,656 $3,218,623 $1,541,712
Current liabilities 18,077,778 8,979,793 7,371,600 3,779,660 3,975,204
Total asset 34,410,310 20,286,670 18,157,431 4,770,262 3,130,104
Long-term liabilities 11,135,541 7,805,048 6,865,493 283,275 161,384
Redeemable
preferred stock 1,393,430 1,393,430 1,405,000 - 0 - - 0 -
Stockholders' equity 3,803,561 2,108,399 2,520,338 707,327 (1,006,484)
Net revenues 67,817,460 40,016,114 26,787,013 21,717,344 19,878,478
Infomercial Income 1,014,888 659,461 189,000 - 0 - - 0 -
Net income (loss) 1,556,046 (1,405,472) (1,281,989) (1,052,335) (2,440,638)
Net income (loss) per
share of common stock $ .12 ($.14) ($.14) ($.13) ($.33)
Cash dividends per
common share - 0 - - 0 - - 0 - - 0 - - 0 -
</TABLE>
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage relationship to total revenue of certain items included in the
Company's Statements of Operations.
<TABLE>
<CAPTION>
Year ended June 30
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of goods sold 59.9 61.3 63.9
Gross profit 40.1 38.7 36.1
Other operating income 1.5 1.7 0.7
Promotion and advertising charges .7 .6 1.0
Salaries and wages 8.2 10.3 12.6
Transponder and cable charges 17.9 15.1 12.0
Other general operating
and administrative expenses
9.8 14.1 13.6
Depreciation and amortization 1.5 2.2 2.0
Other expense (1.3) (1.9) (0.3)
Income tax benefit .1 .3 .0
Net income (loss) 2.3 (3.5) (4.7)
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
FISCAL 1997 VS. FISCAL 1996
- ---------------------------
The Company's total revenues, consisting of net sales, infomercial and
miscellaneous revenues, for the year ended June 30, 1997, were $69,064,000, an
increase of $28,332,000 or 70% over the prior year. The major component of this
increase in revenues was net sales which increased to $67,817,000, an increase
of $27,801,000 or 59% over the prior year. The increase was primarily
attributable to the addition of approximately 3,200,000 full-time equivalent
households (FTEs) resulting in a total of 8,600,000 full-time equivalent
households (FTEs) at the end of June 1997. This increase in households is
attributable mainly to the expanded coverage through greater market penetration
of approximately 2,200,000 full power television station FTEs and approximately
600,000 FTEs through the agreement with TCI. The sales increase was principally
the result of increased sales volume rather than an increase in price points.
17
<PAGE> 18
The Company's product mix trended away from jewelry and more toward
male related merchandise, including sports and collectibles in keeping with its
predominately male audience.
Gross profit increased by $11,692,000 or 75.4%, primarily as a result
of increased sales related to expanded carriage throughout the United States
and increased gross margins. The Company's average gross profit margin
increased to 40.1% from 38.7% in the previous year as a result of improved
purchasing, selection and development of more unique merchandise and product
lines. Higher margins were obtained throughout most product categories,
particularly in the sports product lines.
The Company generated $1,051,000 in informercial revenue from WMFP in
Boston and KZJL in Houston. This represented a 59.5% increase over the
infomercial revenue of the prior year. The Company continued improvement in
this area although future increases should be smaller.
The Company develops a market by broadcasting its programming over a
period of time. Consequently there is a timing difference of approximately 6 to
9 months whereby the distribution expenses outpace future revenues. In these
instances, the Company's profitability in a specific new market will be
initially depressed until future revenue streams exceed expenses.
Operating expenses for fiscal 1997 increased $8,953,000, or 52.9% over
1996. The major items resulting in the increase were: (a) additional cable
carriage and signal distribution costs of approximately $6,094,000 or 101.1%;
(b) an increase in salaries of approximately $756,000 or 22.5% primarily
related to variable labor costs associated with the higher volume of customer
calls and some additions to management; (c) an increase of $368,000 or 162.0%
in legal expenses in connection with the Upper Deck lawsuit and other
litigation; (d) an increase in depreciation, amortization, and utilities of
approximately $975,000 or 22.7% primarily associated with the operating costs
and acquisitions of fixed assets of the Boston and Houston television stations,
and Collector's Edge; (e) an increase in telephone cost of $179,000 or 38.3%;
and (f) credit card discounts of $354,000 or 53.5% related primarily to the
higher business revenues in 1997.
FISCAL 1996 VS. FISCAL 1995
- ---------------------------
The Company's total revenues, consisting of net sales, infomercial,
and miscellaneous revenues, for the year ended June 30, 1996, were $40,732,000,
an increase of $13,667,000 or 50% over the prior year. The major component of
this increase in revenues was net sales which increased to $40,016,000 an
increase of $13,229,000 or 49% over the prior year. The increase was primarily
attributable to greater cable coverage which resulted from the addition of
approximately 2,700,000 full time equivalent households (FTEs) resulting in a
total of
18
<PAGE> 19
5,400,000 FTE households by the end of June 1996. This two-fold increase in
households is attributable mainly to the combined carriage in the Boston,
Houston, and Dallas markets to which the Company did not broadcast in the prior
fiscal year (approximately 60%) and the additional part-time carriage on
various full power stations throughout the United States (approximately 40%).
The sales increase was the result of increased sales volume and not an increase
in sales prices.
During fiscal 1996, the Company introduced and developed new product
lines in Health & Beauty, Fitness, and Collectible Knives. In addition, there
was a broadening of the Coin product line, and the Company re-introduced its
"Dominator" collectible card. These new and expanded product lines helped
generate new sales to broaden the customer base.
Gross profit increased by $5,834,000 or 60.4%, primarily as a result
of increased sales related to expanded carriage throughout the United States
and increased gross margins. The Company's average gross profit margin
increased to 38.7% from 36.1% in the previous year as a result of improved
purchasing, selection and development of more unique merchandise and product
lines. Higher margins were obtained throughout most product categories,
particularly in the jewelry and sports product lines.
The Company generated $659,000 in infomercial revenue from WMFP in
Boston and KZJL in Houston. This represented a 248% increase over the
infomercial revenue of the prior year and was the first full year of
infomercial revenue.
The Company develops a market by broadcasting its programming over a
period of time. Consequently there is a timing difference of approximately 6 to
9 months whereby the distribution expenses outpace future revenues. In these
instances, the Company's profitability in a specific new market will be
initially depressed until future revenue streams exceed expenses.
Operating expenses for fiscal 1996 increased $5,920,000, or 53.8% over
1995. The major items resulting in the increase were: (a) additional cable
carriage and signal distribution costs of approximately $2,798,000 or 86.7%;
(b) an increase in salaries of approximately $756,200 or 22.5% related to
variable labor costs associated with the higher volume of customer calls and
some additions to management; (c) an increase of $367,900 or 162.0% in legal
expenses associated with the unsuccessful Paxson merger and certain litigation;
(d) an increase in depreciation, amortization, station management costs and
utilities of approximately $975,000 or 22.7% primarily associated with the
operating costs and acquisitions of fixed assets of the Boston and Houston
television stations, which were owned for a full year in 1996; (e) the
Company's operating expenses for Houston exceeded revenues by $305,000 until
January 1996 when Houston became profitable; (f) an increase in telephone cost
of $179,000 or 38.3%; and (g) credit card discounts of $354,000 or 53.5%
related primarily to the higher business revenues in 1996.
Other expenses were negatively impacted by $610,000 or 479.1%
primarily due to increased interest expense on the additional $2,000,000 in
debt secured in August 1995 and the full year of expense from new debt incurred
in fiscal 1995.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Fiscal 1997 was a year of dramatic growth for the Company which was
mostly achieved by a 59% increase in FTEs primarily through broadcast stations,
cable system and carriage agreements. Management believes the growing market
value of these broadcast assets and the addition of long-term, full-time,
predictable coverage will significantly and positively add long term value and
revenue to the Company.
The Company believes internally generated funds from operations,
together with borrowings, and the sale of common stock and warrant rights, if
needed, will be sufficient to meet the Company's capital requirements during
the next fiscal year. Additionally, the Company believes it will be successful
in raising capital necessary to fund its bid to acquire the assets of Global
Shopping Network.
In January 1997, the Company completed the installation of an Aspect
Callcenter telephone system, which increases the Company's ability to meet the
higher sales volumes while reducing operator and telephone costs. This system
integrates the Company's database with caller ID capability and will reduce the
time necessary to process calls. In July 1996, the Company instituted a new
credit card processing system, which provides instant credit card verification
at the time of sale. These capital expenditures improve the Company's operating
efficiency in terms of cash flow. They are consistent with management's goal
to invest in current technology to improve the ratio of costs which support
sales.
At June 30, 1997 the Company had a negative net working capital
position of ($4,641,439), a decrease of $934,809. This decrease was
attributable primarily to the $1,100,000 invested in Collector's Edge of
Tennessee, Inc. Much of the growth in liabilities is reflective of the
Company's increased sales volume. The Company believes that it enjoys strong,
long-term relationships with its vendors. It is common in the retail business
to have a low working capital ratio, and the Company believes that its ability
to meet future vendor obligations will be adequate.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In February 1997, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which changes the calculations used for earnings per share (EPS) and makes
them comparable to international EPS standards. It replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The effect of the change in the
standard on the consolidated financial statements results in $0.15 and ($0.14)
of basic EPS for the years ended June 30,
20
<PAGE> 21
1997 and 1996. The standard would have no effect on the diluted EPS. The
Statement is effective for financial statements issued for periods ending after
December 15, 1997; earlier application is not permitted.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure." The Statement establishes standards for disclosing
information about an entity's capital structure. The Statement is effective
for periods ending after December 15, 1997. Management has determined that the
adoption of this Statement will not have a material impact on the financial
statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
Statement is effective for financial statements issued for periods beginning
after December 15, 1997. Management has not yet determined the full effect of
this Statement on its financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting comprehensive
income and its components in a full set of financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997. The Company
currently has no items that would be classified as other comprehensive income.
Thus, management has determined that the adoption of this Statement will not
have a material impact on the financial statements.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 26
Consolidated Balance Sheets at June 30, 1997 and June 30, 1996 27-28
Consolidated Statements of Operations for the years ended June 30, 1997,
June 30, 1996, and June 30, 1995 29
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1997, June 30, 1996, and June 30, 1995 30-31
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, June 30, 1996, and June 30, 1995 32-33
Notes to Consolidated Financial Statements 34-58
</TABLE>
22
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
Board of Directors and Stockholders
Shop at Home, Inc.
We have audited the accompanying consolidated balance sheets of Shop
at Home, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Shop
at Home, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
Knoxville, Tennessee COOPERS & LYBRAND L.L.P.
