<PAGE> 1
As filed with the Securities and Exchange Commission on March 5, 1998
Registration No. 333-44251
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
SHOP AT HOME, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Tennessee 5861 62-1282758
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Identification No.)
</TABLE>
5210 Schubert Road
P.O. Box 12600
Knoxville, Tennessee 37912
(423) 688-0300
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
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<S> <C> <C>
Agent for Service: Kent E. Lillie, President Copy to: C. Michael Norton, Esq.
Shop at Home, Inc. Wyatt, Tarrant & Combs
3100 West End Ave. Nashville City Center
Suite 880 511 Union Street, Suite 1500
Nashville, Tennessee 37203 Nashville, Tennessee 37219
(615) 263-8000 (615) 244-0020
Copy to: Andy Lynch, Esq.
Jenkins & Gilchrist
1919 Pennsylvania Ave. N.W.
Suite 600
Washington, D.C. 20006
(202)326-1521
</TABLE>
(Name and address, including ZIP Code, and telephone number, including area
code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF ADDITIONAL REGISTRATION FEE
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Title of each Additional Proposed Proposed Amount of
class of amount maximum maximum additional
securities to to be offering price aggregate registration
be registered registered per unit (1) offering price (1) fee
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<S> <C> <C> <C> <C>
Common Stock, $.0025 par value(2)...................... 2,875,000 $4.00 $11,500,000 $3,484.85
___% Secured Notes Due 2005......................... $15,000,000 100% $15,000,000 $4,545.45
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457 under the Securities Act of 1933.
(2) Includes 1,150,000 shares of Common Stock which may be purchased by
the Underwriters pursuant to an over-allotment option.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering of ___% Secured Notes
due 2005 of Shop at Home, Inc. (the "Note Prospectus") and one to be used in a
concurrent underwritten public offering of Common Stock of Shop at Home, Inc.
(the "Common Stock Prospectus"). The Note Prospectus and the Common Stock
Prospectus are identical except for the front, back and inside front cover pages
and the sections entitled "Summary--The Offering," "Summary--Concurrent
Offering," "Risk Factors" and "Underwriting." The form of the Note Prospectus is
included herein and is followed by the alternate pages to be used in the Common
Stock Prospectus. The alternate pages for the Common Stock Prospectus included
herein are labeled "Alternate Page for Common Stock Prospectus." Final forms of
each prospectus will be filed with the Securities and Exchange Commission under
Rule 424(b) under the Securities Act of 1933, as amended.
PRELIMINARY PROSPECTUS LEGEND
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 2, 1998
PROSPECTUS
[SHOP AT HOME LOGO]
$75,000,000
SHOP AT HOME, INC.
% SENIOR SECURED NOTES DUE 2005
---------------------
Shop at Home, Inc. (the "Company"), is offering hereby (the "Notes
Offering") $75,000,000 in aggregate principal amount of its % Senior Secured
Notes Due 2005 (the "Notes"). The Notes will mature on , 2005 unless
previously redeemed. Interest on the Notes will be payable semiannually on
and of each year, commencing , 1998. The Notes are
not redeemable at any time prior to , 2002. On or after , 2002,
the Notes will be redeemable at the option of the Company, in whole or in part,
at the redemption prices set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. Upon the occurrence of a Change of Control (as
defined herein), Holders (as defined herein) of the Notes will have the right to
require the Company to repurchase their Notes, in whole or in part, at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase.
The Notes will be secured by a first priority lien on the capital stock and
certain assets of SAH Acquisition Corporation II, a wholly-owned subsidiary of
the Company ("SAH Acquisition II") and a junior lien on the capital stock of the
Other Broadcast Subsidiaries (as defined herein) of the Company. In addition,
the obligations of the Company under the Notes will be jointly and severally
guaranteed on a senior unsecured basis by each of the Company's Restricted
Subsidiaries (as defined herein), including all of its subsidiaries as of the
date hereof. Pursuant to the Indenture, the Company has the right to incur
additional indebtedness, including without limitation, a Senior Credit Facility
in a principal amount of up to $20,000,000, which may be secured by a first
priority lien on certain of the Company's assets, including the Company's
accounts receivable and inventory and a first priority lien on the capital stock
and other assets of the Other Broadcast Subsidiaries. There is no established
trading market for the Notes, and the Company does not intend to apply for a
listing of the Notes on any national securities exchange.
Concurrent with the Notes Offering, the Company is offering 10,000,000
shares of voting Common Stock, par value $0.0025 per share (the "Common Stock")
of the Company by a separate prospectus (the "Common Stock Offering" and
together with the Notes Offering, the "Offerings"). The Notes Offering is
contingent upon the completion of the Common Stock Offering, and the Common
Stock Offering is contingent upon the completion of the Notes Offering.
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND ARE SPECULATIVE
SECURITIES. SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREOF FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF
THE NOTES OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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Price to Underwriting Proceeds to
Public(1) Discount(2) Company(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................. % % %
Total..................................... $ $ $
========================================================================================================================
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(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended, See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $1,000,000.
---------------------
The Notes are offered by the several Underwriters named herein, subject to
receipt and acceptance by the Underwriters, and subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offers and to
reject any order in whole or in part. It is expected that delivery of the Notes
will be made on or about , 1998 in book-entry form through the
facilities of The Depository Trust Company, against payment therefor.
---------------------
NationsBanc Montgomery Securities LLC Friedman, Billings, Ramsey & Co., Inc.
The date of this Prospectus is , 1998
<PAGE> 3
[Graphic showing a television set with two handles configured to make the
television appear to be a shopping bag with the words "Shop At Home" appearing
above the graphic and the words "Watch. Call. Buy." below it]
[Graphic showing a map of United States with five stars marked at Boston,
Cleveland, Raleigh, Houston, and San Francisco, and approximately 150 black dots
marked at various locations around the country, and containing a logo reading:
"[dot] Cable Affiliates"; [star] "Owned & Operated Stations."]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
SUITABILITY REQUIREMENTS
Notice to Ohio Residents: Residents of the State of Ohio may only purchase
Notes from the Company pursuant to this Offering if such residents meet certain
suitability requirements, as follows: (i) the purchaser must have a minimum
annual gross income of $45,000 and a minimum net worth (exclusive of home, home
furnishings and automobiles) of $45,000, or a minimum net worth of $150,000;
(ii) the purchaser can reasonably benefit from the Notes based upon the
prospective purchaser's overall investment objectives and portfolio structure;
(iii) the purchaser is able to bear the economic risk of the investment based on
the purchaser's overall financial situation; and (iv) the apparent understanding
by the purchaser of the fundamental risks of the investment, the risk that the
purchaser may lose the entire investment, the lack of liquidity of the Notes,
and the background and qualifications of the persons responsible for managing
the Company. Any prospective purchaser who is a resident of Ohio will be
required to complete a subscription agreement which will permit the Company to
fulfill its responsibility of making a reasonable effort to determine that the
purchase of the Notes is a suitable and appropriate investment for the
prospective purchaser.
Notice to New Hampshire Residents: Residents of the State of New Hampshire
may only purchase Notes from the Company pursuant to the Notes Offering if such
residents meet certain suitability requirements, as follows: (i) the purchaser
must have a net worth, exclusive of home, home furnishings, and automobiles of
$250,000, or (ii) the purchaser must have a net worth, exclusive of home, home
furnishings, and automobiles of $125,000, and $50,000 of taxable income. Any
prospective purchaser who is a resident of New Hampshire will be required to
establish to the satisfaction of the Company that the purchaser meets one of
these requirements prior to the purchase of any of the Notes by such person.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the Notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this Prospectus. See "Description of Notes -- Certain
Definitions" for the meanings of certain capitalized terms.
THE COMPANY
The Company sells and distributes consumer products through live, customer
interactive retail sales programming that is transmitted via satellite to cable
television systems, television broadcast stations and satellite dish receivers.
Founded in 1986, the Company is one of the fastest growing competitors in the
over $3 billion home shopping industry. Upon the completion of its pending
acquisition of the three UHF television stations described below, the Company
will own and operate five UHF television stations. These stations broadcast in
the San Francisco, Boston, Houston, Cleveland and Raleigh markets, four of which
are among the top 13 television markets in the United States.
The Company's programming is provided on its owned and operated television
stations, and to a "network" of over 80 independently owned television stations
and cable systems throughout the country, located in over 100 television
markets, for all or a portion of each broadcast day. As of December 31, 1997,
the Company's programming was viewable during all or part of the day by
approximately 48.9 million cable households throughout North America, of which
approximately 4.4 million cable households could have viewed the programming on
essentially a full-time basis (20 or more hours per day) and approximately 44.5
million cable households received it on a part-time basis. For households that
received the Company's programming on a part-time basis, the average duration of
viewable programming per day was 4.9 hours.
The Company sells a variety of consumer products, including sports
collectibles and sports related products, rare coins, collectible cutlery,
electronics, jewelry, and health and beauty, personal care, household and
lifestyle products, and other select merchandise and collectibles such as dolls
and figurines. The Company believes that it occupies a unique market niche in
the home shopping industry because its product mix and marketing strategy target
men and feature higher price point products with an emphasis on limited
availability merchandise such as sports memorabilia, rare coins and collectible
knives and cutlery. An independent study commissioned by the Company in June
1997 determined that approximately 55% of the purchasers of the Company's
products are male and that approximately 57% of the Company's customers have
incomes above $45,000 (as compared to 44% as reported in a national database).
The Company's average price per unit sold in fiscal year 1997 was approximately
$150, which the Company believes is substantially above the industry average.
Since Chief Executive Officer Kent Lillie joined the Company in 1993, total
revenues (including merchandise revenues, infomercial revenues and other
revenues) have increased from $20.0 million in fiscal year 1993 to $69.1 million
in fiscal year 1997, a compounded annual growth rate of 36.4%. During the same
period, earnings before interest, taxes, depreciation and amortization
("EBITDA") grew from $(1.8 million) to $3.6 million. Total revenues and EBITDA
for the quarter ended December 31, 1997 were $23.1 million and $1.9 million,
respectively. The Company had a merchandise return percentage of approximately
20.6% for the six months ended December 31, 1997, which the Company believes
compares favorably with those of industry competitors. In addition, Mr. Lillie
has recently strengthened the Company's management team by appointing a Chief
Operating Officer and a Chief Financial Officer.
The Company plans to expand the distribution of its programming and will
seek to acquire additional television broadcast stations. To facilitate its
growth, the Company is moving its operations to a larger, state-of-the-art
facility in Nashville, Tennessee in September 1998. The new 74,000 square foot
facility will provide the Company with additional studio space, more advanced
studio and broadcasting equipment and substantially more call center capacity.
The Company believes that its new facility will further enhance growth by
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enabling the Company to reach new market segments through digital programming,
increased product diversity and by improved processing of customer calls and
product orders. The Company plans to use approximately $4 million of the
proceeds of the Offerings to install new equipment to increase the power and
quality of the broadcast signals at the acquired stations. The Company expects
the increase in the power and quality of the acquired stations to further
increase the number of cable households reached.
The Company is incorporated in Tennessee and its principal place of
business and executive offices are located at 5210 Schubert Road, Knoxville,
Tennessee 37912, and its telephone number in Knoxville is (423) 688-0300.
STRATEGY
The Company's business objective is to increase revenue and cash flow by
implementing the following strategy:
- INCREASE DISTRIBUTION THROUGH THE ACQUISITION OF TELEVISION BROADCAST
STATIONS AND AFFILIATE CARRIAGE AGREEMENTS. The Company plans to
continue to increase the number of television viewers of its
programming by acquiring broadcast television stations in major
markets. Once the Company completes its pending acquisition of the
three television stations, it intends to upgrade the broadcasting
equipment in the San Francisco and Raleigh stations in order to expand
each station's broadcast coverage. By owning and operating stations in
select markets, the Company can broadcast full time programming in
those markets and thereby increase brand awareness and reach more
market segments. In addition, owning stations in select markets
enables the Company to increase its viewership by exercising "must
carry" rights with cable system operators in those markets. See
"Business -- Distribution of Programming." The Company also plans to
increase its programming distribution through additional carriage
agreements with cable systems and broadcast television stations owned
by third parties.
- INCREASE REVENUE PER HOUSEHOLD REACHED. The Company intends to improve
its average revenue per household reached by broadening the types of
products it offers, obtaining more attractive hours of programming and
enhancing customer service. The Company's new facility in Nashville
will provide, among other things, additional studio and programming
capability. In addition, the new facility will substantially improve
picture quality through the utilization of high quality digital
equipment. The Company intends to leverage these additional operating
capabilities to reach additional market segments by offering more
diverse products and programming. The Company believes that it can
better utilize its daytime hours by selectively offering more
programming dedicated to women and women's products. For example, one
of the studios in the new facility will contain a working kitchen that
can be used to air cooking programs and sell kitchen products.
Moreover, the new facility will contain more than one studio, enabling
the Company to multicast different programming simultaneously into
different markets.
- CONTINUE TO OFFER HIGH QUALITY, DIFFERENTIATED PRODUCT MIX. The
Company plans to continue to implement a strategy of selling niche
products such as sports memorabilia, rare coins and other collectibles
that the Company believes are not readily available through other
television home shopping and retail competitors. The Company believes
that its emphasis on targeting male customers and selling higher price
point merchandise enhances the Company's ability to attract carriage
from cable systems and television broadcasters that value the
Company's unique market niche and the appealing demographics of its
customer base.
- UTILIZE EXPANDED CALL CENTER CAPACITY. The new facility in Nashville
will contain an expanded call center. This additional capacity will
enable the Company to process a greater volume of customer calls and
provide enhanced customer services. The Company believes that revenue
growth in recent years has been constrained by its limited capacity to
process customer calls and orders.
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- CONTINUE TO IMPROVE MARGINS. The Company plans to improve profit
margins by taking advantage of its purchasing power to negotiate
lower wholesale prices with its vendors, and spreading its fixed
costs over increased households served.
- CONTINUE TO MINIMIZE INVENTORY RISK AND COSTS. The Company will
continue to utilize drop shipping arrangements and a "just in time"
inventory policy. This strategy permits the Company to operate
without incurring significant working capital costs associated with
the warehousing, distributing, financing and managing of inventory.
- LEVERAGE CUSTOMER DATABASE. The Company has a database of the
purchasing habits of its approximately 1 million customers, nearly
412,000 of whom have ordered a product within the last 18 months.
This database is an invaluable tool for evaluating historical
purchasing preferences, enabling management to refine its
merchandising decisions and maximize viewer interest and sales.
- DEVELOP STRATEGIC REVENUE SOURCES. The Company believes that it has
several opportunities to establish complementary sources of
revenue, including: (i) expansion of its newly developed Internet
site as another avenue for product sales, (ii) establishment of
direct mail and package insert programs, (iii) increasing sales of
broadcast time on the Company's stations to producers of
infomercials, (iv) introduction of periodic paid commercial
advertising in the Company's programming, and (v) introduction of
an outbound telemarketing program to the Company's customers.
RECENT DEVELOPMENT
SAH Acquisition Corporation II, a Tennessee corporation and a wholly owned
subsidiary of the Company ("SAH Acquisition II"), entered into an Asset Purchase
Agreement dated as of September 23, 1997 (the "Asset Purchase Agreement") with
Global Broadcasting Systems, Inc., a Delaware corporation, and its affiliate,
under which SAH Acquisition II agreed to acquire certain broadcast television
assets (the "Acquisition"). Global Broadcasting Systems, Inc. and its affiliate
are currently subject to a proceeding (the "Bankruptcy Proceeding") under
Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy Court") (as debtors
in the Bankruptcy Proceeding, Global Broadcasting Systems, Inc. and its
affiliate are referred to as "Global").
Under the Asset Purchase Agreement, SAH Acquisition II has agreed to
acquire two broadcast television stations owned by Global, KCNS(TV) located in
San Francisco, California ("KCNS"), and WRAY(TV) located in the Raleigh-Durham,
North Carolina market ("WRAY"). Under the Asset Purchase Agreement, SAH
Acquisition II has agreed to assume the legal right and obligation of Global
under an executory purchase contract (the "Executory Contract") to acquire an
additional broadcast television station, WOAC(TV) in the Cleveland, Ohio market
("WOAC"). The Company has guaranteed the performance of SAH Acquisition II under
the Asset Purchase Agreement. An order of the Bankruptcy Court approved the
Asset Purchase Agreement on November 20, 1997.
The total purchase price payable by SAH Acquisition II to Global in
connection with the Acquisition is $52,350,000 (the "Global Purchase Price"), of
which the Company has paid a total of $4,863,750 into an escrow account held by
the trustee appointed to manage Global by the Bankruptcy Court (the "Bankruptcy
Trustee") and which will be applied to the Global Purchase Price at the closing.
The balance of $47,486,250 is payable by the Company to Global at the closing of
the Acquisition. In connection with the assignment of the Executory Contract,
SAH Acquisition II is obligated to purchase WOAC for a total purchase price of
$23,500,000. SAH Acquisition II is entitled to a credit for an escrow deposit
previously paid by Global to the sellers of WOAC in the amount of $2,350,000 and
will make a cash payment of $21,150,000 in connection with the closing of the
purchase of WOAC.
The net proceeds of the Acquisition paid to Global will constitute assets
of the bankruptcy estate of Global, subject to the resolution of the Bankruptcy
Proceeding. Friedman, Billings, Ramsey & Co., Inc. ("FBR"), one of the
Underwriters, has filed a proof of claim in the Bankruptcy Proceeding in the
approximate
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amount of $2.0 million. The claim relates to unpaid placement agent fees and
expenses in connection with a bridge loan facility provided to Global prior to
its bankruptcy. FBR has also filed a proof of claim for an acquisition fee to be
owed by the bankruptcy estate to FBR in the amount of 1.75% of the proceeds of
the sale under the Asset Purchase Agreement if the sale is completed. The
lenders who advanced the bridge loan are also creditors in the Bankruptcy
Proceeding and have filed proofs of claim in the aggregate amount of
approximately $35 million for unpaid principal plus accrued interest, fees and
penalties. In connection with the resolution of the Bankruptcy Proceeding, FBR
and the bridge lenders may be paid in whole or in part on their claims against
Global.
The obligations of the parties under the Asset Purchase Agreement and the
Executory Contract are subject to receipt of the approval of the Federal
Communications Commission ("FCC") of the Applications for Consent to Assignment
of Broadcast Station Licenses (collectively, the "Applications") filed with
respect to the broadcast licenses to be transferred to SAH Acquisition II. The
FCC published public notice of its approval of the Applications for KCNS and
WRAY on December 15, 1997, and such approval became a final order on January 25,
1998. The FCC published public notice of its approval of the Application for
WOAC on January 29, 1998, and such approval is expected to become a final order
on March 10, 1998 assuming no party files a timely objection thereto.
The primary use of the proceeds of the Offerings will be to provide funds
necessary to close the Acquisition and the Executory Contract. These closings
will occur contemporaneously with the consummation of the Offerings. A complete
description of the use of proceeds of the Offerings is set forth under "Use of
Proceeds."
As a result of the Acquisition (and prior to planned upgrades to the
acquired stations and the purchase of WOAC), the Company estimates that
households that could have viewed the Company's programming on a full-time basis
(20 or more hours) will increase to approximately 5.2 million cable households
from approximately 4.4 million cable households, while cable households
receiving the Company's programming on a part-time basis will decrease by
approximately 1.1 million.
6
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THE OFFERING
SECURITIES OFFERED......... $75,000,000 aggregate principal amount of %
Senior Secured Notes due 2005.
Maturity Date.............. , 2005.
Interest Payment Dates..... and , commencing
, 1998.
Optional Redemption........ On or after , 2002, the Company may
redeem the Notes, in whole or in part, at the
redemption prices set forth herein, plus accrued
and unpaid interest, if any, to the date of
redemption.
Mandatory Redemption....... None.
Ranking.................... The Notes will be senior secured indebtedness of
the Company and the Subsidiary Guarantors, ranking
in pari passu with any other senior indebtedness of
the Company and the Subsidiary Guarantors and
senior to any subordinated indebtedness of such
entities. Pro forma for the Offering and the
application of the proceeds thereof, there would
have been approximately $0.6 million of
indebtedness of the Company and its Subsidiaries
outstanding (other than the Notes), all of which
would have been under capitalized leases. The
Indenture will permit the Company and certain
Subsidiary Guarantors to incur up to $20 million of
indebtedness under a Senior Credit Facility. See
"Description of the Notes."
Security................... The Notes will be secured by a lien on all of the
issued and outstanding capital stock of SAH
Acquisition II and the assets of SAH Acquisition
II, other than the FCC licenses held by it. The
Notes will also be secured by a junior lien on all
of the issued and outstanding capital stock of MFP,
Inc., the owner and operator of WMFP(TV) in Boston
and Urban Broadcasting Systems, Inc., the owner and
operator of KZJL(TV) in Houston (the "Other
Broadcast Subsidiaries"). The Senior Credit
Facility is expected to be secured by first
priority liens on the capital stock of the Other
Broadcast Subsidiaries, the assets of the Other
Broadcast Subsidiaries of the Company and/or the
accounts receivable, inventory and general
intangibles of the Company (excluding from general
intangibles any collaterial for the Notes). See
"Description of Notes -- Security."
Guarantees................. The Notes will be guaranteed on a senior unsecured
basis (the "Subsidiary Guarantees") by each of the
existing and future Restricted Subsidiaries of the
Company (each a "Subsidiary Guarantor" and,
collectively, the "Guarantors"). See "Description
of Notes -- Subsidiary Guarantees."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase.
Covenants.................. The Indenture restricts, among other things, the
Company's and its Restricted Subsidiaries' ability
to incur additional indebtedness, issue preferred
stock, incur liens, pay dividends, make certain
other restricted payments, apply net proceeds from
certain asset sales, enter into certain
transactions with affiliates, merge or consolidate
with any other person, issue or sell stock of
Restricted Subsidiaries or sell, assign, transfer,
lease, convey or otherwise dispose of substantially
all of the assets of the
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Company or encumber the assets of the Company or
its Restricted Subsidiaries. See "Description of
Notes -- Certain Covenants."
Absence of a Public Market
for the Notes............ The Notes are a new issue of securities with no
established market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the Notes. NationsBanc Montgomery
Securities LLC and Friedman, Billings, Ramsey &
Co., Inc. (the "Underwriters") have advised the
Company that they each currently intend to make a
market in the Notes. However, the Underwriters are
not obligated to do so, and any market making with
respect to the Notes may be discontinued at any
time without notice. The Company does not intend to
apply for listing of the Notes on a securities
exchange. See "Risk Factors -- Absence of a Public
Market for the Notes." Each of the Underwriters is
a registered broker/dealer and member of the
National Association of Securities Dealers, Inc.
Use of Proceeds............ The Company intends to use the net proceeds from
the Notes Offering, together with the net proceeds
from the Common Stock Offering, in the following
manner: (i) to pay the purchase price to Global
under the Asset Purchase Agreement and the purchase
price to close the Executory Contract for WOAC (See
"Business -- Recent Development"), (ii) to purchase
the real estate and building for the Company's new
main offices and studios in Nashville, Tennessee
(the "Facility"), (iii) to purchase equipment for
the Facility, (iv) to complete interior renovation
of the Facility, (v) to acquire equipment necessary
to upgrade and improve the broadcast television
stations acquired through the Acquisition, (vi) to
repay substantially all of the currently existing
indebtedness of the Company, (vii) as working
capital of the Company, which may be used to
acquire additional television stations that may be
available in the future, and (viii) to pay
transaction fees and expenses. The closings of the
Acquisition and the Executory Contract will occur
contemporaneously with the consummation of the
Offerings. See "Use of Proceeds."
CONCURRENT OFFERING OF COMMON STOCK
Concurrent with the Notes Offering, the Company is offering 10,000,000
shares of Common Stock (plus up to an additional 1,500,000 shares to cover
over-allotments, if any (the "Over-allotment Option")) by a separate prospectus
in the Common Stock Offering. The Notes Offering is contingent upon the
completion of the Common Stock Offering, and the Common Stock Offering is
contingent upon the completion of the Notes Offering. The Common Stock of the
Company is currently quoted on the Nasdaq SmallCap Market under the symbol
"SATH."
RISK FACTORS
Investment in the Notes involves a high degree of risk. Each prospective
investor should carefully consider all of the matters described herein under
"Risk Factors."
8
<PAGE> 10
SUMMARY FINANCIAL DATA
The summary financial information set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Net sales............................... $19,878 $21,717 $26,787 $40,016 $67,817 $29,796 $43,421
Cost of sales........................... 15,010 14,278 17,121 24,516 40,626 18,146 25,244
------- ------- ------- ------- ------- ------- -------
Gross profit............................ 4,868 7,439 9,666 15,500 27,191 11,650 18,177
Other operating income.................. -- -- 189 659 1,014 457 564
Operating expenses...................... 7,327 8,406 11,010 16,930 25,882 11,170 16,940
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........... (2,459) (967) (1,155) (771) 2,323 937 1,801
Other income (expense).................. 18 (85) (127) (738) (847) (321) 24
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes....... (2,441) (1,052) (1,282) (1,509) 1,476 616 1,825
Income tax expense (benefit)............ -- -- -- (104) (80) (10) 702
------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... $(2,441) $(1,052) $(1,282) $(1,405) $ 1,556 $ 626 $ 1,123
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares -- basic....................... 7,379 8,225 9,437 10,284 10,651 10,597 11,283
Weighted average equivalent shares --
dilutive.............................. 7,379 8,225 9,437 10,284 14,268 14,382 14,739
Basic earnings per share(1)............. $ (0.33) $ (0.13) $ (0.14) $ (0.14) $ 0.14 $ 0.06 $ 0.10
Diluted earnings per share(1)........... $ (0.33) $ (0.13) $ (0.14) $ (0.14) $ 0.12 $ 0.05 $ 0.08
Cash dividends per share of common
stock................................. 0.00 0.00 0.00 0.00 0.00 0.00 0.00
OTHER DATA:
EBITDA(2)............................... (1,837) (581) (548) 164 3,612 1,420 3,060
Cash flow from operations............... (201) (936) 1,943 815 6,245 2,348 (1,418)
Ratio of earnings to fixed charges(3)... -- -- -- -- 2.37x 2.58x 5.01x
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(4)
-----------------
JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
------------- ----------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $(4,641) $(5,127) $ 3,692
Total assets............................................ 34,410 38,973 135,793
Current liabilities..................................... 18,078 18,336 16,303
Long-term debt and capital leases, less current
portion............................................... 9,054 8,592 75,396
Redeemable preferred stock.............................. 1,393 1,393 1,393
Stockholders' equity.................................... 3,804 6,738 38,788
</TABLE>
- ---------------
(1) For details of the calculation of basic and dilutive earnings per share see
Note 12 to the Consolidated Financial Statements included elsewhere in this
Prospectus.
(2) EBITDA consists of earnings before interest, income taxes, and depreciation
and amortization expense. While EBITDA should not be construed as an
alternative to operating income or net income or as an indicator of
operating performance or liquidity, it is a measure that the Company
believes is used commonly to evaluate a company's ability to service debt.
EBITDA is not calculated under generally accepted accounting principles and,
therefore, is not necessarily comparable to similarly titled measures of
other companies.
(3) For purposes of calculating these ratios, earnings represent earnings before
income taxes plus (or in the case of a loss, minus) fixed charges. Fixed
charges consist of interest, amortization of debt issuance costs, and the
portion of rental and lease expense, if any, that management believes is
representative of the interest component of rental and lease expense.