August 14, 1997
23
<PAGE> 24
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,077,641 $ 1,914,759
Accounts receivable - trade 3,292,925 380,077
Accounts receivable - related parties 3,000 7,680
Inventories 3,262,080 2,611,142
Prepaid expenses 458,243 279,505
Deferred tax assets 1,342,450 80,000
----------- -----------
Total current assets 13,436,339 5,273,163
PROPERTY & EQUIPMENT, NET 4,433,767 3,470,226
FCC LICENSES, NET 13,423,182 10,516,041
GOODWILL, NET 1,989,529 605,154
OTHER ASSETS 1,127,493 422,086
----------- -----------
TOTAL ASSETS $34,410,310 $20,286,670
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE> 25
SHOP AT HOME, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY
AS OF JUNE 30,
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion - capital leases $ 171,498 $ 109,444
Current portion of long-term debt 2,279,833 741,262
Accounts payable - trade 6,821,654 3,201,320
Accounts payable - related party 631,621 449,550
Credits due to customers 3,121,503 1,100,120
Other payables and accrued expenses 4,944,050 1,865,806
Deferred revenue 107,619 1,512,291
------------ ------------
Total current liabilities 18,077,778 8,979,793
------------ ------------
LONG-TERM LIABILITIES
Capital leases, less current portion 305,666 53,649
Long term debt, less current portion 7,216,465 5,669,063
Deferred income taxes 3,613,410 2,082,336
REDEEMABLE PREFERRED STOCK
$10 par value, 1,000,000 shares authorized,
137,943 issued and outstanding in
1997 and 1996 respectively 1,393,430 1,393,430
COMMITMENTS (NOTES 6,8,10, AND 14)
STOCKHOLDERS' EQUITY Common stock - $.0025 par value, 30,000,000 shares
authorized 10,714,414 and 10,575,255 shares issued in
1997 and 1996 respectively 26,786 26,438
Additional paid in capital 10,066,555 9,927,787
Accumulated deficit (6,289,780) (7,845,826)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,410,310 $ 20,286,670
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE> 26
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AS OF JUNE 30,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 67,817,460 $ 40,016,114 $ 26,787,013
COST OF SALES 40,626,134 24,516,348 17,120,791
------------ ------------ ------------
Gross Profit 27,191,326 15,499,766 9,666,222
------------ ------------ ------------
OTHER OPERATING INCOME 1,014,888 659,461 189,000
------------ ------------ ------------
OPERATING EXPENSES
Promotion and advertising costs 468,255 241,170 269,420
Salaries and wages 5,564,089 4,112,858 3,356,624
Transponder and cable charges 12,118,305 6,024,743 3,226,481
Other general operating and
administrative expenses 6,675,322 5,673,540 3,639,749
Depreciation and amortization 1,056,492 877,861 517,523
------------ ------------ ------------
Total operating expenses 25,882,463 16,930,172 11,009,797
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 2,323,751 (770,945) (1,154,575)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest, net (1,079,529) (794,558) (216,486)
Miscellaneous 231,824 56,637 89,072
------------ ------------ ------------
Total other income (expense) (847,705) (737,921) (127,414)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,476,046 (1,508,866) (1,281,989)
INCOME TAX BENEFIT 80,000 103,394 --
------------ ------------ ------------
NET INCOME/ (LOSS) $ 1,556,046 ($ 1,405,472) ($ 1,281,989)
============ ============ ============
NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ 0.12 ($ 0.14) ($ 0.14)
============ ============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 13,945,540 10,284,085 9,436,870
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE> 27
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL TREASURY
COMMON PAID IN ACCUMULATED STOCK
STOCK CAPITAL DEFICIT AT COST
-------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Balance - June 30, 1994 $ 22,260 $ 5,883,682 $(5,158,365) $(40,250)
(8,904,118 shares)
Issuances of common stock
(389,215 shares) 973 999,027 -- --
Retirement of treasury stock (115) (40,135) -- 40,250
Issuances of common stock
(896,747 shares) 2,242 2,097,758 -- --
Preferred stock dividend accrued
(46,000 shares) -- (5,000) -- --
Net loss -- -- (1,281,989) --
-------- ----------- ----------- --------
Balance - June 30, 1995
(10,144,080 shares) 25,360 8,935,332 (6,440,354) - 0 -
Issuance of common stock
in connection with financing
(100,000 shares) 250 249,750 -- --
Issuance of common stock in
connection with conversion
of preferred stock
(2,000 shares) 5 20,565 -- --
Exercise of employee stock options 315 127,125 -- --
Issuances of common stock in
payment of payable obligations
(203,175 shares) 508 609,015 -- --
Preferred stock dividend accrued -- (14,000) -- --
Net loss -- -- (1,405,472) --
-------- ----------- ----------- --------
Balance - June 30,1996
(10,575,255 shares) 26,438 9,927,787 (7,845,826) - 0 -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE> 28
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
ADDITIONAL TREASURY
COMMON PAID IN ACCUMULATED STOCK
STOCK CAPITAL DEFICIT AT COST
------ ---------- ----------- -------
<S> <C> <C> <C> <C>
Exercise of stock options
(100,000 shares) 250 99,750 -- --
Exercise of employee stock options
(20,000 shares) 50 19,950 -- --
Issuances of common stock in
payment of payable obligations
(19,159 shares) 48 33,068 -- --
Preferred stock dividend accrued -- (14,000) -- --
Net income -- -- 1,556,046 --
------- ------------ ----------- --
Balance - June 30, 1997
(10,714,414 shares) $26,786 $ 10,066,555 $(6,289,780) $ 0
======= ============ =========== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE> 29
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,556,046 ($1,405,472) ($1,281,989)
Non-cash expenses included in net loss
Depreciation and amortization 1,056,492 877,861 517,523
Loss on sale of equipment 3,053 19,165 --
Deferred income taxes (80,000) (103,394) --
Change in provision for inventory obsolescence -- (88,122) --
Provision for bad debt 18,800 -- --
Changes in current and non-current items
Accounts receivable (2,926,968) 119,409 (38,135)
Inventories (650,938) (230,024) (110,577)
Prepaid expenses and other assets (241,321) (197,019) 102,563
Accounts payable and accrued expenses 8,914,889 805,455 2,759,182
Deferred revenue (1,404,672) 1,016,954 (5,888)
----------- ----------- -----------
Net cash provided by operations 6,245,381 814,813 1,942,679
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for acquisitions (1,838,360) -- (1,289,072)
Purchase of equipment (1,056,581) (507,494) (2,370,582)
Proceeds from sale of equipment -- 400,000 --
Other assets (1,856,744) -- --
FCC licenses -- (38,000) --
----------- ----------- -----------
Net cash used by investing activities (4,751,685) (145,494) (3,659,654)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (13,742) -- --
Exercise of stock options 120,000 127,440 --
Repayments of debt (1,233,467) (985,851) (662,115)
Additional long-term debt 2,919,440 2,056,380 1,620,488
Capital lease payments (123,045) (154,675) (114,278)
----------- ----------- -----------
Net cash provided by financing activities 1,669,186 1,043,294 844,095
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 3,162,882 1,712,613 (872,880)
Cash beginning of period 1,914,759 202,146 1,075,026
----------- ----------- -----------
Cash end of period $ 5,077,641 $ 1,914,759 $ 202,146
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE> 30
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
----------- -------- -----------
<S> <C> <C> <C>
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Stock issued for inventory and reduction
of accounts payable $ 33,116 $609,523 $ --
---------- -------- ----------
Cost of equipment purchased through
Capital lease obligation $ 437,116 $ 31,450 $ 290,561
---------- -------- ----------
Notes payable issued for acquisitions
of BCST and MFP, Inc. $1,400,000 $ -- $3,750,000
---------- -------- ----------
Stock issued for acquisitions
of BCST and MFP, Inc. $ -- $ -- $4,500,000
---------- -------- ----------
Stock issued in connection
with financing $ -- $250,000 $ --
---------- -------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 997,671 $795,125 $ 139,097
---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE> 31
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The accompanying consolidated financial statements include the accounts
of Shop at Home, Inc. and its 100% owned subsidiaries, MFP, Inc. ("MFP"),
Broadcast Cable Satellite Technologies, Inc. ("BCST"), Urban Broadcasting
Systems, Inc. ("UBS"), Collectors Edge of Tennessee, Inc. ("Collectors"), and RF
Scientific Transportables, Inc. ("RFS"), (collectively the "Company"). All of
the operating assets of RFS were sold in the latter part of fiscal 1995 and RFS
subsequently ceased operations. RFS was in the business of providing mobile
uplink services. All intercompany accounts and transactions have been eliminated
in consolidation.
OPERATIONS
- ----------
The Company markets various consumer products through a televised "shop
at home" service. The programming is currently broadcast by satellite on a
twenty-four hour day, seven days a week schedule.
BCST's, principal asset consists of ownership of the outstanding shares
of capital stock of UBS. UBS holds the FCC license for television station KZJL,
Channel 61, a full power television station licensed to Houston, TX.
MFP, Inc., operates a commercial television station, WMFP, Channel 62,
serving the Boston television market area. MFP, Inc. was acquired in February
1995 (Note 13).
Collector's Edge of Tennessee, Inc. ("Collectors") is a trading card
manufacturer whose main assets are licenses from the National Football League
Properties and the NFL Players, Inc.
CASH AND CASH EQUIVALENTS
- -------------------------
For the purpose of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents.
INVENTORIES
- -----------
Inventories, which consist primarily of products held for sale such as
jewelry and sports collectibles, are stated at the lower of cost or market with
cost being determined on a first-in, first-out (FIFO) basis. Valuation
allowances are provided for valuation adjustments related to carrying costs in
excess of estimated market value.
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 straight line and accelerated methods
over the estimated useful lives of the assets as reflected in the following
table:
<TABLE>
<S> <C>
Furniture and fixtures 5 - 7 years
Operating equipment 5 - 30 years
Leasehold improvements 4 years
</TABLE>
31
<PAGE> 32
SHOP AT HOME, INC. AND SUBSIDIARIES
FCC LICENSES
- ------------
During fiscal 1995 the Company acquired two subsidiaries who own
licenses from the Federal Communications Commission under which they operate
television stations. The value ascribed to these FCC licenses in connection with
the acquisitions is being amortized over 40 years. Amortization of these
licenses was $508,099 in 1997 and $268,562 in 1996.
GOODWILL
- --------
Management periodically evaluates the net realizability of the carrying
amount of goodwill. Goodwill is amortized over 40 years, using the straight-line
method. Goodwill recorded in connection with the acquisitions of WMFP and BCST
represents the excess purchase price over the fair value of the net identifiable
assets acquired. The goodwill amortization amounted to $60,803 for 1997 and
$15,517 for 1996.
SALES RETURNS
- -------------
The Company allows customers to return merchandise for full credit or
refund within 30 days from the date of receipt. Collectors sells to wholesalers
and retailers, terms of sale and return privileges are negotiated on an
individual basis. At June 30,1997 and 1996, the Company had recorded provisions
of $3,122,000 and $1,100,000, respectively, for estimated returns.
REVENUE RECOGNITION
- -------------------
The Company's principal source of revenue is retail sales to viewing
customers. Other sources of revenue include the sale of air time on its owned
stations (infomercials), the sale of uplink truck services (fiscal 1995 and
1996), and miscellaneous income consisting of list rental, credit card fees, and
commissions. Product sales are recognized upon shipment of the merchandise to
the customer. Service revenue and air time revenue are recognized when the
service has been provided or the air time has been utilized by the user.
Deferred revenue consists of sales proceeds relative to unshipped merchandise.
INCOME TAXES
- ------------
The Company files a consolidated federal income tax return with its
subsidiaries. The companies file separate state returns. 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.
INCOME (LOSS) PER SHARE
- -----------------------
Income (loss) per share was computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the respective periods. Common stock equivalents,
including options, warrants, convertible debt and the convertible preferred
stock have been excluded from the 1996 and 1995 computations because
32
<PAGE> 33
SHOP AT HOME INC. AND SUBSIDIARIES
their inclusion would be antidilutive in these years when the Company generated
losses. The effect of these common stock equivalents on the 1997 per share
computation is an increase of approximately 3.3 million shares, even though
these shares were not issued.
In February 1997, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 128, "earnings per Share," which
changes the calculations used for earnings per share (EPS) and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The effect of the change in the standard on
consolidated financial statements results in $0.15 and ($0.14) of basic EPS for
the years ended June 30, 1997 and 1996. The standard would have no effect on the
diluted EPS. The Statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not permitted.
USE OF ESTIMATES
- ----------------
The preparation of the financial statements in conformity with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The Company's financial instruments consist principally of accounts
receivable, accounts payable, accrued expenses and debt. The fair value of these
financial instruments approximate their carrying value.
IMPAIRMENT OF LONG-LIVED ASSETS
- -------------------------------
In March 1995, the FASB issued Statement of Accounting Standards No
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which i) requires that long-lived assets to be held
and used be reviewed for impairment whenever events or circumstances indicate
that the carrying value of an asset may not be recoverable, ii) requires that
long-lived assets to be disposed of be reported at the lower of the carrying
amount or the fair value less costs to sell, and iii) provides guidelines and
procedures for measuring impairment losses that are different from previously
existing guidelines and procedures. The Company adopted the provisions of
Statement 121 in fiscal year 1996 and the changes did not have a material effect
on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION
- ------------------------
Additionally, in October 1995, the FASB issued Statement of Accounting
Standards No. 123. "Accounting and Disclosure of Stock-Based Compensation" which
encourages but does not require companies to recognize stock awards based on
their fair value at the date of grant. The
33
<PAGE> 34
SHOP AT HOME, INC. AND SUBSIDIARIES
Company currently follows, and expects to continue to follow, the provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equal the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Although the Company is
permitted to continue to follow the provisions of APB 25 under Statement 123,
certain pro forma disclosure will be required beginning in 1996, as if the
Company had accounted for its stock options under the Statement 123 fair value
method. Such disclosures are included in Footnote 10.
SEGMENT INFORMATION
- -------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Statement is
effective for financial statements issued for periods beginning after December
15, 1997. Management has not yet determined the full effect of this Statement on
its financial statements.
CAPITAL STRUCTURE
- -----------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure." The Statement establishes standards for disclosing
information about an entity's capital structure. The Statement is effective for
periods ending after December 15, 1997. Management has determined that the
adoption of this Statement will not have a material impact on the financial
statements.
COMPREHENSIVE INCOME
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement establishes standards for reporting comprehensive income and its
components in a full set of financial statements. The Statement is effective for
fiscal years beginning after December 15, 1997. The Company currently has no
items that would be classified as other comprehensive income. Thus, management
has determined that the adoption of this Statement will not have a material
impact on the financial statements.
RECLASSIFICATIONS
- -----------------
Certain amounts in the prior years' consolidated financial statements
have been reclassified for comparative purposes to conform with the current year
presentation.
34
<PAGE> 35
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTE 2 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consists of the following major classifications
at June 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Leasehold improvements $ 318,416 $ 285,074
Operating equipment 5,819,654 4,736,119
Furniture and fixtures 190,656 194,651
----------- -----------
6,328,726 5,215,844
Accumulated depreciation (1,894,959) (1,745,618)
----------- -----------
Property and equipment, net $ 4,433,767 $ 3,470,226
=========== ===========
</TABLE>
Depreciation expense totaled $527,103, $463,496, and $527,103 for the
fiscal years ended June 30, 1997, 1996 and 1995 respectively.
NOTE 3 - CAPITAL LEASES
- -----------------------
The Company has acquired various equipment under the provisions of long
term leases.
Equipment held under capital leases, which is included in property and
equipment is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Operating equipment $660,032 $ 660,032
Less accumulated depreciation (551,074) (396,267)
-------- ---------
$108,958 $263,765
======== =========
</TABLE>
35
<PAGE> 36
SHOP AT HOME, INC. AND SUBSIDIARIES
Future minimum lease payments under capitalized leases are as follows at June
30,1997:
<TABLE>
<S> <C> <C>
1998 229,002
1999 158,286
2000 154,686
2001 43,712
---------
Total minimum lease payments 585,686
Less amount representing interest (108,522)
---------
Present value of minimum lease payments 477,164
Less current portion (171,498)
---------
Long term portion $ 305,666
=========
</TABLE>
NOTE 4 - LONG-TERM DEBT
- -----------------------
<TABLE>
<CAPTION>
Long term debt consist of the following at June 30: 1997 1996
---- ----
<S> <C> <C>
Note payable bearing interest at 8%, due in equal monthly installments of
principal of $20,833, plus interest through June 6, 2000, collateralized
by common stock of BCST $ 750,000 $ 1,000,000
Notes payable due in April 2000, with interest
payable at 12% quarterly, collateralized by
certain equipment 800,000 800,000
Note payable bearing interest at 9.5% due in
monthly installments of $26,106 with a
balloon payment due in March 2000 2,310,763 2,399,858
Note payable to related party bearing interest
at 15% due in monthly installments of $9,700,
collateralized by certain equipment 380,302 435,101
Note payable to related party bearing interest at
10.75% due in monthly installments of principal
and interest totaling $43,494 through September 1,
2000 1,425,077 1,775,366
Note payable to related party bearing interest at 6%
The first twelve payments consist of interest only while the remainder of the
payments consist of
</TABLE>
36
<PAGE> 37
SHOP AT HOME, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
principal and interest totaling $15,543. The final
payment is scheduled for September 2007 1,400,000 --
Assumption note payable to Norwest Credit bearing interest at 1.75% plus prime
(8.5% at 6/30/97) due in equal monthly installments of principal of $75,047
plus interest through March 1999 1,575,992 --
Term note payable to Norwest Credit Bearing interest at 10% due in equal monthly
installments of principal of $41,667 (with the exception of 1st and
last payment) plus interest through February 1999 854,164 --
----------- -----------
Total long term debt 9,496,298 6,410,325
Less current maturities (2,279,833) (741,262)
----------- -----------
Long term debt less current portion $ 7,216,465 $ 5,669,063
=========== ===========
</TABLE>
The aggregate future required principal payments at June 30, 1997 for
the above liabilities are as follows:
<TABLE>
<S> <C>
1998 $2,279,833
1999 2,001,973
2000 1,050,519
2001 1,281,964
2002 2,882,009
----------
$9,496,298
==========
</TABLE>
NOTE 5 - REDEEMABLE PREFERRED STOCK
- -----------------------------------
The following is a brief summary of the terms and conditions of the
Series A Preferred Stock of the Company issued in connection with the
acquisition of MFP, Inc. This summary is qualified in its entirety by reference
to the Company's charter provisions with respect to the preferred stock.
During fiscal year 1995, the Company issued 140,000 shares of preferred
stock, $10.00 par value, in connection with a merger with MFP, Inc., a Delaware
corporation. The Series A Preferred Stock will rank ahead of the common stock
with respect to dividends, preferences, qualifications, limitations,
restrictions and the distribution of assets upon liquidation. Shares of Series A
preferred stock have no preemptive rights and no voting rights, except those
rights provided by statute. Each holder of Series A preferred stock will have
the option to require the Company to redeem their shares, after 5 years from
date of issuance, for $10.00 per share plus any accumulated and unpaid
dividends. Prior to redemption, Series A preferred stock is convertible into
shares of common stock at a ratio of one share of common stock for one share of
Series A preferred stock.
37
<PAGE> 38
SHOP AT HOME, INC. AND SUBSIDIARIES
Holders of shares of Series A preferred stock are entitled to receive,
but only when and if declared by the Board of Directors of the Company out of
funds legally available, cash dividends at the rate of 1% per annum (i.e., $.10
per share per annum) of par value per share.
Dividends on each share of Series A preferred stock accrue and are
cumulative from (but not including) the date of its original issuance on the
basis of an annual dividend period. For any dividend period, no dividends may be
paid or declared and set apart for payment on any common stock, or any other
series of preferred stock at the time outstanding, unless dividends properly
accumulated in respect to the Series A stock and all other series of preferred
stock senior to or on a parity therewith for all prior dividend periods shall
have been paid or declared and set apart for payment.
In the event of a liquidation, dissolution and winding up of the
Company, whether voluntary or involuntary, the registered holders of shares of
Series A preferred stock then outstanding shall be entitled to receive out of
the assets of the Company, before any distributions to the holders of common
stock or any other junior stock, an amount equal to the "Liquidation Preference"
with respect to such shares of Series A preferred stock. The Liquidation
Preference for the Series A preferred stock is $10.00 per share, plus an amount
equal to all dividends thereon (whether or not declared) accrued and unpaid
through the date of final distribution. For those purposes, a sale of
substantially all of the assets of the Company to a third party, or the
consummation of the Company or its shareholders of any transaction with any
single purchaser whereby a change in control of more than fifty percent (50%) of
the issued and outstanding shares of common stock of the Company occurs, will be
considered a liquidation, dissolution and winding up of the Company entitling
the holders of Series A preferred stock to payment of the Liquidation
Preference.
No class of the Company's capital stock is presently outstanding that
possesses rights with respect to distributions upon liquidation, dissolution and
winding up senior to the Series A preferred stock. So long as the Series A
preferred stock remains outstanding, the Company may not issue any capital
stock, including preferred stock of any series, that ranks senior to the Series
A preferred stock with respect to liquidation, dissolution and winding up.
As of June 30, 1997 and 1996, the Company was $14,000 in arrears of its
dividend payments due. These dividend payments are payable only when declared by
the Board of Directors
NOTE 6 - COMMON STOCK
- ---------------------
In August 1996, the Company issued 100,000 shares of common stock
valued at $250,000 in connection with the securing of $2,000,000 of long term
debt (Note 4); in September the Company issued 2,000 shares in conversion of
its Redeemable Preferred Stock (Note 5); in October 1995 and May 1996, the
Company issued a total of 126,000 shares in connection with the exercise of
employee stock options (Note 10); and during the period of March through June
1996, the Company issued a total of 203,175 shares of common stock, of which
44,000 shares of common
38
<PAGE> 39
SHOP AT HOME, INC. AND SUBSIDIARIES
stock were issued as payment of payable obligations and 159,175 shares of common
stock were issued in exchange for certain sport cards and collectibles acquired
for resale (Note 8). By agreement, the stock was valued at $3.00 per share or
$477,525. The Company has 19,519 additional shares remaining to be issued under
this agreement.