Earnings were inadequate to cover fixed charges for Fiscal 1993, Fiscal
1994, Fiscal 1995 and Fiscal 1996 by $(2.5 million), $(1.1 million), $(1.5
million) and $(2.3 million), respectively.
(4) The pro forma balance sheet data has been calculated giving effect to the
Offerings and the application of the net proceeds therefrom as described in
"Use of Proceeds" as if each occurred on December 31, 1997. No financial
statements with respect to the operation of Global prior to the Acquisition
or pro forma financial information with respect thereto is presented herein
in that the Company will account for the Acquisition as the purchase of
assets rather than the acquisition of a business. This is due to the fact
that, with the exception of a de minimis period of time, none of the
acquired stations have been historically operated as a broadcast outlet for
home shopping programming of Global or the predecessor in title, and the
Company has concluded that there is no continuity of revenues from those
stations from which relevant historical information could be derived.
9
<PAGE> 11
- --------------------------------------------------------------------------------
CORPORATE STRUCTURE OF THE COMPANY
The following chart illustrates where significant Company assets
and rights are, or are expected to be, held, as well as any Subsidiary
Guarantees or security interests granted for the benefit of the Notes:
[Graphic showing corporate organization of Shop at Home, Inc., showing
Broadcast, Cable and Satellite Technologies, Inc., MFP, Inc., and SAH
Acquisition Corporation II as subsidiaries of Shop at Home, Inc.; Showing Urban
Broadcasting Systems, Inc. as a subsidiary of Broadcast, Cable and Satellite
Technologies, Inc., and Collector's Edge of Tennessee, Inc., as a subsidiary of
Urban Broadcasting System, Inc., containing the text set out below.]
SHOP AT HOME, INC.
Issuer of the Notes
- --------------------------------------------------------------------------------
BROADCAST, CABLE AND
SATELLITE TECHNOLOGIES, INC.
-- Guarantor of the Notes
URBAN BROADCASTING
SYSTEMS, INC.
-- Guarantor of the Notes
-- Junior Lien on
Capital Stock
-------------------------------------------------------------------------------
- KZJL-Houston
COLLECTOR'S EDGE
OF TENNESSEE, INC.
-- Guarantor of the Notes
MFP, INC.
-- Guarantor of the Notes
-- Junior Lien on
Capital Stock
-------------------------------------------------------------------------------
- WMFP-Boston
SAH ACQUISITION
CORPORATION II
-- Guarantor of the Notes
-- First Priority Lien on Assets other than FCC Licenses
-- First Priority Lien
on Capital Stock
-------------------------------------------------------------------------------
- KCNS-San Francisco(1)
- WRAY-Raleigh-Durham(1)
- WOAC-Cleveland(1)
(1) The acquisitions of KCNS, WRAY, and WOAC are subject to approval by the FCC
and typical closing conditions. See "Business -- Recent Development."
- --------------------------------------------------------------------------------
10
<PAGE> 12
RISK FACTORS
Prior to making an investment decision with regard to the Company,
prospective investors should carefully consider the following Risk Factors in
addition to the other information and financial data presented in the various
filings made by the Company with the Securities and Exchange Commission. Many of
the statements in this Prospectus are forward-looking in nature and,
accordingly, whether or not they prove to be accurate is subject to many risks
and uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Prospectus. Factors that
could cause or contribute to such difference include, but are not limited to,
those discussed below and those contained elsewhere in this Prospectus.
SIGNIFICANT LEVEL OF INDEBTEDNESS
Following the Offerings, the Company will have a significant level of
indebtedness. As of December 31, 1997, on a pro forma basis, after giving effect
to the Offerings and the application of the net proceeds therefrom as described
in "Use of Proceeds," the Company's consolidated indebtedness and capitalized
lease obligations would have been approximately $75.6 million, including the
Notes. Subject to the restrictions on indebtedness contained in the Indenture,
the Company may incur additional indebtedness, including under a Senior Credit
Facility, for capital expenditures or for other purposes.
The level of the Company's indebtedness following the Offerings could have
material consequences for the Company and the holders of the Company's
securities, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for acquisitions, working
capital, capital expenditures, general corporate or other purposes may be
impaired, (ii) a substantial portion of the Company's cash flow from operations,
if any, will be dedicated to the payment of the principal and interest on its
indebtedness and will not be available for other purposes, (iii) the Company's
ability to react to changes in its industry or economic conditions could be
limited, and (iv) certain of the Company's borrowings may be at variable rates
of interest, which could result in higher interest expense in the event of
increases in interest rates.
The Company's ability to service its indebtedness, including the Notes,
will depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business, and other factors,
certain of which are beyond its control, as well as the availability of
borrowings under a Senior Credit Facility. As of December 31, 1997, the Company
had an accumulated deficit of approximately $(5.2 million). The Company will
require substantial amounts of cash to fund scheduled payments of principal and
interest on its outstanding indebtedness, including the Notes, as well as future
capital expenditures and any working capital requirements, which will increase
as a result of the Acquisitions. If the Company is unable to meet its cash
requirements out of cash flow from operations and its available borrowings,
there can be no assurance that it will be able to obtain alternative financing
or that it will be permitted to do so under the terms of a Senior Credit
Facility, the Indenture or its other indebtedness. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to make future acquisitions, to absorb adverse operating results, to
fund capital expenditures or to pay interest on the Notes may be adversely
affected. If the Company does not generate sufficient increases in cash flow
from operations to repay its indebtedness at maturity, including the Notes, it
could attempt to refinance such indebtedness; however, no assurance can be given
that such refinancing would be available on terms acceptable to the Company, if
at all.
MANAGEMENT OF GROWTH AND RELATED EXPENSES
The Company has experienced rapid growth in net sales in recent years. For
the Company's fiscal years ended June 30, 1994, June 30, 1995, June 30, 1996 and
June 30, 1997, net sales of the Company increased by 9%, 23%, 49% and 69%,
respectively, over net sales for the prior fiscal year. Almost all of the growth
in net sales has resulted from expanded carriage of the Company's programming on
cable systems and broadcast television stations. In connection with the expanded
carriage of its programming, the amounts payable to cable systems and television
broadcasters for the carriage of the Company's programming have increased
substantially. The Company has also incurred other increased expenses associated
with its growth, including increased
11
<PAGE> 13
personnel costs. The Company must effectively control expenses in order to
operate profitably and the failure to effectively control expenses could have an
adverse impact on the Company's financial condition and results of operations.
COST OF ACQUISITION
As a result of the Notes Offering, the Company is incurring a substantial
debt service obligation. In the event that the increased revenues associated
with increased broadcast television carriage of the Company's programming do not
exceed the additional costs and expenses associated with the Acquisition, the
purchase of WOAC and the Company's expansion, including interest payable on the
Notes, the Company's profitability will be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
NET LOSSES; ACCUMULATED DEFICIT
For its fiscal years ended June 30, 1993, 1994, 1995, and 1996, the Company
had net losses of approximately $(2.4 million), $(1.1 million), $(1.3 million)
and $(1.4 million), respectively. For the fiscal year ended June 30, 1997 and
for the six month period ended December 31, 1997, the Company had net income of
approximately $1.6 million and $1.1 million, respectively. As of December 31,
1997, the Company had an accumulated deficit of approximately $(5.2 million). At
June 30, 1997 and at December 31, 1997, the Company had negative working capital
of approximately $(4.6 million) and $(5.1 million), respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" for a discussion of working capital and
liquidity.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the ability of the Company and
its Restricted Subsidiaries to incur additional indebtedness, pay dividends,
make certain other restricted payments, incur liens, issue or sell stock of
Restricted Subsidiaries, apply net proceeds from certain asset sales, merge or
consolidate with any other person, sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company, enter into
certain transactions with affiliates or encumber the assets of the Company or
its Restricted Subsidiaries.
The loan agreements relating to any other indebtedness of the Company or
any of its Subsidiaries, including a Senior Credit Facility, may contain
extensive restrictive covenants and may require the Company to maintain
specified financial ratios and to satisfy certain financial condition tests. The
Company's ability to meet financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those ratios or tests. In addition, the Company's operating and financial
flexibility will be limited by covenants that, among other things, restrict the
ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions to its stockholders or make certain other
restricted payments, create certain liens upon assets, apply the proceeds from
the dispositions of certain assets or enter into certain transactions with
affiliates. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interests of the
Company. Upon the occurrence of an event of default under the other indebtedness
of the Company or any of its Subsidiaries, the lenders could elect to declare
all amounts outstanding thereunder, including accrued interest or other
obligations, to be immediately due and payable or proceed against the collateral
granted to them to secure that indebtedness. If any other indebtedness of the
Company or any of its Subsidiaries were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
that indebtedness and the other indebtedness of the Company, including the
Notes.
As a result of these covenants, the ability of the Company to respond to
changing business and economic conditions and to secure additional financing, if
needed, may be significantly restricted, and the Company may be prevented from
engaging in transactions that might otherwise be considered beneficial to the
Company. See "Description of Notes -- Certain Covenants."
12
<PAGE> 14
OTHER SECURED CREDITORS; SENIOR CREDIT FACILITY
The Indenture provides the Company the right to incur up to $20.0 million
of indebtedness under a Senior Credit Facility secured by the Company's accounts
receivable, inventory and general intangibles (excluding from general
intangibles any collateral for the Notes) and a first priority lien on the
capital stock and other assets of the Other Broadcast Subsidiaries. Accordingly,
the Company's accounts receivable, inventory and general intangibles and the
capital stock and other assets of the Other Broadcast Subsidiaries will not be
available to Noteholders in the event of bankruptcy, liquidation or a similar
transaction, until the indebtedness under a Senior Credit Facility (up to $20.0
million) is paid in full. The accounts receivable and inventory represented
approximately $5.9 million and $4.1 million, respectively, at December 31, 1997,
and are among the most liquid assets of the Company and its Subsidiaries.
RISK OF INABILITY TO EFFECTIVELY REALIZE UPON SECURITY
The Notes will be secured by (i) a first priority lien on the capital stock
of SAH Acquisition II, (ii) a first priority lien on the assets of SAH
Acquisition II (other than the FCC licenses) and (iii) a junior lien on the
capital stock of the Other Broadcast Subsidiaries. The lien on the capital stock
and other assets of the Other Broadcast Subsidiaries will be junior to a first
priority lien in favor of a Senior Credit Facility. Accordingly, up to $20.0
million of indebtedness under a Senior Credit Facility will be entitled to be
paid out of the proceeds from the capital stock and other assets of the Other
Broadcast Subsidiaries in the event of bankruptcy, liquidation or reorganization
of the Company prior to the payment of the Notes from the proceeds of such
collateral. See "Description of Notes -- Security."
In addition, the security agreements relating to the capital stock of the
Subsidiaries that is pledged to the Trustee to secure the Notes will contain
provisions stating that the Trustee will not exercise voting rights with respect
to the stock of any Subsidiary that controls an FCC broadcast license, and will
not transfer control of such pledged stock without the prior approval of the
FCC. There can be no assurance that FCC approval can be readily obtained, and
the requirement of FCC consent is likely to cause a delay in the realization of
the value of the pledged stock in the event of a default under the Notes. See
"Description of Notes -- Security."
RISK OF INSUFFICIENT VALUE OF SECURITY
The assets of SAH Acquisition II were purchased for approximately $74.0
million. However, these assets, as well as the assets of the Other Broadcast
Subsidiaries are not liquid and the value thereof to other parties may be
substantially less than the value thereof to the Company. In addition, the value
of the collateral for the Notes may decline over time. Accordingly, no
assurances can be given as to the value of the collateral for the Notes or as to
the amount of proceeds that could be realized upon the sale, disposition or
liquidation of the collateral for the Notes. See "Description of
Notes -- Security."
POTENTIAL INABILITY TO SATISFY A CHANGE OF CONTROL OFFER
The Indenture provides that, upon the occurrence of a Change of Control (as
defined herein), the holders of the Notes will have the right to require the
Company to repurchase the Notes at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. However, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required repurchases
of Notes tendered. The Company's failure to make a required repurchase of the
Notes in the event of a Change of Control would create an Event of Default under
the Indenture. Moreover, restrictions under the Funded Indebtedness may prohibit
the Company from making such required repurchases; consequently, any such
repurchases could constitute an event of default under the Funded Indebtedness.
These conditions may result in the Company being unable to perform its
agreements under the Indenture relating to a Change of Control. See "Description
of Notes -- Repurchase at the Option of Holders."
13
<PAGE> 15
FRAUDULENT CONVEYANCES AND PREFERENTIAL TRANSFERS
The ability of the holders of the Notes or the Trustee to enforce the
Notes, the Security and Pledge Agreement or the Subsidiary Guarantees may be
limited by certain fraudulent conveyance and similar laws. Various fraudulent
conveyance and similar laws have been enacted for the protection of creditors
and may be utilized by a court of competent jurisdiction to avoid the Subsidiary
Guarantees or to subordinate the obligations of the Company under the Notes and
the Security and Pledge Agreement or to avoid or subordinate the obligations of
any Subsidiary Guarantor under its Subsidiary Guarantee. The requirements for
establishing a fraudulent conveyance vary depending on the law of the
jurisdiction which is being applied. Generally, if in a bankruptcy,
reorganization, rehabilitation or similar proceeding in respect of the Company
or a Subsidiary Guarantor, or in a lawsuit by or on behalf of creditors against
the Company or a Subsidiary Guarantor, a court were to find that (i) the Company
or a Subsidiary Guarantor, as the case may be, incurred indebtedness in
connection with the Notes (including the Subsidiary Guarantees) with the intent
of hindering, delaying or defrauding current or future creditors of the Company
or the Subsidiary Guarantor, as the case may be, or (ii) the Company or a
Subsidiary Guarantor, as the case may be, received less than reasonably
equivalent value or fair consideration for incurring such indebtedness, as the
case may be, and either (a) was insolvent at the time it incurred such
indebtedness, (b) was rendered insolvent by reason of incurring such
indebtedness, (c) was at such time engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital or (d)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, such court could, with respect to the Company or
the Subsidiary Guarantor, as the case may be, declare void in whole or in part
the obligations of the Company or such Subsidiary Guarantor in connection with
the Notes (including the Stock Pledges and the Subsidiary Guarantees) and/or
subordinate claims with respect to the Notes to all other debts of the Company
or the Subsidiary Guarantors, as applicable. If the obligations of the Company
or the Subsidiary Guarantors were subordinated, there can be no assurance that
after payment of the other debts of the Company or the Subsidiary Guarantors,
there would be sufficient assets to pay such subordinated claims with respect to
the Notes and the Subsidiary Guarantees.
Generally, for purposes of the foregoing, an entity will be considered
insolvent if the sum of its debts is greater than the fair saleable value of all
of its property at a fair valuation or if the present fair saleable value of its
assets is less than the amount that will be required to pay its probable
liability on its existing debts, as they become absolute and mature.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or such Subsidiary Guarantor with respect to the Notes or a Subsidiary
Guarantee, respectively, or the incurrence of a Subsidiary Guarantee or if the
Company or such Subsidiary Guarantor anticipated becoming insolvent at the time
of such payment or incurrence, all or a portion of such payment or guarantee
could be avoided as a preferential transfer and the recipient of such payment
could be required to return such payment.
POTENTIAL CONFLICT BETWEEN DEBT AND EQUITY HOLDERS
Certain decisions concerning the operations or financial structure of the
Company may present conflicts between the owners of the Company's capital stock
and the holders of the Notes. For example, if the Company encounters financial
difficulties, or is unable to pay its debts as they mature, the interest of the
Company's equity owners might conflict with those of the holders of the Notes.
In addition, the equity owners may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that could enhance their equity
investment, even though such transactions might adversely affect the ability of
the Company to pay principal and interest on the Notes.
RELOCATION OF PRINCIPAL FACILITY
The Company is in the process of relocating its principal facility,
including its offices and studios from Knoxville, Tennessee to Nashville,
Tennessee. The Company anticipates that the expense of the relocation,
14
<PAGE> 16
including the costs of acquiring the real estate and building, completing the
interior buildout and equipping the new Facility, will be approximately $13.4
million, but there can be no assurance that the actual expense will not exceed
such amount. In addition, certain other transitional matters related to the
relocation could negatively impact the operations and earnings of the Company,
including the transition of the programming origination to the Facility, the
possible transition of telephone call center operations to the Facility, the
possible loss of personnel and lost productivity due to management resources
devoted to the relocation. See "Business -- Properties."
RISK OF INABILITY TO INCREASE DISTRIBUTION OF THE COMPANY'S PROGRAMMING
The Company's strategy involves continued growth through increased
distribution of its programming. Increasing distribution of the Company's
programming may require that the Company raise additional debt or equity capital
subsequent to the Offerings. There can be no assurance, however, that any such
capital would be available to the Company on acceptable terms, if at all. In
addition to the Acquisition and the purchase of WOAC, the Company's strategy
involves the acquisition of additional broadcast television stations. There can
be no assurances that the Company will be successful in acquiring additional
broadcast stations. If the Company is unable to raise additional capital or is
unable to consummate additional acquisitions, the Company may be unable to
increase distribution of its programming. See "Business -- Business Strategy."
NEED FOR CAPITAL EXPENDITURES RELATED TO THE ASSETS ACQUIRED IN THE ACQUISITION
The Company plans certain capital expenditures to acquire and to install
equipment at KCNS and WRAY. Such capital expenditures are required in order for
the broadcast television stations to operate at full power in accordance with
their respective FCC licenses. In particular, WRAY is currently operating under
a construction permit, and a full license for the station has not been obtained
due to the operation of the station at a power level substantially below that
authorized by the FCC. The Company expects to incur capital expenditures of
approximately $4 million for the acquisition and installation of new equipment,
but there can be no assurance that the actual expenditures will not exceed that
amount. See "Business -- Recent Development."
CONTROL BY PRINCIPAL SHAREHOLDER; CHANGE IN CONTROL
J.D. Clinton is the beneficial owner, directly and indirectly, of 3,227,700
shares of the Common Stock representing approximately 27.4% of the outstanding
shares of Common Stock as of December 31, 1997. In addition, Mr. Clinton and his
affiliates hold options and warrants for the right to acquire additional shares
of Common Stock of the Company. On a fully diluted basis after the exercise of
all options and warrants held and after giving effect to the Common Stock
Offering (assuming an issuance of 10,000,000 shares), Mr. Clinton would own,
directly or indirectly, 5,435,200 shares of the Common Stock representing
approximately 22.7% (21.4% if the Over-allotment Option is exercised) of the
shares of Common Stock of the Company. Mr. Clinton's ownership is substantially
greater than that of any other shareholder, and his ownership could give him de
facto control over any shareholder vote, including a vote for election of all of
the members of the Company's Board of Directors, a vote for the adoption of
amendments to the Company's charter and bylaws and a vote for the approval of a
merger, consolidation, asset sale or other corporate transaction requiring
approval of the shareholders of the Company. The concentration of ownership
could have the effect of delaying or preventing a change in control of the
Company, even when a change of control would be in the best interests of the
Company's other shareholders. See "Security Ownership of Certain Beneficial
Owners."
The Company currently has an employment agreement with Kent E. Lillie, who
is the Company's President and Chief Executive Officer. In the event of a change
of control of the Company (as defined in the employment agreement) the
employment agreement grants Mr. Lillie certain rights, including the right to
resign at any time during the 12 months following the occurrence of the change
of control, and the right to receive an amount equal to his base salary and
monthly allowances for the 12 months preceding such resignation. In addition,
any options to purchase stock not yet vested will automatically vest on the date
of his
15
<PAGE> 17
resignation. The provisions of Mr. Lillie's employment agreement may have the
effect of discouraging a change in control of the Company. See
"Management -- Employment Agreements."
The provisions of the Indenture that give the holders of the Notes the
right to require the Company to repurchase their Notes upon a Change of Control
(as defined in the Indenture) may discourage, delay or prevent a Change in
Control of the Company that shareholders might consider to be in the Company's
best interests. See "-- Potential Inability to Satisfy a Change of Control
Offer" above.
The Company's Board of Directors, without shareholder approval, can issue
Preferred Stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the rights of the holders of Common Stock. The
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company that
shareholders might consider to be in the Company's best interests. See
"Description of Capital Stock -- Preferred Stock."
DEPENDENCE ON AFFILIATION AGREEMENTS
The Company's business is dependent upon affiliation agreements and time
brokerage agreements with television broadcast stations and cable system
operators. A significant number of the Company's customers are reached through
the broadcasting of the Company's programming pursuant to such agreements. These
agreements contain various provisions, including agreements to carry the
Company's programming for a number of hours daily or to carry the programming on
substantially a full-time basis. These agreements are subject to renegotiation
and renewal from time to time. Certain agreements provide the station or cable
system operator with the right to terminate the agreement at any time or to
preempt the Company's programming in certain events.
The failure of the Company to maintain distribution of its programming in
particular markets could have a material adverse effect on the Company. The
ability of the Company to maintain these agreements is dependent on the
Company's ability to negotiate renewals of these agreements. There can be no
assurance, however, that any such agreements can be renewed on acceptable terms,
if at all. The home shopping market is highly competitive and there can be no
assurance that the Company can match the prices its competitors may be willing
to pay for broadcast time. See "Business -- Affiliations."
In recent years, consumers have increasingly begun to subscribe to direct
satellite broadcast systems ("DBS") as an alternative to subscription to a local
cable system. DBS is expected to continue to attract new customers in the
future. To date the Company has not secured carriage of its programming by a DBS
system. There can be no assurance that such carriage can be obtained on
acceptable terms, if at all.
DEPENDENCE ON KEY PERSONNEL
The business of the Company depends upon the ability and expertise of
certain key employees, including Kent E. Lillie, its President and Chief
Executive Officer. If the Company loses the services of one or more key
employees of the Company through death, disability or termination of employment,
the Company's operations could be adversely affected. Mr. Lillie is employed
pursuant to an employment and non-compete agreement that expires in June 2002
and certain other key executive officers are employed pursuant to employment or
non-compete agreements. While the Company has endeavored to recruit and to
retain certain key employees through employment agreements, there can be no
assurance that one or more key employees will not resign from employment with
the Company. See "Management -- Executive Officers and Directors" and
"-- Employment Agreements." The Company is the beneficiary of a $5 million key
man life insurance policy on Mr. Lillie.
DEPENDENCE ON ECONOMIC FACTORS
Because the Company derives substantially all of its revenues from the sale
of merchandise, its revenues may be adversely affected by economic conditions
which impact potential customers and suppliers. In particular, operating results
in individual geographic markets will generally be adversely affected by local
or
16
<PAGE> 18
regional economic downturns. Such economic downturns could have an adverse
impact on the Company's financial condition and results of operations.
DEPENDENCE ON PRODUCT VENDORS
The Company has endeavored to position itself in the home shopping market
as the seller of certain unique products, including sports memorabilia. The
Company depends upon a limited number of product suppliers for such products.
The Company believes that there are sufficient product suppliers to allow the
Company to continue to offer such products consistently, but such supply cannot
be assured. If the Company is not able to obtain certain products currently
offered to customers, such event could have an adverse impact on the Company's
financial condition and results of operations. See "Business -- Products and
Customers."
AUTHENTICITY AND PRICING OF COLLECTIBLE PRODUCTS
A portion of the products sold by the Company consists of collectibles and
memorabilia, including sports related products, the price of which is dependent
upon their unique nature and authenticity. The Company endeavors to take
precautions necessary to insure the authenticity of these products; however, the
Company's ability to sell collectible products could be impaired as a result of
real or perceived customer concern about the authenticity of such products. In
addition, the market price of collectible products depends upon a number of
factors, many of which are not within the control of the Company. A reduction in
the amount of collectibles sold by the Company or a reduction in the
desirability of collectibles could have an adverse impact on the Company's
financial condition and results of operations.
SATELLITE TRANSPONDER ARRANGEMENTS
The Company's business depends upon the availability of transponder time or
satellite capacity. An interruption or termination of transponder service could
have a material adverse effect on the Company. The Company's programming is
transmitted via Telstar 402R, a preemptible satellite transponder, under an
agreement with B&P The SpaceConnection, Inc. ("Services Agreement"), expiring on
November 30, 1998. Currently, the Company's right to use the transponder may be
preempted at any time to restore (i) another failed transponder that is entitled
to protection, (ii) a satellite failure, or (iii) other service offerings of the
operator of the transponder. The Services Agreement may be terminated by B&P The
SpaceConnection upon the occurrence of certain defaults specified therein. The
Company has recently accepted an offer to extend the terms of the Services
Agreement for the life of the transponder (estimated to be eight years) and to
make the service non-preemptible. The extension of the Services Agreement is
subject to the completion of documentation. See "Business -- Distribution of
Programming -- Programming Origination."
LITIGATION
The Company is a party to a lawsuit in an Illinois Federal District Court
concerning the competing claims of the Company and another firm to use the name
"Shop at Home." The Company is also a defendant in a lawsuit filed in a Florida
Federal District Court in which an affiliate of the National Basketball
Association has filed suit against a number of defendants, including the
Company, alleging the sale by the defendants of basketball trading cards that
were not authentic and that infringed on certain NBA trademarks. The Company is
party to a lawsuit in a Tennessee Chancery Court filed by an insurance company
for the Company seeking a judgment that the insurance company is not liable for
certain attorneys fees and expenses in connection with previously settled
litigation involving the Company. While the Company does not believe that any of
these lawsuits will result in a judgment or settlement that is materially
adverse to the Company, the results of litigation are difficult to predict and
could be materially adverse to the Company. See "Business -- Legal Proceedings."
COMPETITION
The Company operates in an industry dominated by two established
competitors, the Home Shopping Network and the QVC Network, both of which have
substantially more television and cable carriage than the Company, as well as
greater financial, distribution, and marketing resources. The Company also must
compete
17
<PAGE> 19
with store and catalogue retailers, many of whom have substantially greater
financial, distribution and marketing resources. In addition, the Company
competes with new media businesses, such as computer on-line shopping services.
See "Business -- Competition."
COMPETITION IN THE TELEVISION INDUSTRY; IMPACT OF NEW TECHNOLOGIES
The television broadcasting industry has become increasingly competitive in
recent years, as television stations compete for viewers and advertising
revenues with other broadcast television stations, as well as other media,
including cable television, satellite dishes, multichannel multipoint
distribution systems, pay-per-view programs and the proliferation of video
recorders and video movie rentals. Furthermore, new television networks such as
the United Paramount Network and the Warner Brothers Network have created
additional competition. These changes have fractionalized television viewing
audiences. Through technological developments, such as direct broadcast
satellite, video compression and programming delivered through fiber optic
telephone lines, this trend toward fractionalization will likely continue,
putting additional competitive pressures on the Company.
Additionally, the FCC has adopted rules for implementing digital (including
high-definition) television ("DTV") service in the United States. The FCC also
has adopted a table of allotments for DTV, which will provide eligible existing
broadcasters with a second channel on which to provide DTV service. Television
broadcasters will be allowed to use their channels according to their best
business judgment. Such uses can include multiple standard-definition program
channels, data transfer, subscription video, interactive materials, and audio
signals, although broadcasters will be required to provide a free digital video
programming service that is at least comparable to today's analog service.
Broadcasters will not be required to air "high-definition" programming or,
initially, to simulcast their analog programming on the digital channel. All
commercial broadcasters must be on the air with a digital signal by May 1, 2002.