On June 30, 1994, the Company sold for $240,000 an option to purchase
up to 600,000 shares of common stock at a purchase price of $2.50 per share.
This option may be exercised at any time after December 31, 1995, but on or
before June 30, 1999.
Effective June 9, 1993, an agreement was entered into between the
Company, SAH Holdings, L.P. and Global Network Television, Inc., whereby the
Company agreed to sell 1,000,000 shares of its common stock to SAH Holdings at
$1.00 per share. The Company also agreed to sell to SAH Holdings a warrant to
acquire 1,300,000 shares of common stock in the Company for a purchase price of
$1.00 per share. The warrant expires on June 30, 2001. The Company agreed to
sell to SAH Holdings an additional warrant to acquire up to 2,000,000 shares of
common stock for a purchase price of $1.00 per share. This warrant was sold for
$400,000 and also expires on June 30, 2001.
The Company also issued shares of common and preferred stock in
connection with the acquisitions of BCST and MFP, Inc. For details of those
issuances see Notes 13 and 14.
NOTE 7 - INCOME TAXES
- ---------------------
The components of temporary differences and the approximate tax effects
that give rise to the Company's net deferred tax liability at June 30, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards $ 389,126 $ 2,324,269
Accruals 1,342,450 384,495
Valuation allowance -- (1,263,991)
----------- -----------
Total deferred tax assets 1,731,576 1,444,773
----------- -----------
Deferred tax liabilities:
Licenses 3,726,985 3,331,736
Depreciation 275,551 115,373
----------- -----------
Total deferred tax liabilities 4,002,536 3,447,109
----------- -----------
Net deferred tax liabilities $ 2,270,960 $ 2,002,336
=========== ===========
Current deferred tax asset $ 1,342,450 $ 80,000
Long-term deferred tax liabilities (3,613,410) (2,082,336)
----------- -----------
Net deferred tax liabilities $(2,270,960) $(2,002,336)
=========== ===========
</TABLE>
39
<PAGE> 40
SHOP AT HOME, INC. AND SUBSIDIARIES
At June 30, 1997 the Company had net operating loss carry forwards
which expire as follows:
<TABLE>
<S> <C>
June 30, 2010 409,954
June 30, 2011 614,062
----------
$1,024,016
==========
</TABLE>
Income tax benefit varies from the amount computed by applying the
federal corporate income tax rate of 34% to loss before tax benefit as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Computed "expected" income tax expense (benefit) $ 501,855 $(499,732)
Increase (decrease) in income tax benefit
resulting from:
State income tax expense (benefit), net
of federal effect 74,102 (58,792)
Change in valuation allowance (1,042,816) 362,411
Nondeductible portion of meals
and entertainment 16,529 8,480
Other 370,330 84,239
----------- ---------
Actual income tax benefit $ (80,000) $(103,394)
=========== =========
</TABLE>
In connection with the acquisitions of BCST and MFP, Inc. in 1994, the
Company reduced the valuation allowance for deferred tax assets by an aggregate
of $1,263,438, representing the effect of the deferred tax liabilities expected
to reverse in the net operating loss carry forward period. In connection with
the remaining acquisition of BCST in 1997, the Company reduced the valuation
allowance for deferred tax assets by $221,175, representing the effect of the
deferred tax liabilities expected to reverse in the net operating loss carry
forward period. The reduction of the valuation allowance was effected by
reducing intangible asset balances recorded as a result of the acquisitions.
Recognition of a deferred tax asset is based on management's belief
that it is more likely than not that the tax benefit associated with certain
temporary differences will be realized through the amortization of the license
intangible.
40
<PAGE> 41
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTE 8 - COMMITMENTS
- --------------------
TRANSPONDER USE AGREEMENT
- -------------------------
In December 1995, the Company's transponder lease with AT&T's 402R
became effective. This lease calls for initial monthly payments of $96,000 in
the first year and increasing to $105,000 and $115,000 in years two and three
respectively. Transponder expense was $1,330,000 in 1997, $1,379,000 in 1996,
and $1,281,000 in 1995.
PURCHASE COMMITMENTS
- --------------------
In 1994, the Company entered into an agreement to purchase, over a
period of 18 months, $1,750,000 of inventory, of which 50% could be paid for
with the Company's common stock. The Company also had an option to purchase an
additional $1,750,000 of this inventory. Terms on this commitment require the
Company to pay the greater of $97,222 per month or the value of the actual
inventory shipped during the month. Any amount up to one-half of the contractual
commitment could be satisfied through the issuance of Company common stock on
terms as set forth in the contract.
In January 1996, the Company entered into a "Restated Agreement"
whereby it was obligated to purchase the remaining balance of merchandise it had
not yet acquired approximating $720,000. The payment of which was made part in
cash and part in stock. (Note 6). As of July 31, 1996, the remaining obligation
under this restated agreement had been satisfied.
Collector's Edge of Tennessee, Inc. has minimum contractual
committments to NFL Players Association and NFL Properties of $2.2 million,
which includes $1.2 million in fiscal year 1998 and $1.0 million in fiscal year
1999.
LEASE COMMITMENTS
- -----------------
The Company leases its Knoxville office and studio space from William
and Warren, Inc., an entity owned by a principal owner and director of the
Company. Payments under this lease totaled $139,763, $143,325, and $132,592, in
fiscal years ended June 30, 1997, 1996, and 1995, respectively.
The Company has agreements with various carriers to lease air time. The
terms of the agreements vary from week to week to one year periods.
The expenses for leased air time, primarily for cable access fees, was
$10,789,000 in 1997, $4,646,000 in 1996, and $1,945,000 in 1995.
Rental expense for the office and studio and miscellaneous equipment
inclusive of the Knoxville office and studio expense referred to above, was
$529,484, $483,059, and $184,434, for the fiscal years ended June 30, 1997,
1996, and 1995 respectively.
41
<PAGE> 42
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTE 9- RELATED PARTY TRANSACTIONS
- ----------------------------------
During the fiscal years ended June 30, 1997, 1996, and 1995, the
Company engaged in significant transactions with the Company's directors,
significant stockholders, officers or interests of these parties. The following
is a summary of major transactions with these related parties not disclosed
elsewhere in the consolidated financial statements or notes thereto:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
PURCHASES - MERCHANDISE
V.J.M. (Victor Mueller) $1,077,925 $ 795,689 $989,272
Howards Sports Collectibles 3,136,470 2,116,088 553,462
Combine International, Inc. 706,674 452,348 98,843
OTHER OPERATING EXPENSES
Lakeway Container 5,559 63,978 81,827
Airbank 22,213 37,604 27,673
MediaOne -- 157,567 224,359
</TABLE>
In the year ended June 30, 1995, the Company contracted with MediaOne,
Inc. to provide certain consulting services to the Company. A director and
officer of MediaOne, Inc. also serves as a director of the Company. In addition,
MediaOne, Inc. acted as the commissioned broker for MFP, Inc., a Delaware
corporation, from whom the Company acquired Television Station WMFP, Lawrence,
Massachusetts.
NOTE 10 - STOCK OPTIONS
- -----------------------
In 1991, the Company adopted a stock incentive plan for eligible
employees. A special administrative committee of the Board of Directors was
appointed to administer the plan. All employees of the Company are eligible to
receive stock options and/or stock appreciation rights ("SARs") 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.
SARs generally entitle the participant to receive the excess of the
fair market value of a share of common stock on the date of exercise over the
initial value of the SAR. The initial value of the SAR is the fair market value
of a share of common stock on the date of the grant.
Options and SARs 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.
A maximum of 1,500,000 shares of common stock may be issued upon the
exercise of options and SARs. From its adoption through June 30, 1997, a net of
stock options for 588,500 shares of common stock have been granted under the
plan. No SAR's have been issued under the plan.
42
<PAGE> 43
SHOP AT HOME, INC. AND SUBSIDIARIES
No option or SAR's may be granted after October 15, 2001. No option
that is an incentive stock option and any corresponding SAR that related to such
option shall be exercisable after the expiration of ten years from the date such
option or SAR was granted or five years after the expiration in the case of any
such option or SAR that was granted to a 10% stockholder.
Additionally, 1,650,000 common shares (680,000 vested at June 30, 1997)
were reserved for options granted to certain executive officers, directors,
employees and others as of June 30, 1997. These options vest annually over a
period of five years and expire the earlier of five years from the date of
vesting or 30 days after termination of employment.
As permitted by SFAS 123, the Company has chosen to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for options granted under the plan. Had compensation cost
for the Company's plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the method of SFAS 123, the
Company's net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ------------------------- -------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
---------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $1,556,046 $1,466,058 $(1,405,472) $(1,431,467) $(1,281,989) $(1,292,259)
Net Income (Loss) Per Share $ 0.12 $ 0.11 $ (0.14) $ (0.14) $ (0.14) $ (0.14)
</TABLE>
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 grant in 1997: dividend yield of 0%;
expected volatility of 65%; risk-free interest rate of 6%; and expected life of
7.5 years.
A summary of the status of the Company's plan as of June 30, 1997,
1996, and 1995, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,785,000 $2.01 1,630,000 $1.77 1,460,000 $1.69
Granted 639,500 2.88 325,000 2.84 170,000 2.44
Exercised (200,000) 1.00 (126,000) 1.00 -- --
Forfeited (212,000) 2.81 (44,000) 2.44 -- --
--------- --------- ---------
</TABLE>
43
<PAGE> 44
SHOP AT HOME, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Outstanding at end of year 2,192,500 2.20 1,785,000 2.01 1,630,000 1.77
========== ========= ==========
Options exercisable at year-end 1,493,500 1,012,000 943,000
Weighted-average fair value of $2.04 $2.02 $1.72
options granted during the year
</TABLE>
The following table summarizes information about the plan's stock options at
June 30, 1997;
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price
- --------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.99 630,000 8 years $1.00 620,000 $1.00
$2.00 - $2.99 1,557,500 7 years 2.68 873,500 2.56
$3.00 - $3.99 5,000 10 years 3.00 -
--------- ---------
2,192,500 1,493,500
========= =========
</TABLE>
NOTE 11 - CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------
Concentrations of credit risk include cash on deposit in financial
institutions and accounts receivables. Receivables are primarily due from credit
card companies. The Company maintains reserves which management believes are
adequate to provide for credit losses. Management believes the financial
institutions holding the cash to be financially sound.
The television home shopping business in general is seasonal, with the
major selling season occurring the last quarter of the calendar year. The home
shopping industry is also sensitive to general economic conditions and business
conditions affecting consumer spending. The Company's product lines include
jewelry, sports cards, sports memorabilia, collectibles, and other unique items
that may make it more sensitive to economic conditions.
NOTE 12 - ACQUISITION OF BROADCAST CABLE & SATELLITE TECHNOLOGIES, INC.
- -----------------------------------------------------------------------
On December 6, 1994, the Company purchased all of the issued and
outstanding capital stock of Broadcast, Cable and Satellite Technologies, Inc.
(BCST), a Texas corporation, from Television Media Resources, L.C., a Texas
limited liability company. The purchase price consisted of (a) $250,000 paid in
cash to TMR, (b) the issuance to TMR of 389,215 shares of common
44
<PAGE> 45
SHOP AT HOME, INC. AND SUBSIDIARIES
stock, valued at $2.57 per share, and (c) the delivery to TMR of the Company's
promissory note in the principal amount of $1,250,000.
The acquisition has been accounted for under the purchase method and,
accordingly, the operating results of BCST have been included in the
consolidated operating results since the date of acquisition. The purchase
price, including the acquisition costs, was allocated to the net assets acquired
based on fair values at the date of acquisition as follows:
<TABLE>
<S> <C>
FCC License $2,668,846
Goodwill 993,000
Other assets 68,031
Deferred tax liability ( 993,000)
Accounts payable ( 179,740)
Debt assumed ( 32,137)
----------
$2,525,000
</TABLE>
The principal asset of BCST consists of the ownership of 49% of the
issued and outstanding shares of capital stock of Urban Broadcasting Systems,
Inc., ("UBS"). UBS held a construction permit from the FCC which was utilized to
construct Television Station KZJL, Channel 61, a full-power television station
licensed in Houston, Texas. Construction was completed and the station became
operational in June 1995.
In September 1996, the Company, through its subsidiary, Broadcast,
Cable and Satellite Technologies, Inc. (BCST), entered into a $1,400,000
Promissory Note payable to Charles E. Walker for the acquisition of the
remaining 51% interest in Urban Broadcast Systems, Inc. The note bears interest
at 6% interest only in the first year, principal and interest payable
thereafter; and is payable in 132 monthly installments. The note is
collateralized by a pledge of the capital stock of Urban Broadcast Systems, Inc.
NOTE 13 - ACQUISTION OF MFP, INC.
- ---------------------------------
On February 24, 1995, the Company purchased all of the issued and
outstanding capital stock of MFP, Inc. through a merger with SAH Merger Corp., a
newly formed Tennessee corporation and a wholly owned subsidiary of the Company
MFP, Inc. operates a commercial television station, WMFP, Channel 62, serving
the Boston television market area. Under the agreement, the Company paid the
shareholders of MFP, Inc. a total consideration of $7,000,000.
The total consideration of $7,000,000 was comprised of $1,000,000 cash
and assumption of liabilities, $2,500,000 in notes payable, the issuance of
896,747 shares of common stock valued at $2,100,000, and $1,400,000 in preferred
stock.
45
<PAGE> 46
SHOP AT HOME, INC. AND SUBSIDIARIES
The acquisition has been accounted for under the purchase method and,
accordingly, the operating results of MFP have been included in the consolidated
operating results since the date of acquisition. The purchase price, including
the acquisition costs, was allocated to the net assets acquired based on
appraised fair values at the date of acquisition as follows:
<TABLE>
<S> <C>
FCC License $ 8,960,813
Property & equipment 615,000
Deferred tax liability (2,376,000)
-----------
$ 7,199,813
===========
</TABLE>
The unaudited consolidated pro forma operating data for the Company,
assuming the acquisition of BCST and MFP, Inc. occurred on July 1, 1993, are set
forth below. It should be noted that BCST had no revenues for the periods prior
to the acquisition as the broadcast facility had not been constructed.
Accordingly, the unaudited pro forma information does not include amortization
of the intangible assets of BCST during the 1995 period.
<TABLE>
<CAPTION>
UNAUDITED
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
Revenues $27,376,119 $22,567,430
Net loss 2,166,932 1,920,967
Net loss per share $ .21 $ .20
</TABLE>
The unaudited pro forma information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated as of the above date,
nor are they indicative of future operating results.
NOTE 14 - ACQUISITION OF COLLECTOR'S EDGE OF TENNESSEE, INC.
- ------------------------------------------------------------
On February 25, 1997, Collectors Edge of Tennessee, Inc. ("Collectors")
was formed to acquire the assets of a former trading card manufacturer.
Collectors is a trading card manufacturer whose principal assets are licenses
from the National Football League Properties and NFL Players, Inc.
Collectors was initially funded through the purchase by the Company of
$750,000 of Preferred Stock and a working capital loan of $400,000. The
Preferred Stock is convertible into common stock of Collectors at the option of
the Company. As of June 30, 1997, Collectors has repaid none of the working
capital loan. In addition, Collectors assumed a term note with Norwest Bank at
$1.9 million, and borrowed an additional $1.0 million with Norwest Bank. The
note is guaranteed by the Company and collateralized by BCST.
The acquisition of Collectors has been accounted for under the purchase
method because of its economic dependence on the Company, the Company bears the
economic risk of losses of Collectors , and the Company has the ability to
effectively gain equity control of Collectors. Accordingly, the operating
results of Collectors have been included in the consolidated operating
46
<PAGE> 47
SHOP AT HOME, INC. AND SUBSIDIARIES
results since the date of acquisition. The purchase price of $1,150,000 has been
allocated to the net assets acquired based on appraised fair values at the date
of acquisition as follows:
<TABLE>
<S> <C>
Current assets $ 3,324,000
Licensing costs 1,455,000
Property and equipment 340,000
Goodwill 1,185,000
Accounts payable and accrued
liabilities (2,235,000)
Notes Payable (2,919,000)
-----------
$ 1,150,000
===========
</TABLE>
The unaudited consolidated pro forma operating data for the Company,
assuming the acquisition of the former trading card manufacturer by Collectors,
occurred on the first day of each year presented are set forth below.
<TABLE>
<CAPTION>
UNAUDITED
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Revenues $74,987,000 $50,666,000
Net income (loss) 1,178,000 (1,432,000)
Net income (loss) per share $ .09 $ (.14)
</TABLE>
The unaudited pro forma information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated as of the above date,
nor are they indicative of future operating results.
NOTE 15 - SUBSEQUENT EVENT
- --------------------------
In August 1997, the Company made an offer to the bankruptcy court to
acquire the assets of Global Shopping Network. If successful, this would retain
approximately 1,300,000 FTEs on the Company's existing base and would be a
significant step in adding to its owned and operated stations. The Company has
paid $1,000,000 as a good faith deposit for its bid. If accepted, the Company
will be required to raise additional capital to finance this transaction.
NOTE 16 - CONTINGENCIES
- -----------------------
The Company is subject to claims in the ordinary course of business.
Management does not believe the resolution of any such claims will result in a
material adverse effect on the future financial condition, results of
operations, or cash flows of the Company.
47
<PAGE> 48
SHOP AT HOME, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
48
<PAGE> 49
SHOP AT HOME, INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information with respect to directors and executive officers of the
Company in the Company's definitive Proxy Statement for the 1997 annual Meeting
of Shareholders (the "Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Remuneration of Directors
and Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership by management as set
forth in the Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in
the Proxy Statement is incorporated herein by reference.
49
<PAGE> 50
SHOP AT HOME, INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Item 8 of
Form 10-K:
<TABLE>
<S> <C>
1. Financial Statements
--------------------
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Operations for
the years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1997,
1996, and 1995.
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995.
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule Page
----------------------------
Independent Accountants' Report on
Financial Statement Schedule 57
Schedule II Valuation and Qualifying Accounts 58
The other schedules are omitted because the required
information is either inapplicable or has been
disclosed in the consolidated financial statements
and notes thereto.
3. Exhibits
--------
The Index to Exhibits is at page 59.
(b) Reports on Form 8-K
None
</TABLE>
50
<PAGE> 51
SHOP AT HOME, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT ON FINANCIAL
STATEMENT SCHEDULE
Our report on the consolidated financial statements of Shop at Home,
Inc. and Subsidiaries as of June 30, 1997 and 1996 and for each of the three
years ended June 30, 1997 is included on page 26 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 53 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Knoxville, Tennessee COOPERS & LYBRAND L.L.P.
August 14, 1997
51
<PAGE> 52
SHOP AT HOME, INC. AND SUBSIDIARIES
-----------------------------------
SCHEDULE II
-----------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
----------------------------------------
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING RETURNS AND AT END
OF YEAR ALLOWANCES DEDUCTIONS (1) OF YEAR
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended June 30, 1995
Estimated credits
due to customers $ 471,878 $ 4,863,486 $ 4,717,460 $ 617,904
========== =========== =========== ==========
Year ended June 30, 1996
Estimated credits
due to customers $ 617,904 $10,147,556 $ 9,665,340 $1,100,120
========== =========== =========== ==========
Year ended June 30, 1997
Estimated credits
due to customers $1,100,120 $19,503,181 $17,481,798 $3,121,503
========== =========== =========== ==========
</TABLE>
(1) Merchandise returned
52
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page
<S> <C>
2.1 Agreement and Plan of Merger, dated May 17, 1994, among Shop at Home, Inc.,
SAH Merger Corp., and MFP, Inc., filed as Exhibit 2.1 to the Company's
Registration Statement on Form S-4 filed with the Commission on October 26,
1994, and incorporated herein by this reference.
2.2 First Amendment to Agreement and Plan of Merger, dated
November 11, 1994, among Shop at Home, Inc., SAH Merger
Corp., and MFP, Inc., filed as Exhibit 2.2 to the Company's
Registration Statement on Form S-4 filed with the Commission
on December 28, 1994, and incorporated herein by this
reference.
2.3 Articles of Merger of SAH Merger Corp. And MFP, Inc.,
recorded in Tennessee on February 24, 1995, filed as Exhibit
4.2 to the Company's Current Report on Form 8-K filed with
the Commission on March 2, 1995, and incorporated herein by
this reference.
3(i).1, 4.1 Charter of the Company, filed as Exhibit 3.1 to the
Company's Annual Report Form 10-K for the fiscal year ended
June 30, 1993, and incorporated herein by this reference.
3(i).2, 4.2 Charter amendment recorded February 17, 1995, filed as
Exhibit 4.3 to the Company's Current report on Form 8-K filed
with the Commission on March 2, 1995, and incorporated hereby
by this reference.
3(ii), 4.3 Bylaws of the Company, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K filed with the
Commission for the fiscal year ended June 30, 1993, and
incorporated herein by this reference.
4.1 Form of Trust Indenture dated February 23, 1995, filed as Exhibit 4.5 to the
Company's Current Report on Form 8-K filed with the Commission on March 2,
1995, and incorporated herein by this reference.
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C>
4.2 Form of Promissory Note of the Company issued to the
indenture trustee under the Trust Indenture dated February
23, 1995, filed as Exhibit 4.6 to the Company's Current
Report on Form 8-K filed with the Commission on March 2,
1995, and incorporated herein by this reference.
4.3 Specimen of Common Stock certificate, filed as Exhibit 4.8 to
the Company's Registration Statement on Form S-4 filed with
the Commission on December 28, 1994, and incorporated herein
by this reference.
4.4 Specimen of Preferred Stock certificate, filed as Exhibit 4.9
to the Company's Amendment No. 1 to the Registration
Statement on Form S-4 filed with the Commission on January
20, 1995, and incorporated herein by this reference.
4.5 Specimen of Note Certificate, filed as Exhibit 4.10 to the Company's
Registration Statement on Form S-4 filed with the Commission on December 28,
1995, and incorporated herein by this reference.