Implementation of DTV is expected to improve the technical quality of
television. Under certain circumstances, however, conversion to DTV operations
may reduce a station's geographical coverage area or provide a competitive
advantage to one or more competing stations in the market. In connection with
the conversion to DTV, the Company will incur expenses which cannot be
quantified at this date, but which may be substantial, and the Company cannot
predict the extent or timing of consumer demand for any such DTV services.
REGULATORY MATTERS
The Company's television operations are subject to significant regulation
by the FCC under the Communications Act of 1934, as amended (the "Communications
Act") and most recently amended by the Telecommunications Act of 1996 (the
"Telecommunications Act"). The Communications Act permits the operation of
television broadcast stations only in accordance with a license issued by the
FCC. The Communications Act empowers the FCC, among other things: to determine
the frequencies, location and power of broadcast stations; to issue, modify,
renew and revoke station licenses; to approve the assignment or transfer of
control of broadcast licenses; to regulate the equipment used by stations; to
impose penalties for violations of the Communications Act or FCC regulations;
and, to some extent, to regulate a licensee's programming content. Failure to
observe these or other rules and policies can result in the imposition of
various sanctions, including monetary forfeitures or, for particularly egregious
violations, the revocation of a license. The Company's business will be
dependent upon its continuing ability to hold television broadcasting licenses
from the FCC.
FCC television licenses are generally granted or renewed for terms of eight
years, although licenses may be renewed for a shorter period. The Company must
apply for renewal of each broadcast license. At the time an application is made
for renewal of a license, parties in interest may file petitions to deny the
renewal, and such parties, as well as members of the public, may comment upon
the service the station has provided during the preceding license term and urge
denial of the application. While broadcast licenses are typically renewed by the
FCC, even when petitions to deny are filed against renewal applications, there
can be no assurance that the licenses for the Company's stations will be renewed
at their expiration dates or, if renewed, that the renewal terms will be for the
maximum eight-year period. The non-renewal or revocation of one or more of the
Company's primary FCC licenses could have a material adverse effect on the
Company's operations.
18
<PAGE> 20
The U.S. Congress and the FCC currently have under consideration, and may
in the future adopt, new laws, regulations and policies regarding a wide variety
of matters which could, directly or indirectly, affect the operation and
ownership of the Company's broadcast properties. Such matters include, for
example: changes in the FCC's multiple ownership restrictions; spectrum use
fees; political advertising rates; free political time; potential restrictions
on the advertising of alcoholic beverages; the rules and policies to be applied
in enforcing the FCC's equal opportunity regulations; the standards to govern
the evaluation of television programming directed toward children, and violent
and indecent programming. The Company is unable to predict the outcome of future
federal legislation or the impact of any such laws or regulations on the
Company's operations.
The 1992 Cable Act includes signal carriage or "must carry" provisions that
require cable operators to carry the signals of local commercial television
stations. A cable system is generally required to devote up to one-third of its
aggregate activated channel capacity for the mandatory carriage of local
commercial television stations without charge. The 1992 Cable Act also includes
a retransmission consent provision that prohibits cable operators and other
multi-channel video programming distributors from carrying the signal of
commercial broadcast stations and certain low power stations without obtaining
their consent in certain circumstances. In March 1997, the United States Supreme
Court upheld the constitutionality of the "must carry" requirements. The current
strategy of the Company with respect to the broadcast of its programming by
television broadcast stations has been developed based on the present status of
the "must carry" provisions. While no serious efforts appear to be developing to
change these provisions, there is always a possibility that Congress might elect
to do so. Under the Communications Act, for purposes of the "must carry"
provisions, a broadcast station's market is determined by the FCC using
commercial publications which delineate television markets based on viewing
patterns. The FCC may, however, consider, on a case by case basis and acting on
specific written requests, changes in the station's market areas (currently
defined by the ADI, Arbitron's Area of Dominant Influence, to which the station
has been designated), including the exclusion of communities from a television
station's market. In considering requests for a change in a station's market
area, the FCC takes into account a number of factors including whether or not
the station in question provides coverage to the community and evidence of the
viewing patterns in cable and non-cable households in that community. In recent
months, the FCC has ruled on several such requests and in many of these cases
has excluded particular communities from an ADI. The Company is unable to
predict the impact of any future rulings of the FCC with respect to the
exclusion of the carriage of the Company's broadcast stations from any
particular cable systems in its markets. See "Business -- Regulatory Matters."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities, have no established trading market
and may not be widely distributed. The Company does not intend to list the Notes
on any national securities exchange or to seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation System.
The Company has been advised by the Underwriters that they presently intend to
make a market in the Notes. However, the Underwriters are not obligated to do so
and any market making activities with respect to the Notes may be discontinued
at any time without notice. In addition, such market making activity will be
subject to the limitations imposed by the Securities Exchange Act of 1934. No
assurance can be given that an active public or other market will develop for
the Notes or as to the liquidity of or the trading market for the Notes. If a
trading market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell them at
all. If a market for the Notes develops, any such market may be discontinued at
any time. If a public trading market develops for the Notes, future trading
prices of the Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other facts, including the financial condition of the
Company, the Notes may trade at a discount from their principal amount.
LIMITED LIABILITY OF DIRECTORS
The Company's charter expressly limits the liability of directors for
monetary damages to the Company and its shareholders arising as a result of
errors in judgment or any acts or omissions if the directors acted in good
faith.
19
<PAGE> 21
USE OF PROCEEDS
The gross proceeds to the Company from the Notes Offering will be
approximately $75.0 million before deducting underwriters' discounts and
commissions and estimated expenses of the Offering. The gross proceeds to the
Company from the Common Stock Offering, before deducting underwriting discounts
and commissions of the Common Stock Offering, are estimated to be approximately
$35.0 million ($40.3 million if the Underwriters of the Common Stock Offering
exercise their Over-allotment Option in full).
The Company intends to apply these net proceeds (i) to pay the purchase
price to Global under the Asset Purchase Agreement and the purchase price to
close the Executory Contract for WOAC (See "Business -- Recent Development"),
(ii) to purchase the real estate and building for the Company's new main offices
and studios in Nashville, Tennessee (the "Facility"), (iii) to purchase
equipment for the Facility, (iv) to complete interior renovations of the
Facility, (v) to acquire equipment necessary to upgrade and improve the
broadcast television stations acquired through the Acquisition, (vi) to repay
substantially all of the currently existing indebtedness of the Company, (vii)
as working capital of the Company, which may be used to acquire additional
television stations that may be available in the future, and (viii) to pay
transaction fees and expenses. The closings of the Acquisition and the WOAC
Executory Contract will occur contemporaneously with the consummation of the
Offerings.
The following table summarizes the anticipated use of the proceeds from the
Offerings (in thousands):
<TABLE>
<S> <C> <C>
Sources:
Proceeds of the Notes Offering............................ $ 75,000 68.2%
Proceeds of the Common Stock Offering(1).................. 35,000 31.8
-------- -----
Total............................................. $110,000 100.0%
======== =====
Uses:
Closing of Asset Purchase Agreement....................... $ 47,486 43.3%
Closing of the Executory Contract (WOAC).................. 21,150 19.2
Equipment to upgrade new television stations.............. 4,000 3.6
Acquire land and building for the Facility(2)............. 6,400 5.8
Complete interior renovation of the Facility.............. 3,000 2.7
Equipment and furnishings for the Facility................ 4,000 3.6
Repay existing indebtedness(3)............................ 10,229 9.3
General corporate purposes(1)............................. 6,785 6.2
Estimated transaction fees and expenses (including
underwriting discounts and commissions)................ 6,950 6.3
-------- -----
Total............................................. $110,000 100.0%
======== =====
</TABLE>
- ---------------
(1) Assumes that the Underwriters do not exercise their Over-allotment Option.
If that option is fully exercised, the gross proceeds of the Common Stock
Offering will be approximately $40,250,000, and the additional amount of
approximately $5,250,000 (in each case, before deducting Underwriting
discounts and commissions), if received by the Company, would be added to
working capital of the Company.
(2) The real estate and building will be acquired from Partners-SATH, L.L.C. See
"Business -- Properties;" "Certain Relationships and Related Transactions."
(3) This amount represents the repayment of substantially all of the currently
existing indebtedness of the Company for borrowed funds, other than certain
capitalized leases. See "Consolidated Financial Statements -- Note 5. Long
Term Indebtedness" and "Description of the Notes -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock."
One of the loans being repaid is held by a corporation, a principal of which
is related to J.D. Clinton, a director and principal shareholder of the
Company. At December 31, 1997, the principal balance of that loan was
$349,700. See "Certain Relationships and Related Transactions."
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<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company on an
actual basis as of December 31, 1997, and on a pro forma basis as adjusted to
give effect to the Offerings and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds." This information should be read
in conjunction with "Use of Proceeds," "Selected Historical and Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt and capital leases, including current
portion(1)................................................ $ 2,265 $ 231
======= ===========
Long-term debt and capital leases, less current
portion(1)................................................ $ 8,592 $ 396
% Senior Secured Notes due 2005........................... -- 75,000
------- -----------
Total long-term debt.............................. 8,592 75,396
------- -----------
Redeemable Preferred Stock, $10 par value; 1,000,000 shares
authorized; 137,943 issued and outstanding................ 1,393 1,393
Common Stock, $.0025 par value; 30,000,000 Shares
authorized; 11,742,991 Shares issued and outstanding
(21,742,991 as adjusted for the Common Stock
Offering)(2).............................................. 29 54
Additional paid in capital.................................. 11,875 43,900
Accumulated deficit......................................... (5,166) (5,166)
------- -----------
Total stockholders' equity........................ 6,738 38,788
------- -----------
Total capitalization.............................. $16,723 $ 115,577
======= ===========
</TABLE>
- ---------------
(1) Assumes and gives effect to the issuance of Notes in the principal amount of
$75.0 million pursuant to the Notes Offering and the repayment of
approximately $10.2 million of current and long-term debt.
(2) Assumes and gives effect to the issuance of 10,000,000 shares of Common
Stock at $3.50 per share, net of estimated offering expenses of $500,000 and
underwriting discount of $2.45 million, pursuant to the Common Stock
Offering. See "Description of Certain Indebtedness."
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<PAGE> 23
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The consolidated balance sheets
and consolidated statements of operations set forth below as of and for each of
the five years in the period ended June 30, 1997 and as of and for the six month
period ended December 31, 1997, are derived from the audited financial
statements of the Company. The consolidated balance sheet and consolidated
statement of operations as of and for the six month period ended December 31,
1996 are derived from the unaudited condensed consolidated financial statements
of the Company. The pro forma financial data assumes and gives effect to the
Offerings and the application of the net proceeds therefrom as described in "Use
of Proceeds."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Net sales........................................... $19,878 $21,717 $26,787 $40,016 $67,817 $29,796 $43,421
Cost of sales....................................... 15,010 14,278 17,121 24,516 40,626 18,146 25,244
------- ------- ------- ------- ------- ------- -------
Gross profit........................................ 4,868 7,439 9,666 15,500 27,191 11,650 18,177
Other operating income.............................. -- -- 189 659 1,014 457 564
Operating expenses.................................. 7,327 8,406 11,010 16,930 25,882 11,170 16,940
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations....................... (2,459) (967) (1,155) (771) 2,323 937 1,801
Other income (expense).............................. 18 (85) (127) (738) (847) (321) 24
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes................... (2,441) (1,052) (1,282) (1,509) 1,476 616 1,825
Income tax expense (benefit)........................ -- -- -- (104) (80) (10) 702
------- ------- ------- ------- ------- ------- -------
Net income (loss)................................... $(2,441) $(1,052) $(1,282) $(1,405) $ 1,556 $ 626 $ 1,123
======= ======= ======= ======= ======= ======= =======
Weighted average common shares -- basic............. 7,379 8,225 9,437 10,284 10,651 10,597 11,283
Weighted average equivalent shares -- dilutive...... 7,379 8,225 9,437 10,284 14,268 14,382 14,739
Basic earnings per share(1)......................... $ (0.33) $ (0.13) $ (0.14) $ (0.14) $ 0.14 $ 0.06 $ 0.10
Diluted earnings per share(1)....................... $ (0.33) $ (0.13) $ (0.14) $ (0.14) $ 0.12 $ 0.05 $ 0.08
Cash dividends per share of common stock............ 0.00 0.00 0.00 0.00 0.00 0.00 0.00
OTHER DATA:
EBITDA(2)........................................... (1,837) (581) (548) 164 3,612 1,420 3,060
Cash flow from operations........................... (201) (936) 1,943 815 6,245 2,348 (1,418)
Ratio of earnings to fixed charges(3)............... -- -- -- -- 2.37x 2.58x 5.01x
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(4)
-----------------
JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
------------- ----------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $(4,641) $(5,127) $ 3,692
Total assets................................................ 34,410 38,973 135,793
Current liabilities......................................... 18,078 18,336 16,303
Long-term debt and capital leases, less current portion..... 9,054 8,592 75,396
Redeemable preferred stock.................................. 1,393 1,393 1,393
Stockholders' equity........................................ 3,804 6,738 38,788
</TABLE>
- ---------------
(1) For details of the calculation of basic and dilutive earnings per share see
Note 12 to the Consolidated Financial Statements included elsewhere in this
Prospectus.
(2) EBITDA consists of earnings before interest, income taxes, and depreciation
and amortization expense. While EBITDA should not be construed as an
alternative to operating income or net income or as an indicator of
operating performance or liquidity, it is a measure that the Company
believes is used commonly to evaluate a company's ability to service debt.
EBITDA is not calculated under generally accepted accounting principals and,
therefore, is not necessarily comparable to similarly titled measures of
other companies.
22
<PAGE> 24
(3) For purposes of calculating these ratios, earnings represent earnings before
income taxes plus (or in the case of a loss, minus) fixed charges. Fixed
charges consist of interest, amortization of debt issuance costs, and the
portion of rental and lease expense, if any, that management believes is
representative of the interest component of rental and lease expense.
Earnings were inadequate to cover fixed charges for Fiscal 1993, Fiscal
1994, Fiscal 1995 and Fiscal 1996 by $2.5 million, $1.1 million, $1.5
million and $2.3 million, respectively.
(4) The pro forma balance sheet data has been calculated giving effect to the
Offerings and the application of the net proceeds therefrom as described in
"Use of Proceeds" as if each occurred on December 31, 1997. No financial
statements with respect to the operation of Global prior to the Acquisition
or pro forma financial information with respect thereto is presented herein
in that the Company will account for the Acquisition as the purchase of
assets rather than the acquisition of a business. This is due to the fact
that, with the exception of a de minimis period of time, none of the
acquired stations have been historically operated as a broadcast outlet for
home shopping programming of Global or the predecessor in title, and the
Company has concluded that there is no continuity of revenues from those
stations from which relevant historical information could be derived.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company is qualified in its entirety by the more detailed information and
financial data, including the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
GENERAL
The Company, founded in 1986, is a nationally televised home shopping
retailer offering high-quality merchandise, at prices below those generally
available from traditional retailers and catalogues, as well as unique
merchandise and memorabilia that may be unavailable or have limited availability
elsewhere. The Company derives revenues primarily from the sale of merchandise
marketed through its home shopping programming carried by television stations
owned by the Company, by television stations with which the Company has entered
into agreements to purchase broadcast time, by the carriage of those television
broadcasts on cable television systems under the "must carry" or retransmission
consent provisions of federal law, by direct carriage on cable television
systems under agreements with cable system operators, and by direct reception of
the Company satellite transmission by individuals who own satellite downlink
equipment. Beginning in 1997, another source of revenues has been provided by
the Company's manufacturing subsidiary, Collector's Edge of Tennessee, Inc.
("Collector's Edge"), a wholly-owned subsidiary that engages in the business of
manufacturing and sales of sports trading cards under license with National
Football League Properties, Inc. and National Football Players, Incorporated.
Collector's Edge was organized in March 1997 and acquired the assets of an
existing company that had been engaged in the same business for approximately
four years. The Company also receives some revenues from the sale of broadcast
time on its owned television stations for the broadcast of infomercials.
As of December 31, 1997, the Company's programming was viewable during all
or a part of each day by approximately 48.9 million cable households, of which
approximately 4.4 million cable households could have viewed the programming on
essentially a full-time basis (20 or more hours per day) and the remaining 44.5
million cable households received it on a part-time basis. In order to measure
its performance in a manner that reflects both the growth of the Company and the
part-time nature of its access to cable households, the Company utilizes a cable
household full-time equivalent method to measure the reach of the Company's
programming which accounts for both the quantity and quality of time available
to the Company. To derive this full-time equivalent cable household base ("FTE
Cable Household"), the Company has developed a methodology to assign a relative
value of each daypart to the Company's overall sales based on sales in markets
where the programming is carried on a full-time basis. While the weighting of
each daypart has a subjective element, the Company believes that changes in the
number of FTE Cable Households provide a measure of the growth of the Company
and applies this methodology to all affiliation agreements. Accordingly, the
Company utilizes the revenue per average FTE Cable Household as a measure of
pricing new affiliation agreements and estimating their anticipated revenue
performance.
Principal elements in the Company's cost structure are (i) cost of goods
sold, (ii) transponder and cable costs, and (iii) salaries and wages. The
Company's costs of goods sold as a percentage of sales, have decreased in recent
periods resulting in a corresponding increase in gross margins. This trend is
primarily a result of the Company's strategy to have its product mix include
merchandise with higher product margins. The improvement in gross margin also
reflects the Company's success in negotiating more favorable prices with its
vendors. Transponder and cable costs include expenses related to carriage under
affiliation and transponder agreements. Carriage costs have increased both on an
absolute basis and relative to sales in recent years. This trend is attributable
in part to higher market prices for carriage driven by increased demand from
other home shopping retailers, infomercial companies and advertisers against
whom the Company competes for carriage. The Company's increased carriage costs
relative to revenues is also attributable to the lag time between the initiation
of the Company's programming in a new market (at which time carriage costs begin
to be incurred) and the time viewers become acquainted with the Company's
programming and purchase merchandise. The Company expects this trend will
continue as the Company enters new markets.
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<PAGE> 26
OVERVIEW OF 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
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------------- ---------------------------------
1995 1996 1997 1996 1997
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $26,787 100.0 $40,016 100.0 $67,817 100.0 $29,796 100.0 $43,421 100.0
Cost of goods sold........... 17,121 63.9 24,516 61.3 40,626 59.9 18,146 60.9 25,244 58.1
------- ------- ------- ------- -------
Gross profit............... 9,666 36.1 15,500 38.7 27,191 40.1 11,650 39.1 18,177 41.9
------- ------- ------- ------- -------
Infomercial income........... 189 0.7 659 1.6 1,014 1.5 457 1.5 564 1.3
------- ------- ------- ------- -------
Salaries and wages........... 3,357 12.5 4,113 10.3 5,564 8.2 2,701 9.1 3,522 8.1
Transponder and cable
costs...................... 3,226 12.0 6,025 15.1 12,118 17.9 5,027 16.9 8,082 18.6
Other general operating and
administrative expenses.... 3,909 14.7 5,915 14.7 7,144 10.5 3,027 10.1 4,556 10.6
Depreciation and
amortization............... 518 1.9 878 2.2 1,056 1.6 415 1.4 780 1.8
------- ------- ------- ------- -------
Total operating expenses... 11,010 41.1 16,930 42.3 25,882 38.2 11,170 37.5 16,940 39.1
------- ------- ------- ------- -------
Operating income (loss).... (1,155) (4.3) (771) (1.9) 2,323 3.4 937 3.1 1,801 4.1
------- ------- ------- ------- -------
Interest -- net.............. (216) (0.8) (795) (2.0) (1,080) (1.6) (389) (1.3) (455) (1.0)
Miscellaneous................ 89 0.3 57 0.1 233 0.3 68 0.3 479 1.1
------- ------- ------- ------- -------
Total other expenses,
net...................... (127) (0.5) (738) (1.8) (847) (1.3) (321) (1.0) 24 0.1
------- ------- ------- ------- -------
Income (loss) before income
taxes.................... (1,282) (4.8) (1,509) (3.8) 1,476 2.2 616 2.1 1,825 4.2
Income tax (benefit)
expense.................... 0 0 (104) (.3) (80) (.1) (10) -- 702 1.6
------- ------- ------- ------- -------
Net income (loss).......... $(1,282) (4.8) $(1,405) (3.5) $ 1,556 2.3 $ 626 2.1 $ 1,123 2.6
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996 VS. SIX MONTHS ENDED DECEMBER 31, 1997.
Net Sales. The Company's net sales for the six months ended December 31,
1997 were $43,421,000, an increase of 45.7% from net sales of $29,796,000 for
the six months ended December 31, 1996. The core business of the shopping
network accounted for 78% of the increase in net sales based on an average of
9.3 million FTE Cable Households in the six months ended December 31, 1997
compared to an average of 6.2 million FTE Cable Households in the same period in
1996. In the six months ended December 31, 1997, the Company generated sales per
FTE Cable Household of approximately $9.51 compared with approximately $9.87 per
FTE Cable Household for the same period of the prior year. The major reason for
the decrease in sales per household is due to the addition of 3.1 million
average FTE Cable Households during the six months ended December 31,1997
compared to the same period in 1996, representing a 50% increase. These
additional households have not yet reached their full sales potential as mature
households. The remaining 22% of the 1997 increase in net sales resulted from
approximately $3,045,000 in sales from Collector's Edge, which was acquired in
February 1997 and, therefore, its operations were not included in the 1996
results. Although the broadcast network sales continued to grow through the
addition of more households, sales per FTE Cable Household in the 1997 period
were somewhat lower than expected due to the UPS strike and also the media
coverage of the death of Princess Diana.
Gross Profits. As a result of management's continuing focus on improving
margins, the gross profit margin for the six months ended December 31, 1997 was
41.9% compared to 39.1% for the same period in 1996. This increase represents a
continuation of a favorable trend of increasing gross margins and has been
accomplished through improved buying power as the Company has grown and
emphasized product lines with higher gross margins such as sports memorabilia,
ceremonial cutlery and coins.
Other Operating Income. The Company had infomercial income generated by its
broadcast operations in Boston and Houston of $564,000 compared to $457,000 in
the comparable 1996 six month period, representing a 23.4% increase.
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<PAGE> 27
Salaries and Wages. Salaries and wages for the six months ended December
31, 1997 were $3,522,000, an increase of 30.4% compared to the six months ended
December 31, 1996. Salaries and wages as a percent of sales, however, decreased
to 8.1% from 9.1%. This decrease is attributable to the Company's investment in
prior years in management and operating personnel to build an infrastructure to
support growth and expansion. Salaries and wages expressed as a percentage of
sales have declined since 1995.
Transponder and Cable. Transponder and cable costs for the six months ended
December 31, 1997 were $8,082,000, an increase of $3,055,000 or 60.8% compared
to the six months ended December 31, 1996. Carriage costs increased as a
percentage of sales from 16.9% to 18.6%. Carriage costs as a percentage of sales
initially tend to be higher in periods during which the Company enters a new
market and/or adds a significant number of new households. Due to the fixed
nature of this expense, however, its relationship usually decreases as revenues
develop and the audience matures. The Company's ultimate goal is for carriage
costs to stabilize in mature markets at approximately 15% of revenues. As a
market matures, if carriage costs do not move down toward the target, management
generally attempts to renegotiate the carriage contract.
Other General Operating and Administrative Expenses. Other general,
operating and administrative expenses for the six months ended December 31, 1997
were $4,556,000, an increase of $1,529,000 or 50.6% compared to the six months
ended December 31, 1996. This constituted an increase as a percentage of sales
from 10.1% in 1996 to 10.6% in 1997 and is attributable to a number of factors,
including legal expenses and credit card discounts.
Depreciation and Amortization. Depreciation and amortization for the six
months ended December 31, 1997 was $780,000, an increase of $365,000 or 88.0%
compared to the six months ended December 31, 1996, and is attributable to the
acquisition of additional fixed assets and the amortization of the licenses by
Collector's Edge.
Interest. Interest expense for the six months ended December 31, 1997 was
$455,000, an increase of $66,000 or 17.0% compared to the six months ended
December 31, 1996. The increase was the result of borrowing $2,919,000 by
Collector's Edge to provide working capital and $3,000,000 of additional bank
debt incurred by the Company in connection with the deposit on the Global
stations.
Other Income. The Company sold approximately $309,000 of broadcast time to
certain vendors during the 1997 period. As a result, other income increased to
$479,000 for the six months ended December 31, 1997 from $68,000 for the same
period in 1996, representing a 604.4% increase.
Income Tax (Benefit) Expense. Income tax expense for the six months ended
December 31, 1997 was $702,000, an increase of $712,000 compared to the six
months ended December 31, 1996. For the six month period ended December 31,
1996, income tax expense was lower due to the reversal of a portion of the
valuation allowance on deferred tax assets.
Net Income. As a result of the above revenues and expenses, the Company
generated net income of $1,123,000 for the six months ended December 31, 1997,
compared to net income of $626,000 for the six months ended December 31, 1996,
an increase of 79.4%.
FISCAL 1996 VS. FISCAL 1997
Net Sales. The Company's net sales for the year ended June 30, 1997 were
$67,817,000, an increase of $27,801,000 or 69.5% over the year ended June 30,
1996. The increase was primarily attributable to the addition of approximately
2.6 million FTE Cable Households over the year resulting in a total of 8.3
million FTE Cable Households at the end of June 1997. For the year ended June
30, 1997, the Company generated sales per FTE Cable Household of approximately
$10.25 on an average of 6.6 million FTE Cable Households compared with sales of
approximately $9.50 per FTE Cable Household on an average of 4.2 million FTE
Cable Households in fiscal 1996. This increase in households is attributable
mainly to the expanded coverage through the addition of approximately 1.6
million full power television station FTE Cable Households and approximately 0.6
million FTE Cable Households through an affiliation agreement with
Tele-Communications, Inc. ("TCI").
26
<PAGE> 28
Gross Profit. Gross profit for the year ended June 30, 1997 increased by
$11,691,000 or 75.4% compared to the year ended June 30, 1996, primarily as a
result of increased sales related to expanded carriage throughout the United
States and increased gross margins. The Company's gross profit margin increased
to 40.1% from 38.7% in the previous year as a result of improved purchasing
power, and an emphasis on product lines with a generally higher profit margin.
Higher margins were obtained throughout most product categories, particularly in
the sports product lines.
Infomercial Income. The Company generated $1,014,000 in infomercial revenue
from WMFP in Boston and KZJL in Houston for the year ended June 30, 1997. This
represented a 53.9% increase over the infomercial revenue of the year ended June
30, 1996, and is attributable to an increase in the sale of infomercial time at
KZJL.
Salaries and Wages. Salaries and wages for the year ended June 30, 1997
were $5,564,000, an increase of $1,451,000 or 35.3% over the year ended June 30,
1996, which was attributable primarily to variable labor costs associated with
the higher volume of customer calls and some additions to management. Salaries
and wages decreased significantly as a percentage of sales (8.2% from 10.3%).
This was attributable to escalating sales volumes which outpaced the added
salaries.
Transponder and Cable. Transponder and cable costs for the year ended June
30, 1997 were $12,118,000, an increase of $6,093,000 or 101.1% over year ended
June 30, 1996. Carriage costs increased as a percentage of sales from 15.1% to
17.9%. This is a continuation of a trend that began in 1994 when management made
a strategic decision to use higher cost cable distribution as a means to
increase carriage. Carriage costs as a percentage of sales initially tend to be
higher in periods during which the Company enters a new market. Due to the fixed
nature of this expense, however, its relationship usually decreases as revenues
develop and the audience is cultivated. As a market matures, if carriage costs
do not migrate down toward the target, management attempts to renegotiate the
carriage contract.