10.1 Company's Omnibus Stock Option Plan, filed as Exhibit 10.3 to
the Company's Annual Report on Form 10-K filed with the
Commission for the fiscal year ended June 30, 1992, and
incorporated herein by this reference.
10.2 Lease dated April 1, 1993, between Shop at Home, Inc. and Book Ends Discount
Bookstores, Inc., filed as Exhibit 10.5 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993, and incorporated herein by this
reference.
10.3 Lease dated July 1, 1994 between Shop at Home, Inc. and William & Warren,
Inc., filed as Exhibit 10.3 to the Company's Registration Statement on Form
S-4 filed with the Commission on December 28, 1994, and incorporated herein by
this reference.
10.4 Form of Transponder Use Agreement dated April 1, 1993 between
Shop at Home, Inc. and B & P The Spaceconnection, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993, and incorporated herein
by this reference.
10.5 Transponder Use Agreement dated June 6, 1994, between Shop at Home, Inc. and
Broadcast International, Inc., filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-4 filed with the Commission on December 28,
1994, and incorporated herein by this reference.
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C>
10.6 Form of Transponder Lease Agreement dated December 21, 1994,
between Shop at Home, Inc. and Broadcast International, Inc.,
filed as Exhibit 10.7 to the Company's Registration Statement
on Form S-4 filed with the Commission on December 28, 1994,
and incorporated herein by this reference.
10.7 Stock and Warrant Purchase Agreement dated June 9, 1993,
between Shop at Home, Inc., SAH Holdings, L.P., and Global
Network Television, Inc., filed as Exhibit B to the Statement
on Schedule 13D of SAH Holdings, L.P., filed with the
Commission on June 18, 1993, and incorporated herein by this
reference.
10.8 First Amendment to Stock and Warrant Purchase Agreement dated
July 12, 1993, between Shop at Home, Inc., SAH Holdings,
L.P., and Global Network Television, Inc., filed as Exhibit E
to the Statement on Schedule 13D of SAH Holdings, L.P., filed
with the Commission on July 27, 1993, and incorporated herein
by this reference.
10.9 Agreement dated December 8, 1993, between Richard Howard,
Inc. and Shop at Home, Inc., filed as Exhibit 10.10 to the
Company's Registrant Statement on Form S-4 filed with the
Commission on December 28, 1994, and incorporated herein by
this reference.
10.10 Form of Employment Agreement between Kent E. Lillie and Shop
at Home, Inc., filed as Exhibit B to the Company's Current
Report on Form 8-K filed with the Commission on September 17,
1993, and incorporated herein by this reference.
10.11 Form of Warrant to Purchase Shares dated September 7, 1993,
between Shop at Home, Inc. and SAH Holdings, L.P., filed as
Exhibit A to the Company's Current Report on Form 8-K filed
with the Commission on September 17, 1993, and incorporated
herein by this reference.
10.12 Form of Option Agreement for options issued to employees,
executive officers and others, filed as Exhibit 10.13 to the Company's
Registrant Statement on Form S-4 filed with the Commission on December 28,
1994, and incorporated herein by this reference.
10.13 Agreement dated June 30, 1994, between Combine International, Inc. and Shop at
Home, Inc., filed as Exhibit 10.14 to the Company's Registrant Statement on
Form S-4 filed with the Commission on December 28, 1994, and incorporated
herein by this reference.
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C>
10.14 1994 $2.50 Common Stock Purchase Option dated June 30, 1994, issued to Combine
International, Inc., filed as Exhibit 10.15 to the Company's Registrant
Statement on Form S-4 filed with the Commission on December 28, 1994, and
incorporated herein by this reference.
10.15 Description of agreement with MediaOne, Inc. for consulting
services, filed as Exhibit 10.16 to the Company's Registrant
Statement on Form S-4 filed with the Commission on December
28, 1994, and incorporated herein by this reference.
10.16 Stock Purchase Agreement dated December 6, 1994, by and
between the Company and Television Media Resources, L.C.,
filed as Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
10.17 Promissory Note dated December 6, 1994, in the original
principal amount of $1,250,000, the maker of which is
Registrant and the original payee of which is Television
Media Resources, L.C., filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on
December 20, 1994, and incorporated herein by this reference.
10.18 Security Agreement and Pledge Agreement dated December 6,
1994, by and between Registrant and Television Media
Resources, L.C., filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K filed with the Commission on
December 20, 1994, and incorporated herein by this reference.
10.19 Letter Agreement dated December 6, 1994, by and between
Registrant and Charles E. Walker, filed as Exhibit 10.3 to the Company's
Current Report on Form 8-K filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
10.20 Majority Partnership Interest and Majority Stock Purchase
Option by and among Charles E. Walker, Urban Broadcasting
Systems and Broadcast, Cable and Satellite Technologies,
Inc., filed as Exhibit 10.4 to the Company's Current Report
on Form 8-K filed with the Commission on December 20, 1994,
and incorporated herein by this reference.
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
10.21 Form of Majority Partnership Interest and Majority Stock
Purchase Agreement by and among Charles E. Walker, Urban
Broadcasting Systems and Broadcast, Cable and Satellite
Technologies, Inc., filed as Exhibit 10.5 to the Company's
Current Report on Form 8-K filed with the Commission on
December 20, 1994, and incorporated herein by this reference.
10.22 Minority Partnership Interest and Minority Stock Purchase
Agreement dated May 15, 1993, by and among Charles E. Walker,
Urban Broadcasting Systems and Broadcast, Cable and Satellite
Technologies, Inc., filed as Exhibit 10.6 to the Company's
Current Report on Form 8-K filed with the Commission on
December 20, 1994, and incorporated herein by this reference.
10.23 Modification, Ratification and Consent by and among Charles
E. Walker, Urban Broadcasting Systems, Urban Broadcasting
Systems, Inc., Television Media Resources, L.C., and
Broadcast, Cable and Satellite Technologies, Inc., filed as
Exhibit 10.7 to the Company's Current Report on Form 8-K
filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
10.24 Restated Majority Partnership Interest and Majority Stock
Purchase Option by and among Charles E. Walker, Urban
Broadcasting Systems and Broadcast, Cable and Satellite
Technologies, Inc. dated as of May 15, 1993, filed as Exhibit
10.8 to the Company's Current Report on Form 8-K filed with
the Commission on December 20, 1994, and incorporated herein
by this reference.
10.25 Restated Construction Agreement dated as of May 15, 1993, by
and among Charles E. Walker, Urban Broadcasting Systems,
Broadcast, Cable and Satellite Technologies, Inc., and
Spectrum Communications and Engineering, Inc., filed as
Exhibit 10.9 to the Company's Current Report on Form 8-K
filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
10.26 Engineering Services Agreement dated as of December 14, 1993
by and between Broadcast, Cable and Satellite Technologies,
Inc., and Spectrum Communications and Engineering, Inc.,
filed as Exhibit 10.10 to the Company's Current Report on
Form 8-K filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C>
10.27 Form of Employment Agreement by and between Urban
Broadcasting Systems,Inc. and Charles E. Walker, filed as
Exhibit 10.11 to the Company's Current Report on Form 8-K
filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
10.28 Form of Time Brokerage Agreement dated December 14, 1993, by
and between Urban Broadcasting Systems and Broadcast, Cable
and Satellite Technologies, Inc., filed as Exhibit 10.12 to
the Company's Current Report on Form 8-K filed with the
Commission on December 20, 1994, and incorporated herein by
this reference.
10.29 Form of Escrow Agreement by and between Registrant, Charles
E. Walker and U.S. Trust Company of Texas, N.A., filed as
Exhibit 10.13 to the Company's Current Report on Form 8-K
filed with the Commission on December 20, 1994, and
incorporated herein by this reference.
10.30 Form of Promissory Note in the principal amount of $750,000.00, the maker of
which is Broadcast, Cable and Satellite Technologies, Inc., payable to
Charles E. Walker, filed as Exhibit 10.14 to the Company's Current Report on
Form 8-K filed with the Commission on December 20, 1994, and incorporated
herein by this reference.
10.31 Form of Security Agreement by and between Charles E. Walker and Broadcast,
Cable and Satellite Technologies, Inc., filed as Exhibit 10.15 to the
Company's Current Report on Form 8-K filed with the Commission on December 20,
1994, and incorporated herein by this reference.
10.32 Lease Agreement dated December 28, 1993, by and between H & C
Communications, Inc. and Broadcast, Cable and Satellite
Technologies, Inc., filed as Exhibit 10.16 to the Company's
Current Report on Form 8-K filed with the Commission on
December 20, 1994, and incorporated herein by this reference.
10.33 Agreement dated as of December 17, 1993, by and between Blue
Ridge Tower Corporation and Broadcast, Cable and Satellite
Technologies, Inc., filed as Exhibit 10.17 to the Company's
Current Report on Form 8-K filed with the Commission on
December 20, 1994, and incorporated herein by this reference.
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
10.34 Amendment to Agreement dated December 17, 1993, by and
between Blue Ridge Tower Corporation and Broadcast, Cable and
Satellite Technologies, Inc., filed as Exhibit 10.18 to the
Company's Current Report on Form 8-K filed with the
Commission on December 20, 1994, and incorporated herein by
this reference.
10.35 Letter to Shop at Home, Inc., from the directors of MFP,
Inc., dated November 11, 1994, filed as Exhibit 10.36 to the
Company's Registration Statement on Form S-4 filed with the
Commission on December 28, 1994, and incorporated herein by
this reference.
10.36 Programming Agreement between Shop at Home, Inc., and MFP,
Inc., dated November 11, 1994, filed as Exhibit 10.37 to the
Company's Registration Statement on Form S-4 filed with the
Commission on December 28, 1994, and incorporated herein by
this reference.
10.37 Variable Rate Convertible Secured Note Due 2000 of the Company dated August
16, 1995
10.38 Security Agreement dated August 16, 1995, by and between the Company, MFP,
Inc., and Global Network Television, Inc.
10.39 Restated Agreement dated January 26, 1996, and the First
Amendment thereto dated March 7, 1996, by and between Richard
Howard, Inc., and the Company
10.40 Majority Stock Purchase Agreement dated June 3, 1996, by and between Charles
E. Walker, Broadcast, Cable and Satellite Technologies, Inc., and Urban
Broadcasting Systems, Inc.
10.41 Promissory Note dated September 5, 1996, made by the Company and Broadcast,
Cable and Satellite Technologies, Inc., payable to Charles E. Walker.
10.42 Security Agreement dated September 5, 1996, by and between Broadcast, Cable
and Satellite Technologies, Inc., and Charles E. Walker.
10.43** Employment Agreement between Kent E. Lillie and Shop at Home, Inc. dated July
1, 1997.
_____
11 Schedule of Computation of Net Income Per Share
_____
21.1** Subsidiaries of the Company
_____
27** Financial Data Schedule
_____
**Filed herewith
</TABLE>
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SHOP AT HOME, INC.
<TABLE>
<S> <C> <C>
By: /s/ Kent E. Lillie Date: 9/29/97
------------------------------------- -------------
Kent E. Lillie
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Joseph Nawy Date: 9/29/97
------------------------------------ ------------
Joseph Nawy
(Vice President -Finance)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities on the dates indicated.