Other General Operating and Administrative Expenses. Other general
operating and administrative expenses for the year ended June 30, 1997 were
$7,144,000, an increase of $1,229,000 or 20.8% over the year ended June 30,
1996, the principal elements of which were increases in telephone expenses of
$255,000 and credit card discounts of $490,000, both of which are related to
increased business. While these expenses increased in absolute dollars, they
decreased significantly as a percentage of sales due to escalating sales volumes
which outpaced these added variable expenses.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended June 30, 1997 were $1,056,000, an increase of $178,000 or 20.3%
over the year ended June 30, 1996. This increase is a combination of a $237,000
increase in amortization related to the added license cost for KZJL in Houston
and the amortization of Collector's Edge's NFL licenses, net of an overall
reduction in depreciation of $59,000.
Interest. Interest expense for the year ended June 30, 1997 was $1,080,000,
an increase of $285,000 or 35.8% over the year ended June 30, 1996, which was
the result of indebtedness of $1.4 million incurred in September 1996, in
connection with the acquisition of the final 51% interest in KZJL, Houston,
Texas, and indebtedness incurred and assumed in connection with the acquisition
of Collector's Edge.
Income Tax (Benefit) Expense. Income tax benefit for the year ended June
30, 1997 was $80,000, a decline of $24,000 compared to the tax benefit for the
year ended June 30, 1996. Income tax benefit for the year ended June 30, 1997
was less than the "expected" expense derived by applying the federal corporate
tax rate to pre-tax earnings primarily because the deferred tax valuation
allowance of $1,042,816 was eliminated in 1997 as management determined that the
ability to realize deferred tax assets was more likely than not.
Net Income. As a result of the above revenues and expenses, the Company
generated net income of $1,556,000 for the year ended June 30, 1996 compared to
a net loss of $1,405,000 for the year ended June 30, 1996.
27
<PAGE> 29
FISCAL 1995 VS. FISCAL 1996
Net Sales. The Company's net sales for the year ended June 30, 1996 were
$40,016,000, an increase of $13,229,000 or 49.4% over the year ended June 30,
1995. The increase was primarily attributable to greater cable coverage which
resulted from the addition of approximately 2.7 million FTE Cable Households
resulting in a total of 5.4 million FTE Cable Households by the end of June
1996. This two-fold increase in households is attributable mainly to the
combined coverage 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 increase in sales was the result of sales
volume and not an increase in sales prices. For the year ended June 30, 1996,
the Company generated sales per household of $9.48 on an average of 4.2 million
FTE Cable Households compared.
During fiscal 1996, the Company introduced and developed new product lines
in health and beauty, fitness, and collectible knives. In addition, there was a
broadening of the coin product line, and the Company re-introduced its
"Dominator" collectible baseball card. These new and expanded product lines
helped generate new sales and to broaden the customer base.
Gross Profit. Gross profit for the year ended June 30, 1996 increased by
$5,834,000 or 60.4% over the year ended June 30, 1995, primarily as a result of
increased sales related to expanded carriage throughout the United States and
increased gross margins. The Company's gross profit margin increased to 38.7%
from 36.1% in the previous year as a result of improved purchasing, selection of
higher margin goods and development of unique merchandise and product lines.
Higher margins were obtained throughout most product categories, particularly in
the jewelry and sports product lines.
Infomercial Income. Infomercial income for the year ended June 30, 1996
increased by $470,000 or 248.7% over the year ended June 30, 1995. The Company
generated this income from WMFP in Boston and KZJL in Houston and fiscal 1996
was the first full year of infomercial revenue for the Company.
Salaries and Wages. Salaries and wages for the year ended June 30, 1996
were $4,113,000, an increase of $756,000 or 22.5% compared to the year ended
June 30, 1995, which was attributable to variable labor costs associated with
the higher volume of customer calls and some additions to management.
Transponder and Cable. Transponder and cable costs for the year ended June
30, 1996 were $6,025,000, an increase of $2,799,000 or 86.8% compared to the
year ended June 30,1995, and was attributable to the Company's decision to
pursue a strategy of rapidly expanding cable carriage of the Company's
programming. During this period the Company continued to acquire time on
television and cable systems in a number of markets.
Other General Operating and Administrative Expenses. Other general
operating and administrative expenses for the year ended June 30, 1996 were
$5,915,000, an increase of $2,006,000 or 51.3% over the year ended June 30,
1995. This increase was attributable to an increase in legal expenses associated
with certain litigation, operational expenses for KZJL in Houston which exceeded
revenues during the period of its initial operation, and an increase in
telephone costs and credit card discounts associated with a growth in the
Company's business.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended June 30, 1996 were $878,000, an increase of $360,000 or 69.5%
compared to the year ended June 30, 1995, which was primarily attributable to
the acquisition of fixed assets of the Boston and Houston television stations,
which were owned for a full year in 1996.
Interest Expense. Interest expense for the year ended June 30, 1996 was
$795,000, an increase of $579,000 or 268.1% compared to the year ended June 30,
1995, which was primarily due to increased interest expense on the additional
$2,000,000 in debt secured in August 1995, the proceeds of which were used to
replace working capital used to construct KZJL in Houston, and the full year of
expense from new debt incurred in fiscal year 1995 in connection with the
acquisitions of KZJL and WMFP.
Income Tax (Benefit) Expense. Income tax benefit in the year ended June 30,
1996 was $104,000 compared to no income tax benefit or expense for the year
ended June 30, 1995. Income tax benefit for the
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<PAGE> 30
year ended June 30, 1995 was less than the "expected" benefit derived by
applying the federal corporate tax benefit rate of 34% to pre-tax loss primarily
because the valuation allowance increased $476,582. Management could not
establish at June 30, 1995 that deferred tax assets arising from net operating
loss carryforwards were more likely than not to be realized, accordingly the
valuation allowance was established to adjust the net carrying amount to amounts
expected to be realized.
Net Loss. As a result of the above revenues and expenses, the Company
generated a net loss of $1,405,000 for year ended June 30, 1996 compared to a
net loss of $1,282,000 for the year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical capital sources have included an initial public
offering of Common Stock, proceeds from the private placement of Common Stock
and the private placement of convertible notes, proceeds from the exercise of
warrants, bank lines of credit, funds from operations, and long-term debt
incurred in connection with acquisitions.
The Company had a total of $2,799,000 and $2,613,000 of debt as of December
31, 1997 that was incurred in the acquisition of television stations KZJL in
Houston and WMFP in Boston, respectively. These amounts include seller financing
of $1,999,000 and $2,263,000 for Houston and Boston at an annual interest rate
of 8.9% and 9.8%, respectively. The Company also has outstanding additional debt
of $1,817,000 in connection with its acquisition of Collector's Edge. Other debt
totalling $627,558 as of December 31, 1997, relates primarily to fixed asset
leases on new equipment purchased within the past two years. The total monthly
payments of principal and interest on all debt is approximately $163,000 per
month. In October 1997, a note payable of the Company in the amount of
$1,190,000 was converted into 444,177 shares of Common Stock based on the
conversion terms contained in the original 1995 note. The Company has paid a
total of $4,863,000 as a good faith deposit in connection with the Acquisition,
the first $1,000,000 of which was paid from the cash flow of the Company,
$2,963,000 was obtained from the proceeds of a $3,000,000 loan from a commercial
bank in November 1997, and $900,000 was obtained from the proceeds of the
assignment of the purchase agreement for WPMC (TV). The $3,000,000 was repaid in
February 1998 with proceeds from a working capital facility of the Company.
As of December 31, 1997, the Company had total current assets of
$13,209,000 and total current liabilities of $18,336,000 for negative working
capital of ($5,127,000). The Company's negative working capital position is
primarily attributable to: (i) the deposit with the bankruptcy trustee for the
Acquisition, (ii) increase in accounts receivable due to the Company's
introduction of "stretch pay" terms of sale on higher priced goods, and (iii)
the provision of working capital to Collector's Edge.
The Company expects to incur capital expenditures of approximately
$15,700,000 during the 1998 fiscal year and $3,200,000 in the 1999 fiscal year.
The 1998 expenditures are expected to include (i) $4,000,000 to upgrade the
equipment at the stations acquired in the Acquisition to increase the power and
quality of the broadcast signals of the stations, (ii) $6,400,000 to purchase
the Company's new Facility, (iii) $2,400,000 to equip the Facility, (iv)
$1,800,000 for renovation and improvements at the Facility, and (v) $1,100,000
for normal recurring capital expenditures. The 1999 expenditures are expected to
include an additional (i) $1,600,000 to equip the Facility, (ii) $1,200,000 for
renovation and improvements at the Facility, and (iii) $400,000 for normal
recurring capital expenditures. Of these expenditures, the Company expects the
$17,400,000 to upgrade the stations acquired in the Acquisition and to purchase,
equip and renovate the new Facility will be funded from the proceeds of the
Offerings.
The Company expects that the Offerings and the Acquisition and the
resulting discontinuation of the recently commenced time brokerage agreements
with KCNS and WRAY (See "Business -- Distribution of Programming -- General")
will impact the results of operations as follows: (i) an increase in households
reached due to expanded signal coverage area and enforcing the Company's "must
carry" rights, (ii) costs of carriage will decrease due to the termination of
the time brokerage agreements, (iii) costs related to station operation will
increase, (iv) depreciation and amortization will increase as a result of the
Acquisition, (v) interest expense will increase as a result of the Offerings and
any other additional indebtedness incurred, and (vi) infomercial income will
increase. Notwithstanding the increase in the interest expense resulting from
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<PAGE> 31
the Offerings, the Company believes that funds necessary to meet the Company's
capital requirements for a period of at least 12 months will be available from
the proceeds of the Offerings, funds from operations (after giving effect to the
items listed in (i) through (vi) above) and additional financings, if necessary
or desirable. The Indenture permits the Company, subject to satisfaction of
certain conditions, to incur Indebtedness which may be used for future capital
needs of the Company, including the acquisition of additional broadcast
properties subject to satisfaction of certain conditions. See "Description of
Notes -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Disqualified Stock."
Upon the acquisition of WMFP (TV) in Boston by a subsidiary of the Company
in February 1995, the Company concluded that it was not legally obligated to
collect and remit to the state, sales and use tax on sales to residents of
Massachusetts. The Company requested a ruling from the Massachusetts state
taxing authority that such taxes do not apply to the Company. The ruling request
is currently pending and no decision has been made by the taxing authority. As a
defensive strategy, the Company collects sales and use tax on all sales made
into Massachusetts. The Company intends to pay these collected amounts to the
taxing authority if a determination is made that taxes are due or to refund
these amounts to its customers if not due as taxes. Through December 31, 1997,
the Company had collected approximately $833,000 with respect to sales tax
amounts.
YEAR 2000 COMPLIANCE
The Company's computer systems are programmed to consider the start of the
new century. Accordingly, the Company does not expect that any material
expenditures related to year 2000 compliance will be incurred in future years.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1997, the Company implemented Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure." The Statement consolidates disclosures required by several existing
pronouncements regarding an entity's capital structure. The Company's
disclosures are already in compliance with such pronouncements and, accordingly,
SFAS No. 129 does not require any change to existing disclosures.
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.
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 will
become effective for the Company's June 30, 1998 fiscal year financial
statements and will impact interim reporting beginning with the quarter ending
December 31, 1998. The Company is evaluating SFAS No. 131 to determine the
impact, if any, on its reporting and disclosure requirements.
30
<PAGE> 32
BUSINESS
COMPANY
The Company sells and distributes consumer products through live, customer
interactive retail sales programming that is transmitted via satellite to cable
television systems, television broadcast stations and satellite dish receivers.
Founded in 1986, the Company is one of the fastest growing competitors in the
over $3 billion home shopping industry. Upon the completion of its pending
acquisition of the three UHF television stations described below, the Company
will own and operate five UHF television stations. These stations broadcast in
the San Francisco, Boston, Houston, Cleveland and Raleigh markets, four of which
are among the top 13 television markets in the United States.
The Company's programming is provided on its owned and operated television
stations, and to a "network" of over 80 independently owned television stations
and cable systems throughout the country, located in over 100 television
markets, for all or a portion of each broadcast day. As of December 31, 1997,
the Company's programming was viewable during all or part of the day by
approximately 48.9 million cable households throughout North America, of which
approximately 4.4 million cable households could have viewed the programming on
essentially a full-time basis (20 or more hours per day) and approximately 44.5
million cable households received it on a part-time basis. For households that
received the Company's programming on a part-time basis, the average duration of
viewable programming per day is 4.9 hours.
The Company sells a variety of consumer products, including sports
collectibles and sports related products, rare coins, collectible cutlery,
electronics, jewelry, and health and beauty, personal care, household and
lifestyle products, and other select merchandise and collectibles such as dolls
and figurines. The Company believes that it occupies a unique market niche in
the home shopping industry because its product mix and marketing strategy target
men and feature higher price point products with an emphasis on limited
availability merchandise such as sports memorabilia, rare coins and collectible
knives and cutlery. An independent study commissioned by the Company in June
1997 determined that approximately 55% of the purchasers of the Company's
products are male and that approximately 57% of the Company's customers have
incomes above $45,000 (as compared to 44% as reported in a national database).
The Company's average price per unit sold in fiscal year 1997 was approximately
$150, which the Company believes is substantially above the industry average.
Prior to 1993, the Company's programming was primarily received by
individuals who owned satellite television dishes. Commencing in 1993, the
Company began to distribute its programming through broadcast television
stations and cable television. The Company is a party to numerous affiliation
agreements with cable television systems and time purchase agreements with
broadcast television stations pursuant to which its programming is carried. See
"Business -- Affiliations." In 1995 the Company acquired two independent full
power UHF broadcast television stations. See "Business -- Owned and Operated
Stations." Upon the consummation of the Acquisition and the closing of the
Executory Contract, the Company will have acquired three additional independent
full power UHF broadcast television stations. See "Business -- Recent
Development."
INDUSTRY OVERVIEW
HOME SHOPPING. Home shopping involves the sale of merchandise through
dedicated television channels and blocks of television programming that reach
consumers via broadcast television, cable television or satellite dish. The home
shopping industry has experienced strong growth since its inception in 1982 and
aggregate revenues for the industry have grown steadily from approximately $4
million in 1983 to over $3 billion in 1996, representing a compounded annual
growth rate of approximately 66%. Today, the industry is dominated by two
competitors, the Home Shopping Network and the QVC Network, whose combined sales
represented approximately 95% of the industry's 1996 revenues.
U.S. TELEVISION INDUSTRY; UHF TELEVISION. Commercial television
broadcasting began in the United States on a regular basis in the 1940's over
channels in the very high frequency ("VHF") broadcast band (Channels 2-13).
Television channels were later allocated by the FCC in the ultra high frequency
("UHF")
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<PAGE> 33
broadcast band (Channels 14-83). In subsequent actions, the FCC reallocated
Channels 70-83 to nonbroadcast services.
Although VHF and UHF stations are located in the same market, UHF
television stations have suffered competitive disadvantages in the past. These
disadvantages stemmed from the lack of any regulatory requirement prior to 1962
that television receivers have the capacity to receive Channels 14-83. As a
result, there was insufficient quality programming available for UHF stations.
The Company believes that certain of these historical disadvantages have been
ameliorated by advances in technology, liberalization of government regulation
and increased availability of network programming. However, many UHF stations
continue to broadcast a signal inferior to VHF because of the increased power
that would be necessary to achieve a signal quality equivalent to that of a VHF
station.
The requirement that television tuners receive UHF signals, coupled with
improvements in the capacity of television receiver designs, has removed many of
the technical impediments to consumers receiving over-the-air UHF station
broadcast signals. The recent increase in programming available for UHF
television stations, particularly through the new Fox Television Network, the
United Paramount Network and the Warner Brothers Network, also has enhanced the
commercial viability of UHF stations. Further, the carriage of UHF stations on
cable systems (through exercise of a station's "must carry" rights or
retransmission consent) has reduced the impact of weaker UHF television
stations' broadcast signals.
The relaxation of government regulation also has improved the competitive
position of UHF television stations and has made the Company's acquisition
strategy possible. First, in 1984, the FCC deregulated the level of commercial
matter permissible on UHF television stations. As a result, broadcast television
stations are now able to broadcast home shopping formats that are almost
entirely commercial matter. Second, under the recently enacted
Telecommunications Act, it is now permissible for a group UHF owner to have
stations that reach as much as 70% of the national audience. This was
accomplished by Congress' elimination of the restriction on the number of
television stations that any single party could own, operate, control or
otherwise have an interest in throughout the country. Furthermore, the
Telecommunications Act eliminated the FCC rule that limited the national
audience reach of any single broadcaster to 25% and replaced it with a national
audience reach standard of 35%. The Telecommunications Act did not change the
FCC rule that discounts the audience reach of UHF television stations by 50%
(thus, permitting UHF group owners to reach up to 70% of the national audience).
The FCC has stated that it will review the UHF discount in its biennial review
of ownership rules in 1998. The Telecommunications Act also authorized the FCC
to consider relaxing its current prohibition against owning more than one
television station in a market (the "duopoly rule"). The FCC is currently
considering whether to eliminate the duopoly rule.
All television stations in the United States are grouped by Nielsen, a
national audience measuring service, into approximately 210 generally recognized
television markets that are ranked in size according to various formulae based
upon actual or potential audience. Each designated market area under these
rankings ("DMA") is an exclusive geographic area consisting of all counties in
which the home-market commercial stations receive the greatest percentage of
total viewing hours.
BUSINESS STRATEGY
The Company's business objective is to increase revenue and cash flow by
implementing the following strategy:
- INCREASE DISTRIBUTION THROUGH THE ACQUISITION OF TELEVISION BROADCAST
STATIONS AND AFFILIATE CARRIAGE AGREEMENTS. The Company plans to continue
to increase the number of television viewers of its programming by
acquiring broadcast television stations in major markets. Once the Company
completes its pending acquisition of the three television stations, it
intends to upgrade the broadcasting equipment in the San Francisco and
Raleigh stations in order to expand each station's broadcast coverage. By
owning and operating stations in select markets, the Company can broadcast
full time programming in those markets and thereby increase brand
awareness and reach more market segments. In addition, owning stations in
select markets enables the Company to increase its viewership by
exercising "must carry" rights with cable system operators in those
markets. See
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<PAGE> 34
"Business -- Distribution of Programming." The Company also plans to
increase its programming distribution through additional carriage
agreements with cable systems and broadcast television stations owned by
third parties.
- INCREASE REVENUE PER HOUSEHOLD REACHED. The Company intends to improve
its average revenue per household reached by broadening the types of
products it offers, obtaining more attractive hours of programming and
enhancing customer service. The Company's new facility in Nashville will
provide, among other things, additional studio and programming capability.
In addition, the new facility will substantially improve picture quality
through the utilization of high quality digital equipment. The Company
intends to utilize these additional operating capabilities to reach
additional market segments by offering more diverse products and
programming. The Company believes that it can better leverage its daytime
hours by selectively offering more programming dedicated to women and
women's products. For example, one of the studios in the new facility will
contain a working kitchen that can be used to air cooking programs and
sell kitchen products. Moreover, the new facility will contain more than
one studio, enabling the Company to multicast different programming
simultaneously into different markets.
- CONTINUE TO OFFER HIGH QUALITY, DIFFERENTIATED PRODUCT MIX. The Company
plans to continue to implement a strategy of selling niche products such
as sports memorabilia, rare coins and other collectibles that the Company
believes are not readily available through other television home shopping
and retail competitors. The Company believes that its emphasis on
targeting male customers and selling higher price point merchandise
enhances the Company's ability to attract carriage from cable systems and
television broadcasters that value the Company's unique market niche and
the appealing demographics of its customer base.
- UTILIZE EXPANDED CALL CENTER CAPACITY. The new facility in Nashville will
contain an expanded call center. This additional capacity will enable the
Company to process a greater volume of customer calls and provide enhanced
customer services. The Company believes that revenue growth in recent
years has been constrained by its limited capacity to process customer
calls and orders.
- CONTINUE TO IMPROVE MARGINS. The Company plans to improve profit margins
by taking advantage of its purchasing power to negotiate lower wholesale
prices with its vendors, and spreading its fixed costs over increased
households served.
- CONTINUE TO MINIMIZE INVENTORY RISK AND COSTS. The Company will continue
to utilize drop shipping arrangements and a "just in time" inventory
policy. This strategy permits the Company to operate without incurring
significant working capital costs associated with the warehousing,
distributing, financing and managing of inventory.
- LEVERAGE CUSTOMER DATABASE. The Company has a database of the purchasing
habits of its approximately 1 million customers, nearly 412,000 of whom
have ordered a product within the last 18 months. This database is an
invaluable tool for evaluating historical purchasing preferences, enabling
management to refine its merchandising decisions and maximize viewer
interest and sales.
- DEVELOP STRATEGIC REVENUE SOURCES. The Company believes that it has
several opportunities to establish complementary sources of revenue,
including: (i) expansion of its newly developed Internet site as another
avenue for product sales, (ii) establishment of direct mail and package
insert programs, (iii) increasing sales of broadcast time on the Company's
stations to producers of infomercials, (iv) introduction of periodic paid
commercial advertising in the Company's programming, and (v) introduction
of an outbound telemarketing program to the Company's customers.
RECENT DEVELOPMENT
In September 1997, SAH Acquisition II entered into the Asset Purchase
Agreement with Global. Global is subject to the Bankruptcy Proceeding in the
Bankruptcy Court. Under the Asset Purchase Agreement, SAH Acquisition II has
agreed to acquire two broadcast television stations owned by Global, KCNS
located in San Francisco, California and WRAY located in the Raleigh-Durham,
North Carolina market. Under the
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<PAGE> 35
Asset Purchase Agreement, SAH Acquisition II has agreed to assume the legal
right and obligation of Global under the Executory Contract to acquire an
additional broadcast television station, WOAC in the Cleveland, Ohio market. The
Company has guaranteed the performance of SAH Acquisition II under the Asset
Purchase Agreement. An order of the Bankruptcy Court approved the Asset Purchase
Agreement on November 20, 1997.
The total purchase price payable by SAH Acquisition II to Global in
connection with the Acquisition is $52,350,000, of which the Company has paid a
total of $4,863,750 into an escrow account held by the Bankruptcy Trustee and
which will be applied to the Global Purchase Price at the closing. The balance
of $47,486,250 is payable by the Company to Global at the closing of the
Acquisition. In connection with the assignment of the Executory Contract, SAH
Acquisition II is obligated to purchase WOAC for a total purchase price of
$23,500,000. SAH Acquisition II is entitled to a credit for an escrow deposit
previously paid by Global to the sellers of WOAC in the amount of $2,350,000 and
will make a cash payment of $21,150,000 in connection with the closing of the
purchase of WOAC.
Pursuant to the Asset Purchase Agreement, SAH Acquisition II also will
acquire the right to acquire WPMC(TV) in the Knoxville, Tennessee market. SAH
Acquisition II has assigned the right to purchase WPMC to a third party in
consideration of a payment by the third party to the Bankruptcy Trustee of
$500,000 and a payment of $900,000 to the Company. Under the terms of the
transaction, the Bankruptcy Trustee agreed to reduce the original purchase price
of the Acquisition from $52,850,000 to $52,350,000 upon receipt of the $500,000
payment. The Company agreed to pay the $900,000 into the escrow account held by
the Bankruptcy Trustee, thereby increasing the amount of the escrow deposit from
$3,963,750 (the amount agreed upon in the Asset Purchase Agreement) to
$4,863,750. The amount of this escrow deposit will be retained by the Bankruptcy
Trustee at the closing as a credit to the purchase price of $52,350,000, thereby
leaving a net amount due from the Company of $47,486,250.
The obligations of the parties under the Asset Purchase Agreement and the
Executory Contract are subject to receipt of the approval of the FCC of the
Applications for Consent to Assignment of Broadcast Station Licenses filed with
respect to the broadcast licenses to be transferred to SAH Acquisition II. The
FCC published public notice of its approval of the Applications for KCNS and
WRAY on December 15, 1997 and such approval became a final order on January 25,
1998. The FCC published public notice of its approval of the Application for
WOAC on January 29, 1998 and such approval is expected to become a final order
on March 10, 1998 assuming no party files a timely objection thereto.
The net proceeds of the Acquisition paid to Global will constitute assets
of the bankruptcy estate of Global, subject to the resolution of the Bankruptcy
Proceeding. FBR, one of the Underwriters, has filed a proof of claim in the
Bankruptcy Proceeding in the approximate amount of $2.0 million. The claim
relates to unpaid placement agent fees and expenses in connection with a bridge
loan facility provided to Global prior to its bankruptcy. FBR has also filed a
proof of claim for an acquisition fee to be owed by the bankruptcy estate to FBR
in the amount of 1.75% of the proceeds of the sale under the Asset Purchase
Agreement if the sale is completed. The lenders who advanced the bridge loan are
also creditors in the Bankruptcy Proceeding and have filed proofs of claim in
the aggregate amount of approximately $35 million for unpaid principal plus
accrued interest, fees and penalties. In connection with the resolution of the
Bankruptcy Proceeding, FBR and the bridge lenders may be paid in whole or in
part on their claims against Global.
DISTRIBUTION OF PROGRAMMING
GENERAL. The Company's programming is carried by television stations owned
by the Company, by television stations with which the Company has entered into
agreements to purchase broadcast time, by the carriage of those television
broadcasts by cable television systems under the "must carry" or retransmission
consent provisions of federal law, by direct carriage on cable television
systems under agreements with cable system operators, and by the direct
reception of the Company satellite transmission by individuals who own satellite
downlink equipment.
Prior to 1993, the Company's programming was primarily received by
individuals who owned satellite television dishes. Commencing in 1993, the
Company began to distribute its programming through broadcast
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<PAGE> 36
television stations and cable television. The Company is party to numerous
affiliation agreements with cable television systems and time purchase
agreements with broadcast television stations pursuant to which agreements its
programming is carried. See "-- Affiliations." In 1995 the Company acquired two
independent full power UHF broadcast television stations. Upon the consummation
of the Acquisition and the closing of the Executory Contract, the Company will
have acquired three additional full power UHF broadcast television stations. See
"-- Owned and Operated Stations."
Currently, the programming of the Company is viewable during all or a part
of each day by approximately 48.9 million cable households throughout North
America, of which approximately 4.4 million cable households could have viewed
the programming on essentially a full-time basis (20 or more hours per day) and
approximately 44.5 million cable households received it on a part-time basis.
For households that received the Company's programming on a part-time basis, the
average duration of viewable programming per day is 4.9 hours, most of which is
between the hours of midnight and 7:00 a.m. Currently, the Company estimates its
programming is carried in approximately 10.4 million FTE Cable Households. The
Company's full-time programming consists primarily of viewers in the Boston and
Houston markets that receive the programming from the Company's owned and
operated stations and viewers in San Francisco and Raleigh-Durham that currently
receive the programming through the broadcast of the programming over KCNS and
WRAY pursuant to time purchase agreements between the Company and Global
negotiated and executed in June 1997 (which time purchase agreements will
terminate upon the closing of the Acquisition).
The following table sets forth certain information with respect to the
Company's programming distribution to television cable households at December
31, 1997:
<TABLE>
<CAPTION>
NUMBER OF HOURS OF PROGRAMMING AVAILABLE TO
HOUSEHOLD PER DAY
--------------------------------------------------------
0 TO 3 3+ TO 6 6+ TO 9 9+ TO 12 OVER 12 TOTAL
------ ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Number of Households (in
Thousands)...................... 1,327 37,973 3,336 653 5,652 48,941
</TABLE>
As a result of the Acquisition (and prior to planned upgrades to the
acquired stations), the Company estimates that households that could have viewed
the Company's programming on a full-time basis (20 or more hours) will increase
to approximately 5.2 million cable households from approximately 4.4 million
cable households, while cable households receiving the Company's programming on
a part-time basis will decrease by approximately 1.1 million. As a result, the
Company estimates that its programming will be available during all or part of
each day to approximately 48.6 million cable households, of which approximately
5.2 million cable households could view it on a full-time basis (20 or more
hours per day) and approximately 43.4 million cable households could view it on
a part-time basis. Following the Acquisition (and prior to planned upgrades to
the acquired stations), the Company estimates its programming will be carried in
approximately 11.1 million FTE Cable Households.
The Company plans to use approximately $4 million of the proceeds of the
Offerings to install new equipment to increase the power and quality of the
broadcast signal at the acquired stations, including new transmitters and
antennas for KCNS and WRAY. The Company expects the increase in the power and
quality of the acquired stations to result in a further increase in the number
of FTE Cable Households and the Company estimates its programming will be
carried in approximately 11.4 million FTE Cable Households after the Acquisition
and the capital improvements.
The Company's programming is currently distributed through KCNS and WRAY
pursuant to the time purchase agreements between the Company and Global
negotiated and executed in June 1997.
PROGRAMMING ORIGINATION. The Company's programming is originated from the
Company's studios and transmitted by means of the Company's satellite uplink
facilities to transponders leased or subleased by the Company on domestic
communications satellites. The satellites retransmit the signal received from
the Company to (i) satellite dish receivers, (ii) affiliated cable television
systems, and (iii) broadcast television stations located throughout the United
States and parts of Canada and Mexico.
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<PAGE> 37
The Company's programming is transmitted via Telstar 402R, a preemptible
satellite transponder, under a Services Agreement with B&P The SpaceConnection,
Inc., expiring on November 30, 1998. The Company's right to use the transponder
may be preempted at any time to restore (i) another failed transponder that is
entitled to protection, (ii) a satellite failure, or (iii) other service
offerings of the operator of the transponder. The Services Agreement may be
terminated by B&P The SpaceConnection upon the occurrence of certain defaults
specified therein. The Company has recently accepted an offer to extend the term
of the Services Agreement for the life of the transponder (estimated to be eight
years) and to make the service non-preemptible, on pricing terms the Company
considers to be favorable. Subject to the completion of the documentation for
the extension, the new arrangement would mitigate any potential adverse effect
on the Company from an interruption in transponder service. In the event the
extension is not concluded, and although the availability of replacement
transponder time or agreement for satellite capacity is dependent on a number of
factors, the Company believes the supply thereof is, and will be in the future,
satisfactory to provide for the Company's needs on commercially reasonable
terms.
Owned and Operated Stations. The following table sets forth certain
information regarding each of the broadcast stations that will be owned by the
Company (through its Subsidiaries) following the consummation of the
Acquisition:
<TABLE>
<CAPTION>
COMPANY CABLE
RANK HOUSEHOLDS AFTER
OF TELEVISION CABLE THE
CALL SIGN CHANNEL DMA MARKET DMA HOUSEHOLDS(1) HOUSEHOLDS(1) ACQUISITION(2)
--------- ------- -------------- ---- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
KCNS................. 38 San Francisco 5 2,278,480 1,620,000 1,229,000
WMFP................. 62 Boston 6 2,150,110 1,664,610 1,400,000
KZJL................. 61 Houston 11 1,595,350 894,120 675,000
WOAC................. 67 Cleveland 13 1,461,410 1,000,800 800,000
WRAY................. 30 Raleigh-Durham 29 814,730 504,600 328,000
</TABLE>
- ---------------
(1) Total number of television and cable households in the DMA market in 1997
according to Nielsen Media Research.
(2) Estimated number of cable households in which the Company's programming will
be viewable following the Acquisition (and prior to the planned upgrades of
the acquired stations).
WMFP. In February 1995, the Company acquired its first broadcast television
station, WMFP, Channel 62, licensed to Lawrence, Massachusetts and serving the
greater Boston area. The station broadcasts at maximum FCC allowable power from
atop a 35 floor building in downtown Boston. The Company's programming runs on
the station for the majority of each broadcast day. The purchase price of WMFP
was $7.0 million. The FCC license for WMFP expires in April 1999, subject to the
Company's right to apply for a renewal of the license.
KZJL. In fiscal year 1995, the Company also acquired a 49% interest and an
option to acquire the remaining 51% of broadcast television station KZJL,
Channel 61, licensed to Houston, Texas. On September 5, 1996, the Company
acquired the remaining 51% interest. The station signed on the air on June 3,
1995 and broadcasts from a 1,500 foot tower. The Company's programming runs on
the station for the majority of each broadcast day. The purchase price for KZJL
was $3.9 million and the Company incurred capital expenditures of approximately
$2.2 million in connection with upgrades to the station. The FCC license for
KZJL expires in August 1998, subject to the Company's right to apply for a
renewal of the license.
KCNS. KCNS is a full-power broadcast television station broadcasting on
Channel 38 that began broadcast operations in 1986. The station is licensed to
San Francisco, California. The station is licensed to transmit with an effective
radiated power of 5,000 kilowatts; however, it presently operates below that
level due to equipment limitations. The Company plans to purchase new equipment
for the station in order to allow the station to broadcast at its maximum
authorized power. The FCC license for KCNS expires in December 1998, subject to
the Company's right to apply for a renewal of the license.
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<PAGE> 38
WRAY. WRAY is a full-power broadcast television station broadcasting on
Channel 30 that began broadcast operations in 1995. The station is licensed to
Wilson, North Carolina, which is located inside the Raleigh-Durham DMA. The
station currently operates pursuant to a construction permit issued by the FCC
and is authorized to transmit at a power of 1,830 kilohertz. The station,
however, has been unable to achieve that power with its current equipment and is
operating currently under a special temporary authority issued by the FCC at
1,230 kilohertz, which special temporary authority expires on May 7, 1998. An
application has been filed for a full term license for the station, but the
application has not been granted due to the station's operation at reduced
power. The Company plans to purchase new equipment for the station in order to
allow the station to broadcast at its maximum authorized power. The Company
believes that the special temporary authority can be continued as long as
necessary to accomplish the improvements to the station and that the Company
will obtain issuance of the full term license from the FCC.
WOAC. WOAC is a full-power broadcast television station on Channel 67 that
began operations in 1982. The station is licensed to Canton, Ohio, which is
located inside the Cleveland DMA. The station currently operates from a
transmitter facility with an effective power of 5,000 kilowatts. The FCC license
for WOAC expires in October 2005, subject to the Company's right to apply for a
renewal of the license.
Following the closing of the Acquisition and the purchase of WOAC, the
Company's owned and operated stations will operate in markets that have
approximately 8.3 million television households.
The Acquisition of KCNS and WRAY and the purchase of WOAC are consistent
with the Company's strategy of increasing distribution of the Company's
programming and the Company's evaluation of the underlying asset value of
broadcast television properties.
AFFILIATIONS. In 1993, the Company commenced efforts to build cable
distribution for the Company's programming. Since that time, the Company has
been successful in significantly increasing its cable distribution and in
building relationships with certain owners of multiple cable systems. The
Company's programming is now viewed in more than 80 cable markets, including all
of the country's top ten DMA's. In fiscal year 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 a portion of each day.
The Company has successfully negotiated carriage with TCI that has added
approximately 4.9 million part-time households to the Company's distribution.
The Company is currently negotiating with TCI to reach an agreement pursuant to
which TCI would carry the Company's programming on certain of TCI's cable
systems on a full-time basis. There can be no assurance, however, that such an
agreement will be obtained.
The Company's affiliation agreements typically have a term of one year and
can be canceled upon a thirty day notice by either party. The Company's
experience has been that most of the affiliation agreements are renewed beyond
their original terms. The time purchased under these agreements is usually
preemptible, and the Company generally pays a fixed rate for the hours its
programming is actually carried. In the event that the Company is not operating
profitably in a market under a carriage agreement, the Company will generally
renegotiate the carriage rate or terminate or not renew the agreement.
INTERNET SITE. The Company has recently created a transactional Internet
site, which can be found on the World Wide Web at www.ishopathome.com. At the
present time the costs to the Company of maintaining the web site are in excess
of the net sales attributable to the site. For the six months ended December 31,
1997, total net sales made through the web site were approximately $95,000, and
the Company incurred a loss of approximately $62,000 associated with its
Internet site. At this time, the Company does not intend to make substantial
cash expenditures for infrastructure or advertising of the web site. The Company
believes that the Internet may be an economic distribution path for the
Company's sales programming and that Internet commerce may constitute an aspect
of the Company's business that will become more important in the future.
PRODUCTS AND CUSTOMERS
PRODUCTS AND MERCHANDISE. The Company offers a variety of consumer products
including jewelry, gemstones, sports cards and memorabilia, rare coins and
currency, collectible knives and swords, electronics,
37
<PAGE> 39
fitness equipment, health and beauty products, and home-related items. The
Company seeks to offer high quality products that are not readily available
through its competitors. From time to time, the Company also offers exceptional
values consisting of close-out merchandise from selected vendors.
The Company buys from numerous vendors and believes its relationships with
most of its vendors are excellent. Certain products sold by the Company are
available through multiple suppliers. The Company also acquires unique products
from a select group of vendors (some of whom are shareholders of the Company)
and believes it will be able to continue to identify sources of specialty
products. The Company believes offering unique products helps differentiate the
Company 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.
The following table sets forth certain information about the types of
products sold by the Company:
<TABLE>
<CAPTION>
AVERAGE PRICE AGGREGATE PERCENTAGE
PER UNIT OF AMOUNT OF OF NET
TYPE OF PRODUCT PRODUCT SOLD(1) NET SALES(2) SALES(2)
- --------------- --------------- ------------ ------------
<S> <C> <C> <C>
Sports Products................................ $159 $30,539 45.0%
Collectible Cutlery............................ 117 10,132 14.9
Coins and Currency............................. 223 9,255 13.7
Jewelry and Gemstones.......................... 164 10,009 14.7
Health and Beauty Products..................... 70 2,900 4.3
Electronics.................................... 223 1,910 2.8
Other Items.................................... 96 3,072 4.6
---- ------- -----
Total.......................................... $150 $67,817 100.0%
==== ======= =====
</TABLE>
- ---------------
(1) Based on gross sales for the twelve month period ended December 31, 1997.
(2) For the fiscal year ended June 30, 1997.
PRESENTATION OF MERCHANDISE AND PROGRAMMING. The Company segments most of
its programming into product or theme categories. The Company has the studio and
broadcasting capacity to produce two live shows simultaneously. The Company
occasionally provides multiple broadcasts (two or more) to differing viewer
groups 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 the ESPN Network.
The Company seeks to differentiate itself from other televised home
shopping programmers by utilizing an informal, personal style of presentation
and by offering certain unique and high end types of products with a heavy
emphasis on sports and sports related products. The Company's sale of rare
coins, collectible sports items, and other limited-availability items provides
its 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.
CUSTOMER CHARACTERISTICS. In June 1997, the Company obtained an independent
study of the Company's customer base. The independent consultant that performed
the study compared approximately 7,000 of the Company's customers to a national
database. The study indicated that approximately 55% of the purchasers of the
Company's products are male. In addition, the study indicated that approximately
57% of the Company's customers have incomes above $45,000 as compared to 44% in
the national database. The study also indicated
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<PAGE> 40
that a significant percentage of customers of the Company are in the 45-54 age
bracket (28% as compared to 20%).
REPEAT CUSTOMERS. The Company places an emphasis on the development of
customers who make multiple purchases from the Company. The Company has
developed its "Elite Program" for persons who have purchased more than $10,000
of merchandise and provides certain benefits to these persons under the program.
These benefits include special coupons and offers and priority access to the
Company's call center for placing orders and customer service.
The Company estimates that since July 1, 1996, a total of approximately
412,000 persons have made purchases from the Company. Of this number of
customers, the Company estimates that approximately 27% have made purchases on
more than one occasion.
RETURNS OF PRODUCTS AND MERCHANDISE
The Company offers its customers a full refund on merchandise returned
within 30 days of the date of purchase. During the year ended June 30, 1997,
these returns were 22.2% of total revenues, compared to 20.1% for the year ended
June 30, 1996 and 20.1% for 1995. For the six months ended December 31, 1997,
returns were approximately 20.6% of total revenues compared to approximately
20.3% for the comparable six months in the previous year. The Company's return
percentage compares favorably with those of its competitors in the industry,
although the recent percentage of returns has been somewhat higher due to the
nature of certain special promotions of sports products and the return of
products involved in the litigation with NBA Properties. See "Business -- Legal
Proceedings."
CUSTOMER RELATIONS. 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 or electronic check, and the Company also accepts payment by money order,
personal check, certified check, debit cards and wire transfers. The Company has
recently developed and implemented an in-house training program designed to
improve the productivity, proficiency, product knowledge and customer service of
the Company's call center operators.
The Company ships customer orders as promptly as possible after receipt,
primarily by UPS, Federal Express, or parcel post. The Company ships from its
warehouse facility in Knoxville or directly from selected vendors with which the
Company has "drop ship" agreements. The Company maintains its customer service
department to address customer inquiries about ship dates, product, and billing
information.
The Company offers a 30 day return policy to maintain customer satisfaction
and 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 or products, increase the Company's revenue per household, and introduce
new viewers to its programming. The Company utilizes a number of media for these
promotions, including on-air promotion, show host emphasis, package stuffers,
direct response mailers and cable commercials.
COLLECTOR'S EDGE. In March 1997, Collector's Edge was organized as an
indirect wholly-owned subsidiary of the Company. Collector's Edge manufactures
and sells sports trading cards, principally football cards, and its principal
assets are licenses from National Football League Properties, Inc. ("NFL
Properties") and National Football League Players, Incorporated ("NFL Players").
Collector's Edge is one of eight companies that are known by the Company to have
licensing agreements with NFL Properties and NFL Players to produce and sell
football trading cards. Collector's Edge specializes in the production of these
cards using plastic rather than normal paper stock. Collector's Edge acquired
the assets of a business that previously held
39
<PAGE> 41
the NFL licensing agreements and produced these cards for a period of four
years. For the six months ended December 31, 1997, Collector's Edge had net
sales of approximately $3.4 million.
The licensing agreement with NFL Properties gives Collector's Edge the
right to use the logos and trademarks of NFL teams on its trading cards, and the
current agreement expires on March 31, 1998. The licensing agreement with NFL
Players gives Collector's Edge the right to use the likenesses of NFL players on
its trading cards, and the current agreement expires on February 28, 1999. While
Collector's Edge has no reason to believe that the licensing agreements will not
be renewed, such renewals are not assured. The failure of NFL Players to renew
its license agreement would effectively terminate the Company's ability to
manufacture and sell football trading cards. The failure of NFL Properties to
renew its license agreement would terminate the ability of Collector's Edge to
use NFL logos and trademarks, but not the use of player likenesses, which could
have an adverse effect on its business but would not terminate its ability to
produce football trading cards.
Collector's Edge produces football cards generally during the professional
football season (October to January), but it sells the cards on a year-round
basis and its sales are not typically seasonal. As is normal for the industry,
Collector's Edge permits its purchasers to return unsold trading cards for full
credit upon a notice from Collector's Edge that it will accept return, which
notice is typically given.
COMPETITION
The television home shopping industry is highly competitive and is
dominated by two companies, The Home Shopping Network and the 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 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 position on cable
systems. The Company expects the home shopping industry to continue to grow and
expects increased competition for viewers, personnel, and television station
carriage from present competitors, as well as new entries into the market.
However, the Company believes there are substantial barriers to entry into its
business, including limited ability to obtain distribution for programming.
Several significant new companies that announced or launched competitive
services during 1997 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 the Company is one of only four broadly
distributed electronic retailers in the U.S.
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 companies, and
catalogue companies and other direct sellers.
EMPLOYEES
The Company had approximately 300 employees as of December 31, 1997, most
of whom are full-time employees. Of its employees, approximately 140 are
involved in sales and approximately 160 are involved in administration. The
Company believes its relationship with its employees is good. Presently no
collective bargaining agreements exist between the Company and its employees.
PROPERTIES
The Company's business offices, broadcast studios, inbound call center, and
fulfillment operations are currently located in Knoxville, Tennessee. The
Company leases approximately 17,000 square feet of space in Knoxville, Tennessee
from a corporation controlled by a director. See "-- Certain Relationships and
Related Transactions." The Company also leases approximately 5,000 of additional
warehouse space in Knoxville. Prior to August 1997, the Company leased office
space in Atlanta, Georgia to house its investor and affiliate
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relations departments. The Company now maintains its corporate and investor
relations office in Nashville, Tennessee. The Company also maintains a cable
affiliate development office in Denver, Colorado.
During calendar year 1998, the Company plans to relocate its offices and
studios to the new Facility located in Nashville, Tennessee. The Facility has
been acquired by a limited liability company (the "Initial Purchaser"),
organized at the request of the Company, for a total purchase price of
approximately $4.0 million. The Initial Purchaser has entered into a loan
transaction with a commercial bank under which it may borrow up to $6.4 million
to be used for the payment of the purchase price and to be drawn as needed to be
applied to renovations of the Facility. The loan is secured by a mortgage deed
of trust on the Facility, by the guaranty of the Company, and the personal
guaranty of J.D. Clinton. When completed, the Facility will have approximately
74,000 square feet of usable space and will be renovated to the specifications
of the Company. Following the closing of the Offerings, the Company will acquire
the Facility for a total purchase price of approximately $6.4 million, made up
of the price paid by the Initial Purchaser for the Facility, and the outstanding
balance on the loan for the renovation of the Facility. The Initial Purchaser is
owned by two individuals who are related to the Chairman of the Company. In
addition to the total purchase approximately $6.4 million, the Company plans to
use approximately $3.0 million of the proceeds of the Offerings to complete the
interior structure of the Facility and to also use approximately $4.0 million of
the proceeds of the Offerings to equip the Facility. See "Use of Proceeds."
The Company, through its subsidiaries, leases space to house the
transmitters for WMFP in Boston and KZJL in Houston. Collector's Edge leases a
10,000 square foot facility in Denver which it uses for offices, production and
warehousing. In connection with the acquisition of KCNS and WRAY, the Company
will assume lease obligations with respect to studio and transmitter locations.
In connection with the acquisition of WOAC, the Company will assume the lease of
a transmitter location and will enter into an agreement for the studio
operations of the station to be conducted at the location of another television
station in the Cleveland market.
TECHNOLOGY
The Company's operations, including customer ordering and inventory
control, are fully computerized on two IBM RS600 computers operating on a UNIX
operating system. Many of the Company's vendors are connected on-line with the
Company through an electronic data interchange program, which embraces the
Company's strategy of having products drop-shipped by vendors where possible.
The Company also uses a network of desktop computers with intranet, word
processing, spreadsheet, and similar capabilities. These systems are considered
adequate for at least the next year, with normal and customary additions and
upgrades.
In January 1997, the Company completed the installation of an Aspect Call
center telephone system, which increased the Company's ability to meet higher
sales volumes while reducing operator and telephone costs. The system integrates
the Company's database with caller ID capability and reduces 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 improvements were consistent with management's goal to invest in
current technology to reduce the costs that support sales.
LEGAL PROCEEDINGS
The Company is occasionally a party to litigation arising out of the
conduct of its business.
In May 1997, Signature Financial/Marketing, Inc. ("Signature") filed a
Complaint for Declaratory Judgment in the U.S. District Court for the Northern
District of Illinois seeking a judgment of non-violation of the Lanham Act (the
federal law governing trademarks) with respect to Signature's use of the
designation "SHOP AT HOME" in connection with the promotion and sale of goods.
The case was precipitated by letters from the Company to Signature asserting
that the use of the "SHOP AT HOME" mark by Signature in connection with
catalogue sales and sales on the Internet infringed on the Company's right to
that designation and created confusion in the marketplace. In response to the
filing of the declaratory judgment 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 requesting compensatory and
injunctive relief.
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Signature has filed an amendment to its original complaint alleging that the use
of the name by the Company infringes on the trademark of Signature and
requesting 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 or of Signature recovering damages for such use,
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, in connection with
alleging fraudulent manufacture, promotion, distribution and sale of unlicensed
basketball trading cards depicting NBA Properties' trademarks. NBA Properties is
seeking injunctive relief, an accounting of profits, compensatory damages,
treble damages, punitive damages, statutory damages, interest, costs and fees in
the amount of $1,000,000 from each defendant. According to the complaint filed
by NBA Properties, one of the named defendants that previously had a licensing
agreement with NBA Properties caused trading cards to be printed so as to appear
to have been issued during the period of time the licensing agreement was
effective, but which in fact were issued with false dates and thereby infringed
on the NBA's marks. NBA Properties alleges that the Company acquired and sold
some of these false cards. The cards sold by the Company were not acquired from
the named defendant who allegedly created the false cards, but from the
Company's regular suppliers of sports cards, and the Company had no knowledge
that any of the cards were false or infringed upon any trademarks.
At the present time, the Company has agreed to a temporary injunction with
the plaintiff whereby the Company will not sell any additional cards of that
series of trading cards pending the resolution of the case. If the trading cards
were in fact counterfeit, it is probable that the Company can assert a
successful cross-claim against other defendants who produced the cards or who
sold them to the Company. The Company may be able to recover a portion or all of
any loss from the insurance carriers for the Company, and the Company has
notified its carriers of this litigation. Of the two insurance carriers in
question, one has confirmed coverage in an amount of up to $2,000,000, and the
other insurance carrier is providing legal counsel for the Company's defense but
has reserved its rights to deny coverage at a later date.
In July 1996, one of the Company's liability insurance carriers filed a
lawsuit against the Company in the Chancery Court of Knox County, Tennessee,
seeking a declaratory action that the Company does not have coverage with the
insurance company with respect to certain costs and expenses incurred by the
Company in a lawsuit filed against the Company by Upper Deck Authenticated, Ltd.
("Upper Deck"), in the State of California. The Upper Deck suit has been settled
and dismissed. The current litigation involves the liability of the insurance
company to pay a portion of the legal expenses and costs incurred by the Company
in the Upper Deck suit. The insurance carrier alleges that the Company failed to
properly disclose the existence of the litigation to the carrier and violated
the terms of the insurance policy by failing to give timely notice of the
existence of a claim and that the claims are not within the coverage extended by
the insurance policy. The amount at issue is estimated by the Company to be less
than $150,000. The Company plans to vigorously defend the action at trial and on
appeal, if necessary.
REGULATORY MATTERS
EXISTING REGULATION. The Company's television operations are subject to
significant regulation by the FCC under the Communications Act of 1934, as
amended (the "Communications Act") most recently amended by the
Telecommunications Act of 1996 (the "Telecommunications Act"). The
Communications Act permits the operation of television broadcast stations only
in accordance with a license issued by the FCC upon a finding that the grant of
such license would serve the public "interest, convenience and necessity."
The Communications Act empowers the FCC, among other things: to determine
the frequencies, location and power of broadcast stations; to issue, modify,
renew and revoke station licenses; to approve the assignment or transfer of
control of broadcast licenses; to regulate the equipment used by stations; to
impose penalties for violations of the Communications Act or FCC regulations;
and, to some extent, to regulate a licensee's programming content, including for
example, the broadcast of obscene or indecent material. The
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FCC has also adopted new children's programming regulations for television
broadcasters that require the broadcast of at least three hours per week of
programming designed to meet the educational and informational needs of children
age 16 and younger. Failure to observe these or other rules and policies can
result in the imposition of various sanctions, including monetary forfeitures
or, for particularly egregious violations, the revocation of a license. The
Company's business will be dependent upon its continuing ability to hold
television broadcasting licenses from the FCC.
LICENSE GRANT AND RENEWAL. FCC licenses are generally granted or renewed
for terms of eight years, though licenses may be renewed for a shorter period
upon a finding by the FCC that the public "interest, convenience and necessity"
would be served thereby. The Company must apply for renewal of each broadcast
license. At the time an application is made for renewal of a license, parties in
interest may file petitions to deny such application, and such parties, as well
as members of the public, may comment upon the service the station has provided
during the preceding license term and urge denial of the application. While
broadcast licenses are typically renewed by the FCC, even when petitions to deny
are filed against renewal applications, there can be no assurance that the
licenses for the Company's stations will be renewed at their expiration dates
or, if renewed, that the renewal terms will be for the maximum eight-year
period. The non-renewal or revocation of one or more of the Company's primary
FCC licenses could have a material adverse effect on the Company's operations.
The Company's station licenses of KZJL and WMFP will expire in August 1998, and
April 1999, respectively. The station licenses of KCNS and WOAC will expire in
December 1998, and October 2005, respectively. WRAY is authorized to operate but
has not yet received a license. The station is currently operating at less than
authorized power pursuant to a special temporary authorization. The Company
expects that WRAY will receive its license once the station commences full power
operations. This license is expected to be valid through December 2004, the
standard expiration date for TV stations located in North Carolina.
MULTIPLE OWNERSHIP RESTRICTIONS. The FCC has promulgated rules that limit
the ability of individuals and entities to own or have an ownership interest
above a certain level (known as an "attributable" interest, defined more fully
below), in broadcast television stations and certain other media entities. These
rules include limits on the number of radio and television stations in which an
entity may have an "attributable" interest both on a local and on a national
basis. In the case of corporations holding broadcast licenses, all officers and
directors of a licensee, and stockholders who, directly or indirectly, have the
right to vote 5% or more of the outstanding voting stock of a licensee, are
generally deemed to have an "attributable" interest. Certain institutional
investors who exert no control or influence over a licensee may own up to 10% of
such outstanding voting stock before attribution occurs. Under FCC regulations,
debt instruments, non-voting stock and certain limited partnership interests and
voting stock held by non-minority stockholders (in cases in which there is a
single majority stockholder) are generally not subject to attribution.
On a local basis, FCC rules generally prohibit an entity from holding an
attributable interest in more than one television station with overlapping
service areas. Additionally, the FCC's cross-ownership rules limit combined
local ownership of: (1) a radio station and a television station; (2) a daily
newspaper and a broadcast station; and (3) of a cable television system and a
television station. If an acquisition results in the acquiring entity having a
conflict with the multiple ownership rules, divestiture of one of the media
interests is generally required. The FCC, in certain cases, may grant permanent
waivers of such common ownership. More commonly, the FCC, grants the acquiring
entity temporary waivers of common ownership in order to afford that entity a
reasonable period of time following the consummation of the acquisition to
comply with the applicable law and regulations through disposition of one of the
common interests. A rulemaking proceeding currently pending before the FCC
proposes to liberalize the local ownership limits on television ownership and to
relax the rules prohibiting cross-ownership of radio and television stations in
the same market. There can be no assurance that these rules will be changed.
On a national basis, the FCC generally prohibits an entity from holding an
attributable interest in television stations collectively reaching more than 35%
of all U.S. television households, subject to a 50% discount for UHF television
stations (thus permitting UHF group owners to reach up to 70% of the national
audience). The FCC will review the UHF discount as part of a Congressionally
mandated biennial
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review of ownership rules in 1998. Expansion of the Company's broadcast
operations will continue to be subject to the FCC's ownership rules and any
changes the agency may adopt.