<TABLE>
<S> <C> <C>
Date: 9/29/97 /s/ J. D. Clinton
--------------- ------------------------------------
J. D. Clinton, Director
Date: 9/29/97 /s/ W. Paul Cowell
--------------- ------------------------------------
W. Paul Cowell, Director
Date: 9/29/97 /s/ Kent E. Lillie
--------------- ------------------------------------
Kent E. Lillie, Director
Date: 9/29/97 /s/ Joseph I. Overholt
--------------- ------------------------------------
Joseph I. Overholt, Director
Date: 9/29/97 /s/ A.E. Jolley
--------------- ------------------------------------
A.E. Jolley, Director
Secretary / Treasurer
Date: 9/29/97 /s/ Frank A. Woods
--------------- ------------------------------------
Frank A. Woods, Director
</TABLE>
60
<PAGE> 1
Exhibit 10.43
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of July,
1997, by and between SHOP AT HOME, INC. (the "Corporation"), a Tennessee
corporation, and KENT E. LILLIE ("Employee"), an individual residing in the
State of Georgia;
W I T N E S S E T H:
WHEREAS, the Corporation engages in the business of the retail sale of
merchandise by sales presentations broadcast directly to potential customers by
cable, broadcast and satellite television transmissions commonly known as the
"shop at home business," and in the business of the ownership and operation of
television stations;
WHEREAS, Employee is currently the President and Chief Executive
Officer of the Corporation, pursuant to the Employment Agreement dated September
20, 1993, as amended;
WHEREAS, the Corporation recognizes that the Employee is a valuable
employee of the Corporation who is directly responsible for the Corporation's
growth and financial success; and
WHEREAS, the parties hereto desire to enter into a newly negotiated
agreement for the Corporation's employment of Employee on the terms and
conditions hereinafter stated, with the intention to replace all previous
employment agreements in their entirety.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Employment and Term. The Corporation hereby employs Employee as its
President and Chief Executive Officer to perform such services and duties as the
Board of Directors of the Corporation may from time to time designate during the
term hereof, and Employee accepts such employment, all subject to the terms and
conditions of this Agreement. Employee's employment shall commence on the date
hereof and shall be for a term of five (5) years (the "Term"). Employee's
employment under this Agreement shall be extended automatically for successive
additional two (2) year terms after the initial term unless either party gives
written notice to the contrary to the other at least ninety (90) days prior to
commencement of any such renewal term.
2. Termination. The Corporation may terminate Employee's employment
under this Agreement at any time during the Term (a) for Cause (as hereinafter
defined) or (b) if Employee becomes Completely Disabled (as hereinafter
defined). This Agreement shall terminate automatically upon the death of the
Employee. Upon proper termination of the Employee, except as provided in
subsections 4(c)-(d), Employee shall not be entitled to receive any further
compensation or benefits from the Corporation, and except in the case of the
death of the Employee, the Corporation shall continue to pay to the Employee's
estate or personal representative his Base Salary for a period of six (6)
months.
3. Duties. Employee, during the term of this Agreement, will devote his
full-time attention and energies to the diligent performance of his duties as an
employee of the
<PAGE> 2
Corporation. During the term of this Agreement, Employee will not accept
employment with any other Person, or engage in any venture for profit which the
Corporation may consider to be in conflict with its best interest or to be in
competition with its business or which may interfere with Employee's performance
of his duties hereunder.
4. Compensation.[1] The Corporation will pay to Employee as
compensation for the services to be performed by him hereunder an annual salary
of $190,000.00 (the "Base Salary"), payable in equal installments, subject to
increase from time to time by the mutual agreement of the parties hereto.
[2] As additional compensation, the Corporation will pay to
Employee an annual bonus paid on a quarter basis within sixty (60) days of the
end of each fiscal quarter, and provided that his employment has not been
terminated by Employee or by Employer in accordance with Section 2 hereof prior
to the last day of the fiscal quarter. Each quarterly bonus shall be equal to
the greater of (i) ten percent (10%) of the increase of the Corporation's net
operating profit, after taxes, over the same quarter of the previous fiscal
year, or (ii) five percent (5%) of the Total Cash Flow (as defined below) for
such quarter. For these purposes, Total Cash Flow shall be the net operating
profit, after taxes, plus the depreciation accrued by the Corporation for its
broadcast station properties. The parties agree that the Corporation's quarterly
financial statements as filed on Form 10-Q with the Securities and Exchange
Commission shall be used as the basis upon which to determine the amount of any
additional compensation under this subsection. In the event that the Corporation
later elects or is required to revise its quarterly financial statements, the
parties agree to cooperate to make any necessary adjustments in the additional
compensation, with the intention being to finally balance such additional
compensation against the annual financial statements prepared by the
Corporation's accountants in accordance with generally accepted accounting
practices. Such annual financial statements shall be conclusive as to the total
amount, if any, of such quarterly bonuses due.
[3] If, within 12 months after the occurrence of a Change of
Control, the Corporation elects to terminate Employee's employment hereunder for
any reason, or if the Employee elects to terminate this Agreement by
resignation, the Corporation shall continue to pay Employee an amount equal to
the total amount of cash compensation paid to Employee during the 12 month
period immediately prior to the date of termination. This payment shall be paid
in a lump sum payment within thirty (30) days after the date of the Employee's
termination.
[4] In the event the Corporation terminates for Cause as
defined in Section 8.2(c), the Corporation shall continue to pay Employee's Base
Salary and car allowance in the amount and manner herein provided for a period
of 12 months from the date of termination.
5. Other Benefits. [1] In the event the Employee relocates his primary
residence from the Atlanta area in connection with his duties with the
Corporation, the Corporation shall pay or reimburse the Employee for his
reasonable moving and related expenses. In the event it is determined that the
payment or reimbursement of these expenses will result in taxable income to the
Employee, the Corporation shall pay an additional amount to Employee necessary
to reimburse him for the federal taxes incurred on such income.
[2] The duties to be performed by Employee under this
Agreement will require the regular use of an automobile, and the parties agree
that Employer shall, in lieu of furnishing
2
<PAGE> 3
Employee with a company car or reimbursing Employee for expenses incurred for
use of his personal automobile, pay Employee a monthly automobile allowance of
$1,000.00. Neither the payments to Employee nor any other terms of this
Agreement are intended or shall make Employee the owner, bailee, or lessee of
any automobile utilized by Employee.
[3] The Corporation will reimburse Employee for all expenses
incurred (other than for automobile use) in the course and scope of the
Corporation's business, upon the presentation by Employee, from time to time, of
an account of such expenditures, setting forth the purposes for which incurred,
and the amounts thereof, together with such receipts showing payments as
Employee has reasonably been able to retain.
[4] The Corporation shall provide Employee with health, life
and disability insurance pursuant to its group insurance plan as now or
hereafter in effect. In addition, Employee shall receive vacation and holiday
benefits in accordance with the Corporation's policies as now or hereafter in
effect.
[5] The Corporation will pay the reasonable cost of a country
club membership and the recurring periodic fees for the Employee.
6. Stock Options. The Corporation will grant to Employee a
non-qualified (as defined by the Internal Revenue Code) option to purchase up to
50,000 shares of the Corporation's Common Stock, $.0025 par value, at an
exercise price of $2.875 per share. These options will vest on June 30, 2001,
and shall expire on June 30, 2006, if not exercised on or prior to that date.
The form of such options shall be in accordance with the typical form of such
options previously granted by the Corporation to Employee. In the event Employee
resigns, or the Corporation terminates Employee for Cause, Complete Disability,
or death, all of Employee's rights with respect to such options not yet vested
shall terminate. In the event the Employee resigns within twelve (12) months of
the occurrence of a Change of Control, or the Corporation terminates Employee at
any time for any reason other than for Cause, Complete Disability, or death, all
of Employee's rights with respect to options not yet vested, shall vest as of
the date of termination.
7. Employee Loan. In the event that the Employee relocates his primary
residence, the Corporation agrees to extend a loan to the Employee in the amount
of $800,000. Of this amount, $300,000 shall be advanced upon Employee's
execution of a contract to purchase the residence, and the remaining $500,000
shall be advanced at the closing of such purchase. This loan shall be evidenced
by a promissory note with a final maturity date (the "Maturity Date") of the
earlier of (i) the date of the termination of the employment of the Employee, or
(ii) June 30, 2002. The note shall not bear interest. Employee shall repay the
loan by paying to the Corporation an amount equal to 10% of any amounts paid to
the Employee as additional compensation under Section 4(b) hereof, with the
entire amount of the remaining balance being due and payable on the Maturity
Date. The note shall be secured by a second mortgage deed of trust on the
residence, which deed of trust shall be subordinate to a first mortgage deed of
trust securing a loan to the Employee, from a lender and in an amount determined
by the Employee, the proceeds of which are also used to acquire the residence.
8. Definitions. For purposes of this Agreement the following terms
shall have the meanings specified below:
3
<PAGE> 4
A. "Accounts" - All Persons to whom any employee or agent of
the Corporation (including Employee) has heretofore offered or sold or hereafter
offers or sells any of the Corporation's products or services, or with whom any
such employee or agent has developed a relationship relating to the Corporation
Business at any time during the two-year period preceding termination or
expiration of Employee's employment. For purposes of this Agreement, an Account
shall be deemed to be located at the address of the Account with which the
Corporation regularly deals.
B. "Cause" shall mean any one of the following:
[1] The Employee commits an act of dishonesty, embezzlement
or fraud against the Corporation.
[2] The Employee competes, in a manner prohibited by this
Agreement, with the Corporation.
[3] The Employee fails to use his best efforts on behalf of
the Corporation, or conducts himself in a manner substantially detrimental to
the Corporation, including without limitation, if the Employee breaches any of
his obligations under this Agreement and fails or refuses to comply with the
provisions of this Agreement within five (5) days after receipt of written
notice from the Corporation by Employee detailing such failure or refusal and
the steps necessary to remedy that failure.
[4] Employee is convicted of a misdemeanor involving
dishonesty, breach of trust or moral turpitude, or is convicted of any felony.
[5] Employee engages in the illegal use of any drug.
[6] Any state or federal regulatory agency or court of
competent jurisdiction issues an order requiring the Employee's removal from any
duties or responsibilities for the Corporation.
C. A "Change of Control" shall be an event (i) that results in
any person, including its affiliates, owning or otherwise having voting control
with respect to directors of the Corporation, of more of the issued and
outstanding stock of the Corporation or any successor entity than SAH Holdings,
L.P. and its affiliates (Global Network Television, Inc. or J.D. Clinton) or
(ii) J.D. Clinton or his designee is not elected to, or is removed from, the
Board of Directors of the Corporation (other than by the mutual decision of J.D.
Clinton and Employee).
D. "Corporation Business" - shall mean the business of retail
sales of merchandise by sales presentations broadcast directly to potential
customers over broadcast stations, by cable and by satellite television
transmissions commonly known as the "shop at home business," and shall also
include the ownership or operation of one or more television broadcast stations.
E. The "Corporation's Territory" shall be deemed to be North
America.