The FCC's cross-interest policy, which precludes an individual or entity
from having a "meaningful" but not "attributable" interest in one media property
and an "attributable" interest in a broadcast, cable or newspaper property in
the same area, may be invoked by the FCC in certain circumstances to reach
interests not expressly covered by the multiple ownership rules.
In a rulemaking proceeding currently pending before the FCC regarding the
attribution rules, the FCC is considering: (1) making non-voting stock
attributable in some instances; (2) how to treat limited liability companies for
purposes of attribution; (3) whether to raise certain attribution thresholds;
(4) whether to change the insulation standards for non-attribution of limited
partnership interests; (5) extending the cross-ownership rules to cover
aggregated equity and(or) debt interests exceeding 33% in a second media outlet
in the same market; and (6) deeming attributable certain television local
marketing agreements (LMAs), which would then preclude LMAs where the programmer
owns or has an attributable interest in another television station in the same
market. There can be no assurance that these rules will be changed, and the
expansion of the Company's broadcast operations will continue to be subject to
the FCC's attribution rules and any changes the agency may adopt.
ALIEN OWNERSHIP RESTRICTIONS. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licensees. Foreign
governments, representatives of foreign governments, non-citizens,
representatives of non-citizens and corporations or partnerships organized under
the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, collectively, may directly or indirectly own up to 20% of the
capital stock of a licensee. In addition, a broadcast license may not be granted
to or held by any corporation that is controlled, directly or indirectly, by any
other corporation of which more than one-fourth of its capital stock is owned or
voted by non-citizens or their representatives, by foreign governments of their
representatives, or by non-U.S. corporations, if the FCC finds that the public
interest will be served by the refusal or revocation of such license.
Restrictions on alien ownership also apply, in modified form, to other types of
business organizations, including partnerships.
PROPOSED LEGISLATION AND REGULATION. The U.S. Congress and the FCC
currently have under consideration, and may in the future adopt, new laws,
regulations and policies regarding a wide variety of matters which could,
directly or indirectly, affect the operation and ownership of the Company's
broadcast properties. In addition to the proposed changes noted above, such
matters include, for example: spectrum use fees; political advertising rates;
free political time; potential restrictions on the advertising of certain
products such as cigarettes and certain other tobacco products, as well as beer,
wine and other alcoholic beverages; the rules and policies to be applied in
enforcing the FCC's equal opportunity regulations; reinstitution of the Fairness
Doctrine; the standards to govern the evaluation of television programming
directed toward children, and violent and indecent programming. The Company is
unable to predict the outcome of future federal legislation or the impact of any
such laws or regulations on the Company's operations.
FCC INQUIRY ON BROADCAST COMMERCIAL MATTER. The FCC also has initiated a
notice of inquiry seeking comment on whether the public interest would be served
by establishing time limits on the amount of commercial matter broadcast by
television stations. No prediction can be made at this time as to whether the
FCC will propose any limits on commercial advertising at the conclusion of its
deliberation or the effect the imposition of limits on the commercial matter
broadcast by television stations would have upon the Company's operations.
IMPLEMENTATION OF THE 1992 CABLE ACT. The Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") included certain
statutory provisions, such as signal carriage, retransmission consent and equal
employment opportunity requirements that directly and indirectly effect
television broadcasting.
The 1992 Cable Act includes signal carriage or "must carry" provisions that
require cable operators to carry the signals of local commercial television
stations. A cable system is generally required to devote up to one-third of its
aggregate activated channel capacity for the mandatory carriage of local
commercial television
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stations. The 1992 Cable Act also includes a retransmission consent provision
that prohibits cable operators and other multi-channel video programming
distributors from carrying the signal of commercial broadcast stations and
certain low power stations without obtaining their consent in certain
circumstances. In addition, cable systems are not allowed to carry distant
commercial television stations (other than certain satellite-delivered
"superstations") or distant or local radio stations without obtaining
retransmission consent. The "must carry" and retransmission consent provisions
are related in that a television broadcaster, on a cable system-by-cable system
basis, must elect once every three years to either require a cable system to
carry the station subject to certain exceptions, or whether to waive that right
to mandatory, but uncompensated, carriage and instead to negotiate a grant of
retransmission consent to permit the cable system to carry the station's signal,
in most cases in exchange for some form of consideration from the cable
operator. In March 1997, the Supreme Court upheld the constitutionality of the
"must carry" requirements. The current strategy of the Company with respect to
the broadcast of its programming by television broadcast stations has been
developed based on the present status of the "must carry" provisions. While no
serious efforts appear to be developing to change these provisions, there is
always a possibility that Congress might elect to do so.
Under the Communications Act, for purposes of the "must carry" provisions,
a broadcast station's market is determined by the FCC using commercial
publications which delineate television markets based on viewing patterns. The
FCC may, however, consider on a case by case basis and acting on specific
written requests, changes in the station's market areas (currently defined by
the ADI, Arbitron's Area of Dominant Influence, to which the station has been
designated), including the exclusion of communities from a television station's
market. In considering requests for a change in a station's market area, the FCC
takes into account a number of factors including whether or not the station in
question provides coverage to the community and evidence of the viewing patterns
in cable and non-cable households in that community. In recent months, the FCC
has ruled on several such requests and in many of these cases has excluded
particular communities from an ADI. To the Company's knowledge, there are no
requests pending at the FCC seeking to exclude any station carrying the
Company's programming from any designated ADI, which would have a material
adverse affect on the Company and its owned and operated stations. Pursuant to
the Telecommunications Act, the FCC has ruled that for the election period
commencing January 1, 2000 a station's market will be defined by the Nielsen
Designated Market Area (DMA) to which it has been designated.
The 1992 Cable Act also codified the FCC's basic equal employment
opportunity ("EEO") rules and the use of certain EEO reporting forms currently
filed by television broadcast stations. In addition, pursuant to the Act's
requirements, the FCC has adopted new rules providing for a review of the EEO
performance of each television station at the mid-point in its license term (in
addition to at renewal time). Such a review will give the FCC an opportunity to
evaluate whether the license is in compliance with the FCC's processing criteria
and to notify the licensee of any deficiencies in its employment profile.
NON-FCC REGULATION. Television and radio broadcast stations also may be
subject to a number of other federal, state and local regulations, including:
those of the Federal Aviation Administration affecting tower height and marking;
federal, state and local environmental and land use restrictions; general
business regulation; and a variety of local regulatory concerns.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following information relates to the executive officers and directors
of the Company as of the date of this Prospectus. Directors are elected for
one-year terms. Under Tennessee law, members of the Board of Directors may be
removed by a vote of the shareholders with or without cause. With the exception
of the President and Chief Executive Officer, who has an employment agreement
with a term of five (5) years, and Mr. Nawy and Mr. Gratteau, each of whom has
an employment agreement, the remaining executive officers serve at the
discretion of the Board:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kent E. Lillie............................ 51 President, Chief Executive Officer, Director
James Bauchiero........................... 50 Executive Vice President and Chief Financial
Officer
T. M. Engle, III.......................... 35 Executive Vice President and Chief Operating
Officer
Joseph Nawy............................... 55 Vice President of Finance
George J. Phillips........................ 36 Vice President, General Counsel and Secretary
H. Wayne Lambert.......................... 47 Vice President of Information Technologies
Everit Herter............................. 56 Vice President of Affiliate Relations
Henry I. Shapiro.......................... 51 Vice President of Merchandise
Kent H. Gratteau, Jr...................... 54 Vice President of Broadcasting & Engineering
Linda O. Ford............................. 33 Vice President of Human Resources
Sandra B. Emery........................... 52 Vice President of Customer Relations
William M. Anderson....................... 52 Vice President of Sports Operations
Shannon S. McGuffin....................... 27 Vice President of Sales and Marketing
Teresa M. McDowell........................ 45 Vice President of Call Center Operations
J.D. Clinton.............................. 53 Director, Chairman of the Board
W. Paul Cowell............................ 54 Director
A.E. Jolley............................... 58 Director
Joseph I. Overholt........................ 48 Director
Frank A. Woods............................ 55 Director
J. Daniel Sullivan........................ 46 Director
Patricia E. Mitchell...................... 54 Director
</TABLE>
Kent E. Lillie, President and Chief Executive Officer and Director. Mr.
Lillie joined the Company as President and Chief Executive Officer in September
1993 and has been a Director since such date. Prior to joining the Company, Mr.
Lillie was Vice President and General Manager, WATL-TV, Atlanta, Georgia,
1992-1993, and was Vice President and General Manager, WPTY-TV, Memphis,
Tennessee, 1987-1992. Mr. Lillie is a graduate of Sacramento City College.
James Bauchiero, Executive Vice President and Chief Financial Officer. Mr.
Bauchiero has served as Executive Vice President and Chief Financial Officer
since January 1, 1998. Prior to joining the Company, Mr. Bauchiero was Vice
President and Chief Financial Officer of Orchid International Group, an
automation and robotics designer and fabricator for heavy manufacturing
facilities and manufacturer of metal stamped products. Prior to joining Orchid
in 1996, Mr. Bauchiero was Vice President and Chief Financial Officer of
National Auto/Truckstops, a franchisor of full-service truckstops. Mr. Bauchiero
holds a BS degree in finance and business economics and an MBA from the
University of Southern California.
Joseph Nawy, Vice President of Finance. Mr. Nawy has served as Vice
President of Finance since September 1994. Mr. Nawy has experience in direct
mail, computer operations and distribution, and prior to joining the Company was
involved in business turnaround situations. From 1990 to 1993 Mr. Nawy was the
Chief Operating Officer and Chief Financial Officer of LP Music Group, a
manufacturer and importer of percussion musical instruments. From 1987 to 1990,
Mr. Nawy was the Chief Financial Officer of American Direct Industries, Inc., a
direct mail retailer. Prior to that, Mr. Nawy served in a variety of corporate
positions,
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and also started his career in public accounting with the firm of Ernst & Young.
Mr. Nawy is a certified public accountant and holds an accounting degree from
New York University.
T.M. Engle, III, Executive Vice President and Chief Operating Officer. Mr.
Engle joined the Company in January 1998. Between 1995 and joining the Company,
Mr. Engle was the Chief Operating Officer of HLC, Inc., a national credit card
marketing company. Between 1985 and 1995, Mr. Engle was employed by IBM
Corporation, initially as a financial analyst, and during his tenure was
promoted to accounting and planning management, Product Pricing Manager, and
finally as Controller for Tennessee Marketing. Mr. Engle holds a degree in
accounting from the University of Tennessee and is a Certified Management
Accountant.
George J. Phillips, Vice President, General Counsel and Secretary. Mr.
Phillips joined the Company in November 1997. Prior to his employment with the
Company, Phillips was counselor to the Assistant Attorney General of the Civil
Division of the United States Department of Justice from 1993 through 1997,
where he oversaw the Office of Consumer Litigation. Prior to joining the Justice
Department, Mr. Phillips was in private practice with Baker, Worthington,
Crossley, Stansberry & Woolf in Nashville, Tennessee, from 1989 to 1993. Mr.
Phillips received his undergraduate degree from Duke University and his law
degree from the University of Tennessee.
H. Wayne Lambert, Vice President of Information Technologies. Mr. Lambert
has served as Vice President of Operations for the Company since March 1992.
Immediately before joining the Company, he served as Operations Officer for
National Book Warehouses, Inc., Knoxville, Tennessee. Prior to that employment,
he served as Assistant Controller for the Knoxville News-Sentinel, Knoxville,
Tennessee. Mr. Lambert is a retired Captain of the Tennessee Air National Guard
and a Base Budget Officer. He is a graduate of the University of Tennessee.
Henry I. Shapiro, Vice President of Merchandise. Mr. Shapiro has served as
the Vice President of Merchandise for the Company since January 1994. Prior to
joining the Company, Mr. Shapiro designed and manufactured jewelry for leading
jewelry retailers, Home Shopping Network and QVC from 1983 through 1993. Mr.
Shapiro attended the Fashion Institute of Technology and Maryland University. He
has served as a consultant for jewelry manufacturers with special emphasis on
the television markets in Thailand, Czechoslovakia, Hong Kong, Switzerland and
Italy.
Kent Gratteau, Jr., Vice President of Broadcasting and Engineering. Mr.
Gratteau joined the Company in August 1995, and before that, he served for ten
years as Engineering Manager for KWGN(TV), Denver, Colorado. He is member of the
Society of Motion Picture and Television Engineers and has served that
organization as Section Chairman and on the Board of Managers for the Rocky
Mountain Section. Mr. Gratteau attended the University of Utah and Florida State
University.
Linda O. Ford, Vice President of Human Resources. Ms. Ford has served as
the Vice President of Human Resources for the Company since May 1996.
Immediately prior to joining the Company, Ms. Ford served as a Human Resources
Consultant for Phillips & Phillips Associates, Inc. From 1993 to 1995, she was
the Manager of Human Resources for National Auto/Truckstops, Inc. From 1989 to
the time she joined National Auto/Truckstops, Inc., Ms. Ford was a Human
Resources Manager for Union Oil Company of California.
Sandra B. Emery, Vice President of Customer Service. Ms. Emery has served
as Vice President of Customer Service for the Company since June 1994. From 1992
until 1994, she served as Operations Manager of Order Entry and Customer Service
for the Company. Prior to that time, she served as Operations Director for
National Book Warehouse, Inc. Her other experience includes positions with
Jostens' Printing and Publishing Company, R.V. Emery Company and Carousel of
Curios.
Everit A. Herter, Vice President of Affiliate Relations. Mr. Herter has
served as Vice President of Affiliate Relations since July 1997. Since 1994, Mr.
Herter has served the Company as Director of Affiliate Relations and as a
consultant. Prior to joining the Company, Mr. Herter was a Senior Vice President
of J. Walter Thompson Co.
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Teresa M. McDowell, Vice President of Call Center Operations. Ms. McDowell
has served as Vice President of Call Center Operations since November 1996. From
1994 to 1996, Ms. McDowell served as Director of Customer Service for Mark
Group, Inc., a catalogue sales company. From 1993 until 1994, Ms. McDowell
served as Manager of Customer Relations at the Customer Service Center of
Bedford Fair Industries, Ltd., also a catalogue sales company. From 1988 to
1993, Ms. McDowell was Manager of Administration and Planning for the Atlanta,
Georgia office of Spring Corporation.
William M. Anderson, Vice President of Sports Operations. Mr. Anderson has
served as Vice President of Sports Operations since August 1997. Prior to that
time, he provided periodic consulting services to the Company and was a
self-employed consultant from 1995 to 1997, primarily providing real estate
acquisition, retail site selection and marketing services. From 1993 to 1995,
Mr. Anderson was President of Beaty Title Company, and from 1990 to 1993 was
President of Interior Logic, a commercial office furniture sales and
installation business. In 1994, Mr. Anderson filed a voluntary Chapter 7
bankruptcy proceeding and received a discharge.
Shannon S. McGuffin, Vice President -- Sales and Marketing. Ms. McGuffin
joined the Company in July 1997 as Program Development Manager and assumed her
present duties in January 1998. From May until August 1996, Ms. McGuffin was an
Account Service Summer Intern with Carden & Cherry, an advertising agency,
during the time she was working toward her M.B.A. degree in Marketing/Management
at the University of Tennessee. From March 1994 until August 1995, Ms. McGuffin
was an account executive selling advertising time for WIS(TV), Columbia, South
Carolina. From November 1992 until March 1994, Ms. McGuffin was employed by J.
Walter Thompson, an advertising agency, doing media negotiation. Ms. McGuffin
has a B.A. in advertising from Southern Methodist University in addition to her
M.B.A. degree.
J.D. Clinton, Director and Chairman of the Board. Mr. Clinton has been a
Director and Chairman of the Board since 1993. Mr. Clinton is Chairman,
President and Chief Executive Officer, Independent Southern Bancshares, Inc.,
Brownsville, Tennessee, a diversified financial institutions holding company.
Mr. Clinton is Chairman and Director of INSOUTH Bank, Brownsville, Tennessee.
Mr. Clinton is a Director, Union Savings Bank, Covington, Tennessee. Mr. Clinton
is a Director, Southern Financial, Inc. Nashville, Tennessee. Mr. Clinton is a
graduate of the University of Memphis.
W. Paul Cowell, Director. Mr. Cowell has been a Director since 1988. Mr.
Cowell was Chairman of the Board of the Company from 1990 through 1993. Mr.
Cowell has been President and Chief Executive Officer, Warren & William, Inc.
(formerly National Book Warehouse, Inc.) a real estate management and holding
company since 1989. Mr. Cowell has been President and Owner, Book Ends Discount
Book Stores, Inc., since 1987. Mr. Cowell is a Director, Global Christian
Ministries, Inc.
A.E. Jolley, Director. Mr. Jolley has been Director since 1986. Mr. Jolley
has been President, Lakeway Containers, Inc., Morristown, Tennessee, a
corrugated container manufacturer, since 1975. Mr. Jolley is a Director, Union
Planters Bank. Mr. Jolley is a Director, Kingwood School, Morristown, Tennessee,
and Commissioner, Morristown City Planning Commission. Mr. Jolley is a Member,
Board of Trustees, Walters State Community College.
Joseph I. Overholt, Director. Mr. Overholt has been a Director since 1986.
Mr. Overholt has been President and Owner of Planet Systems, Inc. a computer
software development company engaged in the satellite delivery of computer data,
since 1992. Mr. Overholt has been President and Owner of Skylink Communications
since 1989. Mr. Overholt was a Vice President of the Company from 1986 through
August 1993. Mr. Overholt is a graduate of the University of Tennessee.
Frank A. Woods, Director. Mr. Woods has been a Director since 1993. Mr.
Woods has been Chairman of the Board and Director of MediaUSA, Inc., Nashville,
Tennessee, a merchant banking firm since 1991. Mr. Woods is a Principal, The
Woods Group, Nashville, Tennessee, a diversified merchant banking firm. Mr.
Woods is a graduate of Vanderbilt University and Vanderbilt University School of
Law.
J. Daniel Sullivan, Director. Mr. Sullivan joined the Company as a Director
in March 1998. Since 1995, Mr. Sullivan has served as the President and CEO of
Sullivan Broadcasting Company, a television
48
<PAGE> 50
broadcasting company. Prior to that time, from 1987 until 1995, Mr. Sullivan was
President of Clear Channel TV, a subsidiary of Clear Channel Communication,
Inc., a broadcasting company.
Patricia E. Mitchell, Director. Ms. Mitchell joined the Company as a
Director in March 1998. Since 1995, Ms. Mitchell has served as the President of
Turner Original Productions, a motion picture production company and an
affiliate of Time, Inc. From 1992 to 1995, Ms. Mitchell was employed by Turner
Broadcasting System, Inc. as a senior vice president and executive vice
president of TBS productions, and has extensive experience in television
production. Ms. Mitchell serves on the advisory board of the Schlesinger Library
on the History of Women at Radcliffe College, the Board of Trustees of the
Sundance Institute, the Advisory Board of the School of Communications at the
University of California at Santa Barbara, the Atlanta TMCA and the High Museum
of Atlanta.
The principal business activity of each of the above persons has been
disclosed above for at least the last five years. In some cases, the individual
also has been employed by a predecessor organization or has undertaken greater
responsibilities within the same employer, a parent company or a successor
organization.
EMPLOYMENT AGREEMENTS
KENT E. LILLIE. On September 25, 1993, the Company executed an employment
agreement with Kent E. Lillie whereby Mr. Lillie commenced employment as the
Company's President and Chief Executive Officer. Under that agreement, Mr.
Lillie was granted options to purchase up to 600,000 shares of Common Stock at
an exercise price of $1.00 per share during the term of the agreement. Of those
options, options to purchase 100,000 shares vested immediately, and additional
options to purchase 100,000 shares vested on each anniversary date of the
agreement. The options expire on the earlier to occur of (i) five years after
the date of vesting or (ii) thirty days after termination of Mr. Lillie's
employment with the Company. In the event of a "change of control" of the
Company, as defined in the agreement, the agreement granted Mr. Lillie certain
rights, including the right to resign at any time during the twelve months
following the occurrence of the change of control, and in the event of such
resignation any options to purchase stock not yet vested would automatically
vest on the date of resignation.
On July 1, 1996, the Board of Directors granted to Mr. Lillie options to
purchase an additional 500,000 shares of the Company's Common Stock at a price
of $3.75 per share. Options to purchase 100,000 shares vested on January 1,
1997, and options to purchase a total of 100,000 shares will vest on January 1
of each year thereafter for another four years. Effective June 19, 1997, these
options were replaced with options having the same terms and conditions, except
for the exercise price which was reduced to $2.87.
Effective July 1, 1997, the Company executed a new employment agreement
with Mr. Lillie to continue his employment as President and Chief Executive
Officer. Under the terms of the agreement, Mr. Lillie will be employed for an
initial term of five years with a base salary of $190,000 per year. The
agreement is automatically renewable for successive two year terms unless either
party terminates the agreement prior to the commencement of the renewal term. In
addition to the base salary, the agreement also provides for a quarterly bonus
of the greater of (i) 10% of the increase in the Company's net operating profit
after taxes over the same quarter of the previous fiscal year, or (ii) 5% of the
"Total Cash Flow" for the quarter. "Total Cash Flow" means the net operating
profit, after taxes, plus depreciation accrued by the Company for its broadcast
station properties. Under the agreement, Mr. Lillie receives an automobile
allowance and other fringe benefits and allowances. The agreement provides that
Mr. Lillie will be granted options to purchase up to 50,000 shares of the
Company's Common Stock at an exercise price of $2.875 per share. These options
will vest on June 30, 2001 and expire on June 30, 2006. In the event of a
"change of control" of the Company, as defined in the agreement, the agreement
grants Mr. Lillie certain rights, including the right to resign at any time
during the 12 months following the occurrence of the event, and the right to
receive an amount equal to his base salary and monthly allowances for the 12
months preceding such resignation. In addition, any options to purchase stock
not yet vested shall automatically vest on the date of such resignation. The
Company has agreed to pay or reimburse Mr. Lillie for the relocation of his
primary residence from Atlanta, Georgia, to Nashville, Tennessee, the Company's
new headquarters location. The Company also agreed to make Mr. Lillie a loan in
the amount of $800,000 in connection with the relocation of his residence. All
of these loan
49
<PAGE> 51
proceeds have been advanced to Mr. Lillie. The loan matures on the earlier of
(i) the date of Mr. Lillie's termination from the Company, or (ii) June 30,
2002. Until maturity, payments equal to 10% of payments made to Mr. Lillie in
addition to his base salary are required to be used to repay the loan. The loan
does not bear interest. The agreement also provides that Mr. Lillie will not
compete with the Company for two years following the termination of his
employment. The loan to Mr. Lillie was made in connection with his relocation to
Nashville, Tennessee, and the loan was approved by a majority of the independent
members of the Board of Directors who did not have an interest in the
transaction and who had access, at the Company's expense, to the Company's or
independent legal counsel.
JOSEPH NAWY. The Company and Mr. Nawy entered into a written employment
agreement on August 24, 1994. The agreement established Mr. Nawy's basic
compensation at $96,000 with a structured bonus, and further provides that the
compensation will be reviewed annually and adjusted by mutual consent. The
agreement also provided that Mr. Nawy would be granted options to purchase
60,000 shares of the Company's Common Stock, with 12,000 shares of this total
vesting after one year and an additional 12,000 shares vested on each
anniversary date until fully vested. The agreement also provides that if Mr.
Nawy's employment is terminated for any reason other than "for cause," he will
receive his normal compensation for a period of 180 days.
COMPENSATION OF DIRECTORS
The Company has not historically paid remuneration to its non-employee
directors for their service as directors. In June 1997, each director was
granted an option to purchase 10,000 shares of the Common Stock of the Company
at a price of $2.875 per share. These options expire in June 2002 if not
exercised prior to such date. Beginning in 1998, the Company expects to pay each
director $500 for each meeting attended in person (or $200 if attended by
telephone), along with the director's expenses associated with attending the
meeting. The Company granted to each director an option to purchase 5,000 shares
of the Company's Common Stock on January 1, 1998, with an exercise price of
$3.75 per share.
REMUNERATION OF DIRECTORS AND OFFICERS
The following table shows compensation earned during the three fiscal years
ended June 30, 1997, by (i) the Chief Executive Officer and (ii) the Company's
four other most highly compensated individuals who were serving as officers on
June 30, 1997 and whose salary exceeded $100,000 for the year ended June 30,
1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING OPTIONS ALL OTHER
SALARY BONUS COMPENSATION /SAR COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) (#) ($)
- ----------------------------- ---- -------- -------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kent E. Lillie............... 1997 $188,654 $155,605 $12,000 510,000 --
President/CEO 1996 120,000 -- 12,000 -- --
1995 120,000 50,000 12,000 -- $18,000(2)
Joseph Nawy,................. 1997 114,393 15,560 6,000 20,000 --
Vice President 1996 96,000 -- 3,500 -- 7,423(3)
Finance(4) 1995 76,431 -- -- 60,000 --
Thomas C. Sutula,............ 1997 122,866 -- 5,000 10,000 --
Executive Vice 1996 101,539 -- -- 100,000 --
President/COO(5)
</TABLE>
- ---------------
(1) Other Annual Compensation consists of an automobile allowance.
(2) Other Compensation consists of a housing allowance.
(3) Other Compensation consists of a relocation allowance.
50
<PAGE> 52
(4) Mr. Nawy's employment began in September 1994.
(5) Mr. Sutula's employment began in July 1995 and terminated in March 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock option
and stock appreciation right ("SAR") grants to any Named Executive Officer who
was granted a stock option during the 1997 fiscal year of the Company.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------
% OF TOTAL
OPTIONS/SARS EXERCISE POTENTIAL REALIZABLE VALUE AT
OPTIONS/SARS GRANTED TO OR BASE ASSUMED ANNUAL RATES OF
GRANTED EMPLOYEES IN PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME (#)(1) FISCAL YEAR ($/SH) DATE OPTION TERMS
---- ------------ ------------ -------- ---------- ------------------------------
5%($) 10%($)
------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Kent E. Lillie.......... 500,000 77.0% $2.87 (1) $588,990 $1,386,877
Kent E. Lillie.......... 10,000 1.5 2.87 6/19/02 7,929 17,522
Joseph Nawy............. 20,000 3.1 2.87 (2) 23,560 55,475
</TABLE>
- ---------------
(1) Options to acquire 500,000 shares of Common Stock of the Company were issued
July 1, 1996, of which options to purchase 100,000 shares became exercisable
on January 1, 1997, with options to acquire 100,000 shares to become
exercisable on January 1, 1998, 1999, 2000 and 2001. The options expire on
the earlier of 30 days after the termination of employment or five years
from the date the options became exercisable. These options were originally
granted at an exercise price of $3.75, but were reissued on June 19, 1997,
at an exercise price of $2.87.
(2) Options to acquire 20,000 shares of Common Stock of Registrant were issued
July 1, 1996, of which options to purchase 4,000 shares became exercisable
on July 1, 1997, with options to acquire 4,000 shares to become exercisable
on July 1, 1998, 1999, 2000, and 2001. The options expire on the earlier of
30 days after the termination of employment or five years from the date the
options become exercisable. These options were originally granted at an
exercise price of $3.75, but were reissued on June 19, 1997, at an exercise
price of $2.87.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to options
exercised by any Named Executive Officer during the 1997 fiscal year of the
Company, and with respect to unexercised options to purchase shares held by such
officers as of the end of the 1997 fiscal year.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS THE-MONEY OPTIONS/SARS
AT JUNE 30, 1997 AT JUNE 30, 1997
SHARES ACQUIRED --------------------- ------------------------
ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) VALUE REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(1)
---- --------------- --------------------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Kent E. Lillie....... None N/A 410,000/600,000 $543,900/$362,600
Joseph Nawy.......... None N/A 24,000/56,000 16,512/24,768
</TABLE>
- ---------------
(1) The market value of underlying securities at June 30, 1997, was $2.813 per
share based upon the Nasdaq SmallCap Market closing price. "In-the-Money"
options are ones in which the fair market value of the underlying securities
exceeds the exercise price of the options.
51
<PAGE> 53
REPORT ON REPRICING OF OPTIONS
At the meeting of the Company's Board of Directors on June 19, 1997, the
Board voted to reprice all of the options to purchase shares of its Common Stock
granted to its employees during 1996 to a new option price of $2.87, the market
price of the stock as of the close of business on June 19, 1997, according to
the Nasdaq SmallCap Market. The options eligible to be repriced had been issued
to a total of approximately 43 employees for a total of 682,500 shares. Among
the employees holding options subject to repricing, six (6) of the employees
were executive officers whose options subject to repricing totaled 585,000 of
the shares. The Board determined that because of the decline in the market price
of the stock from 1996 to 1997, the options were not achieving the goal of
providing an employment incentive to the effected employees.
This repricing of employee stock options is the only repricing of options
ever carried out by the Company. The following table sets out information
concerning the repricing of options held by executive officers of the Company:
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES ORIGINAL
UNDERLYING MARKET PRICE OPTION TERM
OPTIONS/ OF STOCK AT EXERCISE PRICE REMAINING AT
SARS TIME OF AT TIME OF NEW DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT
---- ------------- ----------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kent E. Lillie......... June 19, 1997 100,000 $2.87 $3.75 $2.87 54 mos.*
Kent E. Lillie......... June 19, 1997 100,000 2.87 3.75 2.87 66
Kent E. Lillie......... June 19, 1997 100,000 2.87 3.75 2.87 78
Kent E. Lillie......... June 19, 1997 100,000 2.87 3.75 2.87 90
Kent E. Lillie......... June 19, 1997 100,000 2.87 3.75 2.87 102
Joseph Nawy............ June 19, 1997 4,000 2.87 3.75 2.87 60
Joseph Nawy............ June 19, 1997 4,000 2.87 3.75 2.87 72
Joseph Nawy............ June 19, 1997 4,000 2.87 3.75 2.87 84
Joseph Nawy............ June 19, 1997 4,000 2.87 3.75 2.87 96
Joseph Nawy............ June 19, 1997 4,000 2.87 3.75 2.87 108
Henry I. Shapiro....... June 19, 1997 2,000 2.87 3.75 2.87 60
Henry I. Shapiro....... June 19, 1997 2,000 2.87 3.75 2.87 72
Henry I. Shapiro....... June 19, 1997 2,000 2.87 3.75 2.87 84
Henry I. Shapiro....... June 19, 1997 2,000 2.87 3.75 2.87 96
Henry I. Shapiro....... June 19, 1997 2,000 2.87 3.75 2.87 108
Kent H. Gratteau, Jr. . June 19, 1997 1,000 2.87 3.75 2.87 60
Kent H. Gratteau, Jr. . June 19, 1997 1,000 2.87 3.75 2.87 72
Kent H. Gratteau, Jr. . June 19, 1997 1,000 2.87 3.75 2.87 84
Kent H. Gratteau, Jr. . June 19, 1997 1,000 2.87 3.75 2.87 96
Kent H. Gratteau, Jr. . June 19, 1997 1,000 2.87 3.75 2.87 108
Linda O. Ford.......... June 19, 1997 5,000 2.87 3.56 2.87 58
Linda O. Ford.......... June 19, 1997 5,000 2.87 3.56 2.87 70
Linda O. Ford.......... June 19, 1997 5,000 2.87 3.56 2.87 82
Linda O. Ford.......... June 19, 1997 5,000 2.87 3.56 2.87 94
Linda O. Ford.......... June 19, 1997 5,000 2.87 3.56 2.87 106
Teresa McDowell........ June 19, 1997 5,000 2.87 2.94 2.87 65
Teresa McDowell........ June 19, 1997 5,000 2.87 2.94 2.87 77
Teresa McDowell........ June 19, 1997 5,000 2.87 2.94 2.87 89
Teresa McDowell........ June 19, 1997 5,000 2.87 2.94 2.87 101
Teresa McDowell........ June 19, 1997 5,000 2.87 2.94 2.87 113
</TABLE>
- ---------------
* rounded to the nearest month
52
<PAGE> 54
OMNIBUS STOCK INCENTIVE PLAN
The Company's Omnibus Stock Incentive Plan (the "Plan") was adopted by the
Company's Board of Directors on October 15, 1991, and approved by the Company's
shareholders at the 1991 Annual Meeting of Shareholders. The Plan was amended at
the 1996 Annual Meeting of Shareholders to make certain technical changes in the
Plan. A maximum of 1,500,000 shares of Common Stock may be issued upon the
exercise of options and SARs. No option or SAR may be granted after October 15,
2001.
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 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 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.
No option that is an incentive stock option, or any corresponding SAR
relating to such option, shall be exercisable after the expiration of 10 years
from the date such option or SAR was granted or after the expiration of five
years in the case of any such option or SAR that was granted to a 10%
shareholder.
As of December 31, 1997, stock options for 638,100 shares of Common Stock
have been granted under the Plan and were outstanding and unexercised. A total
of 130,400 shares of Common Stock of the Company have been previously issued
upon exercise of stock options issued under the Plan. Mr. Lillie's options were
not granted by the Company pursuant to the Plan. The Company has never issued
any SARs.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company does not have a Compensation
Committee. All directors of the Company participate in executive compensation
decisions. The members of the Board of Directors during the fiscal year ended
June 30, 1997, were J.D. Clinton, W. Paul Cowell, A.E. Jolley, Joseph I.
Overholt, Frank A. Woods, and Kent E. Lillie.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its Knoxville office and studio space from William and
Warren, Inc., an entity owned by W. Paul Cowell, a director, and paid total
lease payments of approximately $139,800 during the fiscal year ended June 30,
1997. Management of the Company determined that these terms and conditions were
competitive with comparable commercial space being leased in the Knoxville
market.
On August 16, 1995, the Company issued its $2,000,000 Variable Rate
Convertible Secured Note Due 2000 to a corporation wholly-owned by J.D. Clinton,
a director of the Company. See "Security Ownership of Certain Beneficial
Owners." The loan carried interest at the prime rate plus 2%, and was payable in
60 monthly installments. The loan was secured by a security interest in the
inventory, accounts receivable, and certain equipment, furniture and fixtures of
the Company, as well as the stock of MFP, Inc., a subsidiary of the Company, and
an assignment of the proceeds of any sale of the Federal Communications
Commission license of Television Station WMFP, Lawrence, Massachusetts. The note
was convertible to Common Stock of the Company based upon one share of stock for
each $3.00 of the principal balance of the note. Based upon the Company's
knowledge of the commercial lending market, the interest rate and terms of the
note were considered to be at arm's length. On October 1, 1997, the holder sold
the note to FBR Private Equity Fund, L.P., which party immediately converted the
note to 444,177 shares of Common Stock of the Company. FBR Private Equity Fund,
L.P. is an affiliate of FBR.
The Company requested that Partners -- SATH, L.L.C., a Tennessee limited
liability company (the "Initial Purchaser") acquire the land and building which
the Company plans to use as its new Facility in Nashville, Tennessee. The sole
members of the Initial Purchaser are Steve Sanders and James P. Clinton,
53
<PAGE> 55
both of whom are related to J.D. Clinton. The Initial Purchaser acquired the
Facility for a total purchase price of approximately $4 million. The Initial
Purchaser has entered into a loan transaction with a commercial bank under which
it may borrow up to $6.4 million to be used for the payment of the purchase
price and to be drawn as needed to be applied to renovations of the Facility.
The loan is secured by a mortgage deed of trust on the Facility, by the guaranty
of the Company, and the personal guaranty of J.D. Clinton. The Company agreed to
pay an annual fee equal to 1% of the outstanding balance of the Facility loan in
consideration for Mr. Clinton's guaranty, which amount is payable in cash or
stock of the Company. Following the closing of the Offerings, the Company will
acquire the Facility for a total purchase price of approximately $6.4 million,
consisting of the price paid by the Initial Purchaser for the Facility and the
outstanding balance on the loan for the renovation of the Facility, which will
be paid in full. The Company expects to pay a development fee to the development
company owned by Mr. Sanders in the amount of approximately $150,000.
In connection with the relocation of Kent E. Lillie's primary residence
from Atlanta, Georgia, to Nashville, Tennessee, the Company has made an
interest-free loan to Mr. Lillie in the principal amount of $800,000. See
"Management -- Employment Agreements -- Kent E. Lillie" herein.
In February 1995, the Company leased the transmitter for WMFP(TV) from
Brownsville Auto Leasing Corporation. The transaction is a financing lease with
monthly principal payments of $9,700 and an effective interest rate of 15%. The
outstanding balance on the lease was approximately $349,700 at December 31,
1997. James P. Clinton, the brother of J.D. Clinton, is the President and a
principal shareholder of Brownsville Auto Leasing Corporation. The Company
believes that the terms of the lease transaction, when originated, were as
favorable to the Company as those generally available from unaffiliated third
parties.
All of the above transactions were approved by the Company's Board of
Directors, which at the date of such approval had at least two independent
directors who were not interested in the transaction, and a majority of the
independent directors approved each transaction. Any future loans or forgiveness
of loans by the Company to, and any future material transactions between, the
Company and any of its affiliates will be subject to approval by a majority of
the independent disinterested members of the Board of Directors who will have
access, at the Company's expense, to the Company's legal counsel or independent
legal counsel, or by a majority of the shareholders of the Company, other than
any interested shareholders, and will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
The bylaws of the Company provide that (i) the Company will always have at
least two independent directors and that those directors will have access, at
the Company's expense, to the Company's or independent legal counsel, (ii) prior
to entering into any material transaction with an affiliate of the Company, the
transaction must be approved by a majority of the independent directors who are
disinterested in the transaction, and (iii) no transaction with an affiliate may
be approved if the Company has less than two independent directors who are
disinterested in the transaction. In addition, Section 4.11 of the Indenture
prohibits the Company from entering into certain transactions with any affiliate
of the Company, unless certain specific criteria are met. See "Description of
the Notes -- Certain Covenants -- Transaction with Affiliates."
54
<PAGE> 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of January 20, 1998, information with
respect to the beneficial ownership of the Common Stock of the Company by (i)
each person known by the Company to be the beneficial owner of more than five
percent (5%) of the Common Stock of the Company, (ii) each director and director
nominee of the Company, (iii) each of the Named Executive Officers, and (iv) all
directors, director nominees and executive officers of the Company as a group.
Unless otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of Common Stock
of the Company beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
---------------------
AMOUNT AND NATURE AFTER
OF BENEFICIAL BEFORE OFFERINGS
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP OFFERINGS (11)
--------------------------------------- -------------------- --------- ---------
<S> <C> <C> <C>
J.D. Clinton and SAH Holdings, L.P.(2)................... 5,435,200 38.96% 22.69%
W. Paul Cowell(3)........................................ 563,400 4.79 2.59
Frank A. Woods(4)........................................ 15,000 .13 .06
Kent E. Lillie(5)........................................ 735,000 6.10 3.33
A.E. Jolley(6)........................................... 516,092 4.39 2.37
Joseph I. Overholt(7).................................... 524,200 4.46 2.41
Joseph Nawy(8)........................................... 45,000 .38 .21
J. Daniel Sullivan(9).................................... 0 0 0
Patricia E. Mitchell(10)................................. 0 0 0
All executive officers and directors as a group (21
persons)............................................... 8,049,442 55.62 32.89
</TABLE>
- ---------------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options and warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised.
(2) Mr. Clinton's address is 400 Fifth Avenue South, Suite 205, Naples, Florida
34102. The address of SAH Holdings, L.P. ("SAH") is 111 South Washington,
Brownsville, Tennessee 38012. SAH is a Tennessee limited partnership with
Gatehouse Equity Management Corporation, a Tennessee corporation ("GMC"),
as its sole general partner. Mr. Clinton is chairman, a director and the
sole shareholder of GMC. SAH currently owns 2,867,900 shares of Common
Stock. Clinton Investments, L.P., a limited partnership for which GMC is
the sole general partner, owns 332,500 shares and holds warrants to
purchase an additional 542,500 shares of Common Stock. Mr. Clinton holds an
option to purchase 15,000 shares of stock from the Company. Mr. Clinton's
wife owns, individually, 6,800 shares of Common Stock. Two trusts, the
beneficiaries of whom are members of Mr. Clinton's immediate family, own
20,500 shares. SAH holds warrants to purchase up to 1,650,000 shares of
Common Stock.
(3) Mr. Cowell's address is 8205 Walker Road, Knoxville, Tennessee 37938. Mr.
Cowell presently owns 413,456 shares of Common Stock in his individual
name. Mr. Cowell holds an option to purchase 15,000 shares of Common Stock
from the Company. In addition, Mr. Cowell is the income beneficiary and has
a limited right to name the beneficiary of the trust which owns 134,944
shares.
(4) Mr. Wood's address is 631 2nd Avenue South, Nashville, Tennessee 37210. Mr.
Woods holds an option to acquire 15,000 shares of Common Stock from the
Company.
(5) Mr. Lillie's address is 102 Woodmont Boulevard, Suite 200-228, Nashville,
Tennessee 37205. Mr. Lillie presently owns 414,000 shares of Common Stock,
and holds options currently exercisable to purchase an additional 315,000
shares of Common Stock from the Company. Mr. Lillie also holds 6,000 shares
in a retirement account. Mr. Lillie's retirement account is also a limited
partner of SAH Holdings, L.P., and holds a 1.57% equity interest in SAH;
however, Mr. Lillie is not considered the beneficial owner of any shares
held by SAH.
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(6) Mr. Jolley's address is 5715 Superior Drive, Morristown, Tennessee 37814.
Includes options for 15,000 shares issued by the Company.
(7) Mr. Overholt's address is 213 Abbey Road, Newport, Tennessee 37821.
Includes options for 15,000 shares issued by the Company.
(8) Mr. Nawy's address is 5210 Schubert Road, Knoxville, Tennessee 37219.
Includes options for 40,000 shares issued by the Company.
(9) Mr. Sullivan's address is 4431 Dyke Bennett Road, Franklin, Tennessee
37064.
(10) Ms. Mitchell's address is 1050 Techwood Drive NW, Atlanta, Georgia 30818.
(11) Assumes the issuance of 10,000,000 shares pursuant to the Common Stock
Offering.
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DESCRIPTION OF NOTES
GENERAL
The Notes offered hereby will be issued under an indenture to be dated as
of , 1998 (the "Indenture") among the Company, as issuer, each of the
Company's Restricted Subsidiaries (the "Subsidiary Guarantors"), as Subsidiary
Guarantors, and PNC Bank, National Association, trustee (the "Trustee"), a copy
of the form of which will be made available to prospective purchasers of the
Notes upon request. The Indenture will be subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of the material provisions of the Indenture does not purport to be
complete and is subject to, and qualified in its entirety by, reference to the
provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to the
Trust Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "Certain Definitions" below.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on , 2005, will be initially limited in
aggregate principal amount to $75.0 million and will be senior secured
obligations of the Company. Interest on the Notes will accrue at the rate of
% per annum and will be payable semiannually on each and
, commencing , 1998, to the Holders of record on the
immediately preceding and . Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the original date of issuance (the "Issue Date").
Interest will be computed on the basis of a 360-day year comprising twelve
30-day months. Subject to compliance with the covenants in the Indenture, the
Company may issue additional Notes under the Indenture. If issued, such Notes
would be treated as the same class of Notes offered hereby for all purposes
under the Indenture.
The principal of and premium, if any, and interest on the Notes will be
payable and the Notes will be exchangeable and transferable, at the office or
agency of the Company in the City of New York maintained for such purposes (or,
at the option of the Company, payment of interest may be paid by check mailed to
the address of the person entitled thereto as such address appears in the
security register; provided that all payments with respect to Global Notes and
Certificated Notes (as such terms are defined below under the caption "-- Book
Entry, Delivery and Form") the holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof.
The Notes will be issued only in registered form without coupons and only in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange or redemption of
Notes, but the Company may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith.
The Notes will not be entitled to the benefit of any sinking fund.
SUBSIDIARY GUARANTEES
Payment of the principal of (and premium, if any) and interest on the
Notes, when and as the same become due and payable, will be guaranteed, jointly
and severally, on a senior unsecured basis (the "Subsidiary Guarantees") by the
Subsidiary Guarantors. At the Closing Date, each of the Company's Restricted
Subsidiaries will be a Subsidiary Guarantor. In addition, if the Company or any
of its Restricted Subsidiaries shall acquire or create another Restricted
Subsidiary, then such Restricted Subsidiary shall be required to execute a
Subsidiary Guarantee, in accordance with the terms of the Indenture. See
"Certain Covenants -- Issuance of Guarantees by New Restricted Subsidiaries."
The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees
will be limited so as not to constitute a fraudulent conveyance under applicable
law. See "Risk Factors -- Fraudulent Conveyance Considerations."
The Indenture provides that upon a sale or other disposition to a Person
not an Affiliate of the Company of all or substantially all of the assets of any
Subsidiary Guarantor, by way of merger, consolidation or
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otherwise, or a sale or other disposition to a Person not an Affiliate of the
Company of all of the Capital Stock of any Subsidiary Guarantor, by way of
merger, consolidation or otherwise, which transaction is carried out in
accordance with the covenants described below under the captions "Repurchase at
the Option of Holders -- Asset Sales," or in the event that a Subsidiary
Guarantor is, in compliance with the provisions of the Indenture, designated as
an Unrestricted Subsidiary, so long as (a) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect on a pro forma basis to, such release, (b) the Company could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the first paragraph of "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Disqualified Stock" on the date on which such
release occurs, such Subsidiary Guarantor will be deemed automatically and
unconditionally released and discharged from all of its obligations under its
Subsidiary Guarantee without any further action on the part of the Trustee or
any holder of the Notes; provided that any such termination shall occur only if
all obligations of such Subsidiary Guarantor under all of its guarantees of, and
under all of its pledges of assets or other security interests which secure any,
other Indebtedness of the Company shall also terminate upon such sale,
disposition or release.
RANKING
The Notes and Subsidiary Guarantees will be senior obligations of the
respective obligors and will rank pari passu in right of payment with all other
existing and future senior obligations of the Company and the Subsidiary
Guarantors, respectively. Indebtedness under a Senior Credit Facility may be
secured by a first priority pledge of the capital stock of the Other Broadcast
Subsidiaries, the assets of the Other Broadcast Subsidiaries, the accounts
receivable, inventory and general intangibles of the Company (excluding from
general intangibles any collateral for the Notes). Accordingly, the Notes and
the Subsidiary Guarantees will be effectively subordinated to Indebtedness under
a Senior Credit Facility to the extent of the value of the assets securing such
loans and guarantees. As of December 31, 1997, on a pro forma basis after giving
effect to this Offering and the use of proceeds therefrom, the Company would
have had approximately $0.6 million of consolidated Indebtedness other than the
Notes, all of which would have been under capitalized leases. Subject to certain
limitations, the Company and its Restricted Subsidiaries may incur additional
Indebtedness in the future.
SECURITY
Pursuant to current FCC regulations, a licensee of a television broadcast
station may not directly pledge the FCC license. Accordingly, the Company and
the Trustee will enter into the Security and Pledge Agreement pursuant to which
the Notes will be secured by, (i) a first priority pledge of all of the issued
and outstanding capital stock of SAH Acquisition II (which will own KCNS and
WRAY and WOAC subsequent to the Acquisition and the purchase of WOAC and will
hold the FCC licenses of such stations), (ii) a second and junior pledge of all
of the issued and outstanding capital stock of the Other Broadcast Subsidiaries,
which own KZJL and WMFP, (such pledged stock referred to in clauses (i) and
(ii), the ("Pledged Stock")) and (iii) a first priority Lien on all assets owned
by SAH Acquisition II, other than any FCC licenses owned by SAH Acquisition II,
(the "Pledged Assets"), together with profits and proceeds therefrom and
property received with respect to the Pledged Stock in addition thereto, in
exchange for or in substitution therefor (all of the foregoing being referred to
herein collectively as the "Collateral"). So long as no Event of Default has
occurred and is continuing, the Company will be entitled to receive and retain
cash dividends and other cash distributions on any of the Pledged Stock and will
be entitled to vote the Pledged Stock. Upon the occurrence of an Event of
Default, the Indenture will provide that the Trustee can vote the Pledged Stock.
In addition, upon an Event of Default, the Indenture will provide that the
Trustee can realize upon and sell or otherwise dispose of all or any part of the
Collateral and will apply the proceeds of any sale or disposition, first to the
payment of costs and expenses of sale, second to amounts due to the Trustee,
third to the payment in full of all amounts due and unpaid on the Notes and,
finally, any surplus to the Company or the applicable pledgor or to whomever may
be lawfully entitled to receive such surplus. The Notes will not be secured by
any lien on, or other security interest in, any other properties or assets of
the Company or any other properties or assets of any Restricted Subsidiary. The
right of the Trustee to vote the Pledged Stock or to transfer the Pledged Stock
is subject to the Trustee obtaining the prior consent of the FCC. For a
description of risks regarding the value of,
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and inability to realize upon, the Collateral, see "Risk Factors -- Risk of
Insufficient Value of Collateral" and "-- Risk of Inability to Effectively
Realize upon Security."
The Indenture will provide that the Company and SAH Acquisition II must
maintain the condition of all Collateral (other than the Pledged Securities) in
good working order, ordinary wear and tear excepted. In the event that any such
Collateral becomes obsolete or worn out, the Company shall cause a similar piece
of collateral (having a value at least equal to the obsolete or worn out
Collateral) to be acquired for, and transferred to, SAH Acquisition II. SAH
Acquisition II shall grant a first priority lien on such asset to the Trustee.
In addition, the Indenture will provide that the Company will not permit
SAH Acquisition II or any of the Other Broadcast Subsidiaries to transfer any of
its assets (other than pursuant to an Asset Sale), unless SAH Acquisition II or
such Other Broadcast Subsidiary receives fair market value therefor.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to ,
2002. Thereafter, the Notes will be redeemable, at the option of the Company, as
a whole or from time to time in part, on not less than 30 nor more than 60 days'
prior notice to the Holders at the following Redemption Prices (expressed as
percentages of principal amount) together with accrued and unpaid interest, if
any, to the date of redemption (subject to the right of holders of record in the
relevant record date to receive interest due on an interest payment date), if
redeemed during the 12-month period beginning on , of the years
indicated below.
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2002........................................................ %
2003........................................................
2004 and thereafter......................................... 100%
</TABLE>
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date by
the Trustee by such method as the Trustee deems fair and appropriate, provided
that no Note of $1,000 in principal amount at maturity or less shall be redeemed
in part.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs at any time, then each Holder will have the
right to require that the Company purchase such Holder's Notes in whole or in
part in integral multiples of $1,000, at a purchase price in cash equal to 101%
of the principal amount of such Notes, plus accrued and unpaid interest, if any,
to the date of purchase, pursuant to the offer described below (the "Change of
Control Offer") and the other procedures set forth in the Indenture.
Within 10 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes by first-class mail, postage prepaid, at its address appearing in the
security register, stating, among other things: (i) the purchase price and the
purchase date of the Change of Control Offer, which will be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed;
(ii) that any Note not tendered will continue to accrue interest; (iii) that,
unless the Company defaults in the payment of the purchase price, any Notes
accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest after the Change of Control purchase date; and (iv) certain
other procedures that a Holder must follow to accept a Change of Control Offer
or to withdraw such acceptance.
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If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by Holders of Notes seeking to accept the
Change of Control Offer. The failure of the Company to make or consummate the
Change of Control Offer or pay the applicable Change of Control purchase price
when due would result in an Event of Default and would give the Trustee and the
Holders of Notes the rights described under "Events of Default and Remedies."
A Senior Credit Facility may provide that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, may constitute a default
under a Senior Credit Facility.
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event of a substantial asset disposition, if the Holders of Notes seek to
require the Company to purchase the Notes and the Company disputes that it is
required to do so there can be no assurance as to how a court interpreting New
York law would resolve the dispute.
The existence of a Holder's right to require the Company to purchase such
Holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford Holders of Notes the right to
require the Company to repurchase such Notes in the event of a highly leveraged
transaction or certain transactions with the Company's management or its
affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Company (including, in certain circumstances, an
acquisition of the Company by management or its affiliates) that may adversely
affect Holders, if such transaction is not a transaction defined as a Change of
Control. See "Certain Definitions" below for the definition of "Change of
Control." A transaction involving the Company's management or its affiliates, or
a transaction involving a recapitalization of the Company, would result in a
Change of Control only if it is the type of transaction specified in such
definition.
The Company will comply with the applicable tender offer rules including
Rule-14e under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Restricted Subsidiary to,
create any restriction (other than restrictions existing under Indebtedness as
in effect on the Closing Date or in refinancings of such Indebtedness) that
would materially impair the ability of the Company to make a Change of Control
Offer to purchase the Notes tendered for purchase.
Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any Asset Sale unless (i) the consideration received by the Company or
such Restricted Subsidiary for such Asset Sale is not less than the fair market
value of the assets sold, as evidenced by a resolution of the Board of Directors
set forth in an Officers' Certificate delivered to the Trustee and (ii) the
consideration received by the Company or the relevant Restricted Subsidiary in
respect of such Asset Sale consists of at least 85% cash or cash equivalents;
provided, however, that in the case of any Asset Sale that involves Collateral,
(i) the consideration received by the Company or the relevant Restricted
Subsidiary in respect thereof shall be all cash or cash equivalents in which the
Trustee shall be granted a security interest of the same priority as the
priority of the security interest
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held by the Trustee in the asset subject to the Asset Sale, (ii) no Default or
Event of Default shall have occurred and be continuing on the date of such
proposed Asset Sale or would result as a consequence of such Asset Sale, and
(iii) such Asset Sale will not materially adversely affect or materially impair
the value of the remaining Collateral or materially interfere with the Trustee's
ability to realize such value and will not materially impair the maintenance and
operation of the remaining Collateral.
If the Company or any Restricted Subsidiary engages in an Asset Sale not
involving Collateral, the Company may, at its option, within 365 days after such
Asset Sale, (i) apply all or a portion of the Net Cash Proceeds to the permanent
reduction of Indebtedness under a Senior Credit Facility or to the permanent
reduction of other senior Indebtedness of the Company or a Restricted Subsidiary
or (ii) invest (or enter into a legally binding agreement to invest) all or a
portion of such Net Cash Proceeds in properties and long-term assets to replace
the properties and assets that were the subject of the Asset Sale or in assets
(other than current assets) that will be used in a Permitted Line of Business.