4
<PAGE> 5
F. "Complete Disability" - Employee's inability, due to
illness, accident or any other physical or mental incapacity, to perform the
duties provided for herein for an aggregate of 90 days within any period of 240
consecutive days.
G. "Confidential Information" - Names, addresses, telephone
numbers, contact persons and other identifying information relating to Accounts
and information with respect to the needs and requirements of Accounts for the
Corporation's products and services; rate and price information on products and
services provided by the Corporation to its Accounts; all business records and
personnel data relating to the Corporation's employees, including compensation
arrangements of such employees; any trade secrets or other confidential
information licensed to, obtained, developed or purchased or otherwise possessed
by the Corporation or licensed by the Corporation to others; any other trade
secrets or confidential information used or obtained by Employee in the course
of his employment hereunder from any officer, employee, agent or representative
of the Corporation or any division, subsidiary or affiliate of the Corporation
or otherwise, information contained in any confidential documents prepared by or
for the Corporation and its employees or agents at the Corporation's expense, on
Corporation time or otherwise in furtherance of the Corporation Business, and
other confidential information used or obtained by Employee in the course of his
employment with the Corporation; financial information with respect to the
Corporation Business; and information with respect to the Corporation's
suppliers, and the source and availability of the supplies, equipment and
materials used in the Corporation Business; provided, however, that Confidential
Information shall not include: (i) any information that shall become generally
known to the industry through no fault of Employee; (ii) any information that
shall be disclosed to Employee by a third party (other than an officer,
employee, agent or representative of the Corporation or any division, subsidiary
or affiliate of the Corporation) having legitimate and unrestricted possession
thereof and the unrestricted right to make such disclosure; or (iii) any
information that Employee can demonstrate was within his legitimate and
unrestricted possession prior to the time of his employment by the Corporation.
All Confidential Information shall be contractually subject to protection under
this Agreement whether such information would otherwise be regarded or legally
considered "confidential" and without regard to whether such information
constitutes a trade secret under applicable law or is separately protectable at
law or in equity as a trade secret.
H. "Person" - Any individual, corporation, bank, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization, governmental authority or other entity.
9. Covenants Against Unfair Post-Termination Competition.
A. Covenant Against Disclosure or Use of Confidential
Information. In consideration of his employment hereunder, Employee agrees that,
for a period of two (2) years immediately after the termination or expiration of
his employment hereunder, he will not:
[a] disclose to any Person,
[b] use in soliciting the patronage of any Person for
the purpose of providing products or services of
the kind provided in the Corporation Business, or
5
<PAGE> 6
[c] otherwise use for his own purposes,
any Confidential Information obtained by Employee while employed by the
Corporation; provided, however, that Employee may make disclosures required by a
valid order or subpoena issued by a court or administrative agency of competent
jurisdiction. In such event, Employee will promptly notify the Corporation of
such order or subpoena to provide the Corporation an opportunity to protect its
interest. Employee shall not be bound by this Section if the payments and
benefits described in Section 4(c) or (d) to which Employee shall be entitled
are not current; the Employee has notified the Corporation of that default, and
the Corporation has not cured that default within thirty (30) days from the date
of notice.
B. Covenant Against Post-Termination Competition. In
consideration of Employee's employment by the Corporation, Employee agrees that,
for a period of two (2) years immediately after the termination or expiration of
his employment hereunder, he will not, directly or indirectly, individually or
on behalf of any Person:
[a] solicit any Account for the purpose of selling
or providing to the Account products or services
of the same kind as provided by the Corporation
during Employee's employment by the Corporation;
or
[b] provide services of the type provided by Employee
to the Corporation to any Person which is then
engaged in the Corporation Business; or
(iii) enter into the employ of or render any service
to or act in concert with any person,
partnership, corporation or other entity engaged
in the Corporation Business within the
Corporation's Territory; or
(iv) become interested in the Corporation Business, as
a proprietor, partner, shareholder, director,
officer, principal, agent, employee, consultant
or in any other relationship or capacity;
provided, that Employee may own up to 5% of the
outstanding shares of any company which is a
reporting company with the U.S. Securities
and Exchange Commission.
This Section shall survive the expiration or termination of this
Agreement for any reason.
Notwithstanding any of the preceding provisions, the agreement of the
Employee not to compete with the Corporation after his termination shall be void
and unenforceable after the occurrence of a Change of Control.
10. Inventions, Discoveries and Improvements.
A. Disclosure to Corporation. Employee will promptly disclose
in writing to the Corporation any and all inventions, discoveries and
improvements, directly or indirectly related to the Corporation Business,
whether conceived or made solely by Employee or jointly
6
<PAGE> 7
with others during the period of Employee's employment hereunder. All of
Employee's right, title and interest n and to all such inventions, discoveries
and improvements developed or conceived by Employee during the period of his
employment shall be the sole property of the Corporation.
B. Documents of Assignment. At the Corporation's request and
expense, both during and subsequent to Employee's employment hereunder, Employee
will promptly execute a specific assignment of title to the Corporation of each
invention, discovery or improvement belonging to the Corporation and will
perform all other acts reasonably necessary to enable the Corporation to secure
a patent therefor in the United States and in foreign countries, and to
maintain, defend and assert such patents. This Section shall survive the
expiration or termination of this Agreement.
C. Prior Inventions. Any inventions, discoveries or
improvements, patented or unpatented, that Employee can demonstrate were
conceived or made by him prior to the date hereof shall be excluded from the
provisions of this Section.
11. Return of Client Lists, Other Documents and Equipment. Upon the
termination or expiration of his employment hereunder, Employee shall deliver
promptly to the Corporation all Corporation files, customer lists, memoranda,
research, drawings, blueprints, Corporation forms and other documents supplied
to or created by him in connection with his employment hereunder (including all
copies of the foregoing) in his possession or control and all of the Corporation
equipment and other materials in his possession or control. Employee
acknowledges that all items described in this Section are and will remain at all
times the sole and exclusive property of the Corporation.
12. Survival of Restrictions. Notwithstanding the breach of any of the
provisions of this Agreement by either party hereto, all of the provisions of
Sections 9, 10 and 11 of this Agreement shall survive the termination or
expiration of Employee's employment with the Corporation and shall continue in
full force and effect in the same manner and to the same extent as if they were
set forth in a separate agreement between the Corporation and Employee, and all
of such provisions shall be binding on the heirs, legatees and legal
representative(s) of Employee.
13. Hold Harmless. Employee and the Corporation covenant and agree that
they will indemnify and hold harmless the other from (i) any and all losses,
damages, liabilities, expenses of claims resulting from or arising out of any
nonfulfillment by the defaulting party of any material provision of this
Agreement, and (ii) any and all losses or damages resulting from the defaulting
party's malfeasance or gross negligence.
14. Contract Nonassignable. The parties acknowledge that this Agreement
has been entered into due to, among other things, the special skills of
Employee, and agree that this Agreement may not be assigned or transferred by
Employee, in whole or in part, without the prior written consent of the
Corporation. This Agreement shall be binding and shall inure to the benefit of
the Corporation and its successors and assigns.
15. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed, first class, certified mail, postage
prepaid:
7
<PAGE> 8
To Corporation:
Shop At Home, Inc.
5210 Schubert Road
Knoxville, Tennessee 37912
To Employee:
Mr. Kent Lillie
1133 Tennyson Place
Atlanta, Georgia 30319
16. Cumulative and Severable Nature of Rights and Agreements. Employee
acknowledges and agrees that the Corporation's various rights and remedies in
this Agreement are cumulative and nonexclusive of one another and that
Employee's several undertakings and agreements contained herein, including,
without limitation, those contained in Sections 9.1, 9.2, 10 and 11 of this
Agreement, are severable covenants independent of one another and of any other
provision or covenant of this Agreement. Employee agrees that the existence of
any claim by him against the Corporation, whether predicated on this Agreement
or otherwise, shall not constitute a defense to enforcement by the Corporation
of any or all of such provisions or covenants. If any provision or covenant, or
any part thereof, of this Agreement should be held by any court to be invalid,
illegal or unenforceable, either in whole or in part, such invalidity,
illegality or unenforceability of the remaining provisions or covenants, or any
part thereof, of this Agreement, all of which shall remain in full force and
effect.
17. Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the future performance of any such
condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
18. Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto.
19. Execution to Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.
20. Headings. The headings set out in this Agreement are for
convenience of reference and shall not be deemed a part of this Agreement and
shall not affect the meaning or construction of any of the provisions her
21. Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
8
<PAGE> 9
22. Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Tennessee without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Tennessee or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Tennessee.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
EMPLOYER:
SHOP AT HOME, INC.
By: /s/ J.D. Clinton
---------------------------
J.D. CLINTON,
Chairman
EMPLOYEE:
/s/ Kent E. Lillie
--------------------------
KENT E. LILLIE
9
<PAGE> 1
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
Years Ended June 30,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $1,556,046 $(1,405,472) $(1,281,989)
Interest expense saved from
conversion of debt 107,408 -
Preferred stock dividend (14,000) (14,000) (5,000)
------------ ------------- --------------
Adjusted net income (loss) $1,649,454 $(1,419,472) $(1,286,989)
------------ ------------- --------------
Common shares outstanding 10,651,472 10,284,085 9,436,870
Common equivalent shares
issuable upon exercise of
stock options and warrants (1) 2,681,100
Common equivalent shares
issuable upon conversion
of debt 475,026
Common equivalent shares
issuable upon conversion
of preferred stock 137,943
------------ ------------ ------------
Total weighted average shares 13,945,540 10,284,085 9,436,870
============ ============ ============
Primary and fully diluted net
earnings per common and
equivalent share $0.12 $(0.14) $(0.14)
============ ============ ============
</TABLE>
Notes: (1) Amount calculated using the modified treasury stock method and fair
market values.
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
Subsidiaries of the Company:
Name State of Incorporation
- ---- ----------------------
<S> <C>
MFP, Inc. Tennessee
SAH Acquisition Corporation Tennessee
Broadcast, Cable and Satellite Technologies, Inc. Texas
SAH Acquisition Corporation II Tennessee
UBS Texas
Collector's Edge of Tennessee, Inc. Tennessee
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,077,641
<SECURITIES> 0
<RECEIVABLES> 3,292,925
<ALLOWANCES> 0
<INVENTORY> 3,262,080
<CURRENT-ASSETS> 13,436,339
<PP&E> 6,328,726
<DEPRECIATION> 1,894,959
<TOTAL-ASSETS> 34,410,310
<CURRENT-LIABILITIES> 18,077,778
<BONDS> 7,522,131
1,393,430
0
<COMMON> 26,786
<OTHER-SE> 3,776,775
<TOTAL-LIABILITY-AND-EQUITY> 34,410,310
<SALES> 67,817,460
<TOTAL-REVENUES> 69,064,172
<CGS> 40,626,134
<TOTAL-COSTS> 40,626,134
<OTHER-EXPENSES> 26,881,992
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,079,529
<INCOME-PRETAX> 1,476,046
<INCOME-TAX> (80,000)
<INCOME-CONTINUING> 1,556,046
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,556,046
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