Notwithstanding the foregoing, in the event the Asset Sale involves Collateral
or upon the receipt by the Company or any Restricted Subsidiary of any Insurance
Proceeds or Condemnation Proceeds, as the case may be, resulting from a Loss
Event, within 365 days of consummation of such Asset Sale or the receipt of such
Insurance Proceeds or Condemnation Proceeds, as the case may be, the Company or
the relevant Restricted Subsidiary shall invest (or enter into a legally binding
agreement to invest) all or a portion of such Net Cash Proceeds, Insurance
Proceeds or Condemnation Proceeds in properties and long-term assets to replace
the properties and long-term assets that were the subject of the Asset Sale or
Loss Event or in properties and long-term assets that will be used in the same
or similar business as the business of the Company or its Restricted
Subsidiaries, as the case may be, existing on the Closing Date, in which
properties and assets the Trustee shall have a security interest of the same
priority as the priority of the security interest held by the Trustee in the
Collateral subject to such Asset Sale or Loss Event. If any legally binding
agreement to invest Net Cash Proceeds, Insurance Proceeds or Condemnation
Proceeds referred to above in this paragraph is terminated, the Company may,
within 90 days of such termination or within 365 days of such Asset Sale or Loss
Event, whichever is later, invest such Net Cash Proceeds as provided above
(without regard to the parenthetical relating to the legally binding agreement
to invest). The amount of such Net Cash Proceeds, Insurance Proceeds or
Condemnation Proceeds not so used as set forth above in this paragraph
constitutes "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5 million, the
Company will, within 30 days thereafter, make an offer to purchase (an "Excess
Proceeds Offer") from all Holders of Notes on a pro rata basis, in accordance
with the procedures set forth in the Indenture, the maximum principal amount
(expressed as an integral multiple of $1,000) of Notes that may be purchased
with the Excess Proceeds, at a purchase price in cash equal to 100% of the
principal amount thereof, plus accrued interest, if any, to the date such offer
to purchase is consummated. To the extent that the aggregate principal amount of
Notes tendered pursuant to such offer to purchase is less than the Excess
Proceeds, the Company may use such deficiency for general corporate purposes;
provided, however, that any Excess Proceeds which represent Net Cash Proceeds of
Asset Sales involving Collateral or Insurance Proceeds or Condemnation Proceeds
involving Collateral shall continue to remain subject to the security interest
of the Trustee and Collateral for the Notes and may be invested by the Company
in assets (other than current assets) that will be used in a Permitted Line of
Business, the Capital Stock, or properties and assets, of which the Trustee
shall have a first priority security interest in. If the aggregate principal
amount of Notes validly tendered and not withdrawn by holders thereof exceeds
the Excess Proceeds, the Notes to be purchased will be selected on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess Proceeds
will be reset to zero.
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Release and Substitution of Collateral
(a) Notwithstanding the provisions of "Repurchase at the Option of
Holders -- Assets Sales," the Company may transfer any Collateral consisting of
100% of the Capital Stock of a subsidiary owning licenses for a broadcast
television station or assets used thereby (the "Replaced Collateral") in
exchange for Capital Stock of a subsidiary owning licenses for a broadcast
television station, related assets and/or cash ("Replacement Collateral") (such
exchange, a "Substitution Transaction") if:
(i) no Default shall have occurred and be continuing;
(ii) the Company shall have complied with the other provisions of the
Indenture, if any, applicable to such Substitution Transaction;
(iii) if the Replaced Collateral consists of Capital Stock of a
subsidiary owning licenses for a broadcast television station, the
Replacement Collateral consists of 100% of assets or equity interests in
one or more broadcast television stations;
(iv) unless the Replaced Collateral has a value not in excess of
$250,000 (as determined by the Company and set forth in an Officer's
Certificate delivered to the Trustee), the Company delivers a written
opinion of an investment banking firm of national standing or an appraisal
firm with expertise in the valuation of broadcast television stations,
stating that the value to the Company of the Replacement Collateral is at
least equal to the value to the Company of the Replaced Collateral;
(v) the Company (or the relevant Restricted Subsidiary) executes a
supplemental indenture subjecting the Replacement Collateral to the Lien in
favor of the Trustee on behalf of Noteholders under the Indenture; and
(vi) the Company delivers an Opinion of Counsel satisfactory to the
Trustee stating that the Replacement Securities are subject to a valid,
perfected Lien in favor of the Trustee having the same priority as the lien
on the Replaced Collateral on behalf of the Noteholders.
(b) The Company will also be entitled to release Collateral (other than the
Pledged Securities) from the Lien in favor of the Noteholders provided that it
delivers to the Trustee an Officer's Certificate stating that the Collateral so
released, since the Closing Date and giving pro forma effect to the proposed
release, has a fair market value not in excess of $100,000.
(c) Consideration received in a Substitution Transaction shall be subject
to the provisions of "-- Asset Sales."
CERTAIN COVENANTS
Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, take any of the following actions:
(a) declare or pay any dividend on, or make any distribution to holders of,
any shares of the Capital Stock of the Company or any Restricted Subsidiary
(including, without limitation, any payment to stockholders of the Company in
connection with a merger or consolidation involving the Company), other than (i)
dividends or distributions payable solely in Qualified Equity Interests, or (ii)
dividends or distributions by a Restricted Subsidiary payable to the Company or
another Restricted Subsidiary.
(b) purchase, redeem or otherwise acquire or retire for value, directly or
indirectly, any shares of Capital Stock, or any options, warrants or other
rights to acquire such shares of Capital Stock, of the Company, any Restricted
Subsidiary or any Affiliate of the Company (other than, in either case, any such
Capital Stock owned by the Company or any of its Restricted Subsidiaries);
(c) make any principal payment on, or repurchase, redeem, decease or
otherwise acquire or retire for value, prior to the related scheduled principal
payment, sinking fund payment or final maturity, any Subordinated Indebtedness;
and
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(d) make any Investment (other than a Permitted Investment) in any Person
(such payments or other actions described in (but not excluded from) clauses (a)
through (d) being referred to as "Restricted Payments"), unless at the time of,
and immediately after giving effect to, the proposed Restricted Payment:
(i) no Default or Event of Default has occurred and is continuing,
(ii) the Company could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the first
paragraph of the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Disqualified Stock," and
(iii) the aggregate amount of all Restricted Payments made after the
Closing Date does not exceed the sum of:
(A) cumulative Consolidated EBITDA of the Company (or, if the
cumulative Consolidated EBITDA for such period is a deficit, less 100%
of such deficit) less 1.5 times cumulative Consolidated Interest Expense
of the Company, in each case for the period (taken as one accounting
period) commencing on the first day of the fiscal quarter beginning
after the date of the Indenture and ending on the last day of the most
recent fiscal quarter for which financial statements have been made
publicly available but in no event ending more than 135 days prior to
the date of such determination; plus
(B) 100% of the aggregate net cash proceeds received and retained
by the Company from the issue or sale since the date of the Indenture of
Qualified Equity Interests of the Company or of debt securities of the
Company that have been converted into such Qualified Equity Interests
(other than (i) Qualified Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company, (ii) Disqualified Stock
or debt securities that have been converted into Disqualified Stock and
(iii) Qualified Equity Interests sold in the Common Stock Offering).
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions, so long as no Default or Event of Default has
occurred and is continuing or would occur:
(a) the payment of any dividend in cash or Qualified Equity Interests
of the Company within 60 days after the date of declaration thereof, if at
the declaration date such payment would not have been prohibited by the
foregoing provisions;
(b) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary) of, Qualified Equity Interests of the
Company;
(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary) of, shares of Qualified Equity Interests
of the Company;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance or sale
(other than to a Subsidiary) of Subordinated Indebtedness, so long as the
Company or a Restricted Subsidiary would be permitted to refinance such
original Subordinated Indebtedness with such new Subordinated Indebtedness
pursuant to clause (iv) of the definition of Permitted Indebtedness;
(e) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company, options on
any such shares or related stock appreciation rights or similar securities
held by officers or employees or former officers or employees (or their
estates or beneficiaries under their estates) or by any employee benefit
plan, upon death, disability, retirement or termination of employment or
pursuant to the terms of any employee benefit plan or any other agreement
under which such shares of stock or related rights were issued; provided
that the aggregate cash consideration paid for
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such purchase, redemption, acquisition, cancellation or other retirement of
such shares of Capital Stock after the Closing Date does not exceed $1.0
million in any fiscal year; or
(f) the making of any Investment (other than a Permitted Investment)
in exchange for, or out of the proceeds of, the substantially concurrent
sale (other than to a Restricted Subsidiary) of Qualified Equity Interests
of the Company (other than Qualified Equity Interests sold in the Common
Stock Offering); or
(g) Restricted Payments in an aggregate amount not to exceed $5.0
million since the date of the Indenture (measured as of the date made and
without giving effect to subsequent changes in value).
The actions described in clauses (b), (c), (e), (f) and (g) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph but will reduce the amount that would otherwise
be available for Restricted Payments under clause (iii) of the first paragraph
of this covenant and the actions described in clauses (a) and (d) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph and will not reduce the amount that would
otherwise be available for Restricted Payments under clause (iii) of the first
paragraph of this covenant.
For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will
be deemed to have made an Investment in an amount equal to the greater of the
fair market value or net book value of the net assets of such Restricted
Subsidiary at the time of such designation as determined by the Board of
Directors of the Company, and (ii) any property transferred to or from an
Unrestricted Subsidiary will be valued at fair market value at the time of such
transfer, as determined by the Board of Directors of the Company. The amount of
any Restricted Payment (other than cash) shall be the fair market value on the
date of the Restricted Payment of the asset(s) or securities proposed to be
transferred or issued by the Company or such Restricted Subsidiary, as the case
may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by a nationally
recognized investment banking firm if such fair market value exceeds $1.0
million. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officer's Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required under "Certain Covenants -- Restricted Payments" were
computed, together with a copy of any opinion or appraisal required by the
Indenture.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other Person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision will
be reduced by the lesser of (x) the fair market value of such Unrestricted
Subsidiary or other Person at the time it becomes a Restricted Subsidiary and
(y) the initial amount of such Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such Investment
(resulting from the payment of interest or dividends, loan repayment, transfer
of assets or otherwise, other than the redesignation of an Unrestricted
Subsidiary or other Person as a Restricted Subsidiary), to the extent such net
reduction is not included in the Company's Consolidated Net Income; provided
that the total amount by which the aggregate amount of all Restricted Payments
may be reduced may not exceed the lesser of (x) the cash proceeds received by
the Company and its Restricted Subsidiaries in connection with such net
reduction and (y) the initial amount of such Investment.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Company will not, and will not permit any Restricted Subsidiary to,
create, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of, or otherwise incur (collectively, "incur"), any
Indebtedness (including Acquired Indebtedness and the issuance of Disqualified
Stock), except that the Company may incur Indebtedness and a Subsidiary
Guarantor (other than SAH Acquisition II and
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its Restricted Subsidiaries) may incur Indebtedness, in each case if, after
giving effect to such event, the Indebtedness to EBITDA Ratio would be less than
(i) 6.5 to 1.0, for any incurrence occurring through March 15, 2000, (ii) 6.25
to 1.0, for any incurrence occurring after March 15, 2000 and prior to March 15,
2002, or (iii) 6.0 to 1.0, for any incurrence occurring March 15, 2002 and
thereafter.
Notwithstanding the foregoing, the Company may, and may permit its
Restricted Subsidiaries (except as specified below) to, incur the following
Indebtedness ("Permitted Indebtedness"):
(i) Indebtedness of the Company or any Subsidiary Guarantor (other
than SAH Acquisition II and its Restricted Subsidiaries) under a Senior
Credit Facility in an aggregate principal amount (or accredited value, as
applicable) at any time outstanding not to exceed $20.0 million less the
aggregate amount of all Net Cash Proceeds for Assets Sales applied to
permanently reduce such Indebtedness pursuant to the provisions of the
covenant described under the caption "-- Repurchase at the Option of
Holders -- Asset Sales;"
(ii) Indebtedness represented by the Notes and the Subsidiary
Guarantees;
(iii) Existing Indebtedness (other than Indebtedness referred to in
clauses (i) and (ii) above);
(iv) the incurrence by the Company of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are used to
refund, refinance or replace, any Indebtedness that is permitted to be
incurred under clause (ii) or (iii) above;
(v) Indebtedness owed by the Company to any Wholly Owned Restricted
Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary (provided that such Indebtedness is held by the
Company or such Restricted Subsidiary); provided, however, that any
Indebtedness of the Company owing to any such Restricted Subsidiary is
unsecured and subordinated in right of payment from and after such time as
the Notes shall become due and payable (whether at Stated Maturity,
acceleration, or otherwise) to the payment and performance of the Company's
obligations under the Notes;
(vi) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Obligations incurred in the ordinary course of business; or
(vii) the incurrence by the Company or any of the Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations
(whether or not incurred pursuant to Sale and Leaseback Transactions),
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction and improvement of property used in the business of the
Company or such Restricted Subsidiary or any Permitted Refinancing
Indebtedness in respect thereof, in an aggregate amount not to exceed $3.0
million at any one time outstanding.
Liens
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind (other than Permitted Liens) on or with respect to any of its property or
assets, including any shares of stock or indebtedness of any Restricted
Subsidiary, whether owned at the Closing Date or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any right
to receive income thereon, unless (i) in the case of any Lien securing
Subordinated Indebtedness, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien and (ii) in the case
of any other Lien, the Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien; provided, however, that no Lien shall at any time exist on any
Collateral, other than (i) the Lien of the Trustee, for the benefit of the
holder of Notes and (ii) a Lien in favor of the lenders under a Senior Credit
Facility on the capital stock and assets of the Other Broadcast Subsidiaries and
the accounts receivable, inventory and general intangibles of the Company
(excluding from general intangibles any Collateral for the Notes), of the
Company to secure Indebtedness under a Senior Credit Facility that is permitted
under clause (i) of Permitted Indebtedness.
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SAH Acquisition II
The Indenture and the articles of incorporation of SAH Acquisition II and
each Subsidiary thereof will provide that, so long as any Note is outstanding:
(i) SAH Acquisition II and each Subsidiary thereof shall be a special purpose
corporation, organized solely in order to acquire and own the assets of KCNS,
WRAY and WOAC, including the FCC licenses, (ii) SAH Acquisition II and each
Subsidiary thereof will not own any other assets or conduct any other business
other than KCNS, WRAY and WOAC and assets related to the business thereof, (iii)
SAH Acquisition II and each Subsidiary thereof will not, directly or indirectly,
incur any Indebtedness except in respect of the Notes, (iv) SAH Acquisition II
and each Subsidiary thereof will not create, incur, assume or suffer to exist
any Lien securing Indebtedness on any asset of SAH Acquisition II or any
Subsidiary thereof except Liens in favor of the Trustee, for the benefit of the
holders of Notes, and (v) SAH Acquisition II and each Subsidiary thereof will
not be permitted to file for bankruptcy or similar provisions under state law.
There can be no assurance regarding the enforceability of the provision
described in clause (v) above.
Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make
any other distributions on or in respect of its Capital Stock, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans or advances to the Company or any other Restricted Subsidiary or (d)
transfer any of its properties or assets to the Company or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of:
(i) applicable law;
(ii) customary non-assignment provisions of any lease governing a
leasehold interest of the Company or any Restricted Subsidiary;
(iii) the refinancing or successive refinancing of Indebtedness
incurred under the agreements in effect on the Closing Date, so long as
such encumbrances or restrictions are no more restrictive than those
contained in such agreement in effect on the Closing Date;
(iv) any agreement or other instrument of a Person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person, or the property or assets of the
Person, so acquired; and
(v) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (d) above on the property so acquired.
Line of Business
The Company will not, and will not permit any Restricted Subsidiary to,
conduct a business other than a Permitted Line of Business.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Leaseback Transaction, provided that the Company or any
Restricted Subsidiary may enter into a Sale and Leaseback Transaction if (i) the
Company or such Restricted Subsidiary could have incurred (a) Indebtedness in an
amount equal to the Attributable Debt relating to such Sale and Leaseback
Transaction under "-- Incurrence of Indebtedness and Issuance of Disqualified
Stock" and (b) a Lien to secure such Indebtedness pursuant to "-- Liens," (ii)
the aggregate rent payable by the Company or such Restricted Subsidiary in
respect of such Sale and Leaseback Transaction for the duration of the lease is
not in excess of the fair market rental value of the property of assets leased
pursuant to such Sale and Leaseback Transaction for the duration of the lease,
and (iii) such Sale and Leaseback Transaction is treated as an Asset
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Sale and the Company and the relevant Restricted Subsidiaries comply with
"Repurchase at the Option of Holders -- Asset Sales."
Merger, Consolidation or Sale of Assets
The Company may not, in a single transaction or series of related
transactions, consolidate or merge with or into (whether or not the Company is
the surviving corporation), or directly and/or indirectly through its
Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Subsidiaries taken as a whole) in one or more
related transactions to, another Person or entity unless:
(a) either (i) the Company is the surviving corporation or (ii) the
entity or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made (the
"Surviving Entity") is a corporation organized or existing under the laws
of the United States, any state thereof or the District of Columbia and
assumes all the obligations of the Company under the Notes, the Indenture
and the Security and Pledge Agreement pursuant to a supplemental indenture
and an addendum to the Security and Pledge Agreement in a form reasonably
satisfactory to the Trustee;
(b) immediately after giving effect to such transaction, and treating
any obligation of the Company in connection with or as a result of such
transaction as having been incurred as of the time of such transaction, no
Default or Event of Default has occurred and is continuing;
(c) the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could, at the time of such
transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the first paragraph of "-- Incurrence
of Indebtedness and Issuance of Disqualified Stock;"
(d) each Subsidiary Guarantor, unless it is the other party to the
transaction described above, has by supplemental indenture confirmed that
its Subsidiary Guarantee applies to the Surviving Entity's obligations
under the Indenture and the Notes;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the covenant described above under the caption "-- Liens" are
complied with;
(f) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; and
(g) the Company delivers, or causes to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an Officers'
Certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into any other Person or convey, sell, assign, transfer,
lease or otherwise dispose of its properties and assets substantially as an
entirety to any other Person (other than the Company or another Subsidiary
Guarantor) unless: (a) the Person formed by or surviving such consolidation or
merger (if other than such Subsidiary Guarantor) or to which such properties and
assets are transferred assumes all of the obligations of such Subsidiary
Guarantor under the Indenture and its Subsidiary Guarantee, pursuant to a
supplemental indenture in form and substance satisfactory to the Trustee, (b)
immediately after giving effect to such transaction, no Default or Event of
Default has occurred and is continuing and (c) the Subsidiary Guarantor
delivers, or causes to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an Officers' Certificate and an opinion
of counsel, each stating that such transaction complies with the requirements of
the Indenture.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will, except in the
case of a lease, be discharged from all its obligations and covenants under the
Indenture and Notes.
Transactions with Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or suffer to exist any transaction with, or
for the benefit of, any Affiliate of the Company ("Interested Persons"), unless
(a) such transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's-length transaction with third parties who are not
Interested Persons and (b) the Company delivers to the Trustee (i) with respect
to any transaction or series of related transactions entered into after the
Closing Date involving aggregate payments in excess of $500,000, a resolution of
the Board of Directors of the Company set forth in an officers' certificate
certifying that such transaction or transactions complies with clause (a) above
and that such transaction or transactions have been approved by the Board of
Directors (including a majority of the Disinterested Directors) of the Company
and (ii) with respect to a transaction or series of related transactions
involving aggregate payments equal to or greater than $1.0 million (except in
the case of the SATH Transaction), a written opinion as to the fairness to the
Company or such Restricted Subsidiary of such transaction or series of
transactions from a financial point of view issued by a nationally recognized
investment banking firm.
The foregoing covenant will not restrict:
(A) transactions among the Company and/or its Restricted Subsidiaries;
(B) the Company from paying reasonable and customary regular
compensation, fees and indemnification to directors of the Company or any
wholly owned Restricted Subsidiary who are not employees of the Company or
any Restricted Subsidiary;
(C) loans or advances to employees in the ordinary course of business;
and
(D) Restricted Payments not prohibited by the covenant described under
the caption "Certain Covenants -- Restricted Payments."
Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
The Company (a) will not permit any Restricted Subsidiary to issue any
Capital Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) and (b) will not, and will not permit any Restricted Subsidiary to,
transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any
Restricted Subsidiary to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); provided, however, that this covenant will not prohibit
(i) the sale or other disposition of all, but not less than all, of the issued
and outstanding Capital Stock of a Restricted Subsidiary owned by the Company
and its Restricted Subsidiaries in compliance with the other provisions of the
Indenture, or (ii) the ownership by directors of director's qualifying shares or
the ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law. The Indenture will provide
for the execution of the Security and Pledge Agreement, pursuant to which the
Capital Stock of Restricted Subsidiaries shall be pledged to secure the Notes.
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Payments for Consent
The Indenture will provide that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly participate in the
amendment of the Indenture, if there is paid any consideration, whether by way
of interest, fee or otherwise, to any Holder for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the Indenture
or the Notes, unless such consideration is offered to be paid or is paid to all
Holders that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Issuances of Guarantees by New Restricted Subsidiaries
The Company will provide to the Trustee, on the date that any Person
becomes a Restricted Subsidiary, a supplemental indenture to the Indenture,
executed by such new Restricted Subsidiary, providing for a guarantee on a
senior basis by such new Restricted Subsidiary of the Company's obligations
under the Notes and the Indenture to the same extent as that set forth in the
Indenture, provided that in the case of any new Restricted Subsidiary that
becomes a Restricted Subsidiary through the acquisition of a majority of its
voting Capital Stock by the Company or any other Restricted Subsidiary, such
guarantee may be subordinated to the extent required by the obligations of such
new Restricted Subsidiary existing on the date of such acquisition that were not
incurred in contemplation of such acquisition. The obligations of the Subsidiary
Guarantors under the Subsidiary Guarantees will be limited so as not to
constitute a fraudulent conveyance under applicable law.
Unrestricted Subsidiaries
(a) The Board of Directors of the Company may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary so long as (i) neither the Company nor any Restricted Subsidiary is
directly or indirectly liable for any Indebtedness of such Subsidiary, (ii) no
default with respect to any Indebtedness of such Subsidiary would permit (upon
notice, lapse of time or otherwise) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the covenant described under the caption "-- Restricted Payments,"
(iv) neither the Company nor any Restricted Subsidiary has a contract,
agreement, arrangement, understanding or obligation of any kind, whether written
or oral, with such Subsidiary other than those that might be obtained at the
time from Persons who are not Affiliates of the Company, (v) neither the Company
nor any Restricted Subsidiary has any obligation to subscribe for additional
shares of Capital Stock or other equity interest in such Subsidiary, or to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results, and (vi) such
Unrestricted Subsidiary has at least one director on its Board of Directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is an executive officer
of the Company or any of its Restricted Subsidiaries. Notwithstanding the
foregoing, the Company may not designate any of its Subsidiaries existing as of
the Closing Date or any successor to any of them as an Unrestricted Subsidiary
and may not sell, transfer or otherwise dispose of any properties or assets of
any such Subsidiary to an Unrestricted Subsidiary, other than in the ordinary
course of business.
(b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; provided that (i) no Default or Event of
Default has occurred and is continuing following such designation and (ii) the
Company could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the first paragraph of the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance of
Disqualified Stock" (treating any Indebtedness of such Unrestricted Subsidiary
as the incurrence of Indebtedness by a Restricted Subsidiary).
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Reports
Whether or not the Company is required to file reports with the Commission,
the Company will file all such annual reports, quarterly reports and other
documents that the Company would be required to file if it were subject to
Section 13(a) or 15(d) under the Exchange Act. The Company will also be required
(a) to supply to the Trustee and each Holder, or supply to the Trustee for
forwarding to each such Holder, without cost to such Holder, copies of such
reports and other documents within 15 days after the date on which the Company
files such reports and documents with the Commission or the date on which the
Company would be required to file such reports and documents if the Company were
so required and (b) if filing such reports and documents with the Commission is
not accepted by the Commission or is prohibited under the Exchange Act, to
supply at the Company's cost copies of such reports and documents to any
prospective Holder promptly upon written request.
EVENTS OF DEFAULT AND REMEDIES
The following will be "Events of Default" under the Indenture:
(a) default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days
(whether or not prohibited by the subordination provisions of the
Indenture);
(b) default in the payment of the principal of (or premium, if any,
on) any Note when due (whether or not prohibited by the subordination
provisions of the Indenture);
(c) failure to perform or comply with the Indenture provisions
described under the captions "-- Repurchase at the Option of
Holders -- Change of Control," "-- Repurchase at the Option of
Holders -- Asset Sales," "-- Certain Covenants -- Restricted Payments,"
"-- Incurrence of Indebtedness and Issuance of Disqualified Stock,"
"-- Liens," "-- Limitation on Issuances and Sales of Capital Stock of
Restricted Subsidiaries" or "-- Merger, Consolidation or Sale of Assets;"
(d) default in the performance, or breach, of any covenant or
agreement of the Company or any Subsidiary Guarantor contained in the
Indenture or in any Subsidiary Guarantee (other than a default in the
performance, or breach, of a covenant or agreement that is specifically
dealt with elsewhere herein), and continuance of such default or breach for
a period of 30 days after written notice has been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least
25% in aggregate principal amount of the Notes then outstanding;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of
Indebtedness of the Company or any Restricted Subsidiary, which issue
individually or in the aggregate has an aggregate outstanding principal
amount of not less than $5.0 million, and such default has resulted in such
Indebtedness becoming, whether by declaration or otherwise, due and payable
prior to the date on which it would otherwise become due and payable or
(ii) a default in any payment when due at final maturity of any such
Indebtedness;
(f) failure by the Company or any of its Restricted Subsidiaries to
pay one or more final judgments the uninsured portion of which exceeds in
the aggregate $5.0 million, which judgment or judgments are not paid,
discharged or stayed for a period of 60 days;
(g) any Subsidiary Guarantee ceases to be in full force and effect or
is declared null and void or any such Subsidiary Guarantor denies that it
has any further liability under any Subsidiary Guarantee, or gives notice
to such effect (other than by reason of the termination of the Indenture or
the release of any such Subsidiary Guarantee in accordance with the
Indenture);
(h) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Subsidiary; or
(i) the Security and Pledge Agreement shall cease to be in full force
and effect or enforceable in accordance with its terms other than in
accordance with its terms, or the Company denies or disaffirms its
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obligations under the Security and Pledge Agreement or the obligations
under the Security and Pledge Agreement cease to be secured by a perfected
first priority security interest in that portion of the Collateral
purported to be pledged as a first priority pledge under the Security and
Pledge Agreement and a perfected second priority security interest in that
portion of the Collateral purported to be pledged as a second priority
pledge under the Security and Pledge Agreement (other than in accordance
with its terms).
If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such Holders will, declare the principal of, and accrued interest on,
all of the outstanding Notes immediately due and payable and the Trustee may
(subject to FCC regulations, see "Risk Factors -- Risk of Inability to
Effectively Realize Upon Security") enforce its Liens on any Collateral for the
Notes pursuant to the Pledge Agreement or any other security document.
If an Event of Default specified in clause (h) above occurs and is
continuing, then the principal of and accrued interest on all of the outstanding
Notes will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration and its consequences if: (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes,
(B) all unpaid principal of (and premium, if any, on) any outstanding Notes that
has become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes, (C) to the extent that payment of such
interest is lawful, interest upon overdue interest and overdue principal at the
rate borne by the Notes and (D) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and (ii) all Events of Default,
other than the non-payment of amounts of principal of (or premium, if any, on)
or interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. No such rescission will affect any
subsequent default or impair any right consequent thereon.
No Holder has any right to institute any proceeding with respect to the
Indenture or any remedy thereunder, unless the Holders of at least 25% in
aggregate principal amount of the outstanding Notes have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding
within 60 days after receipt of such notice and the Trustee, within such 60-day
period, has not received directions inconsistent with such written request by
Holders of a majority in aggregate principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a Holder for the
enforcement of the payment of the principal of, premium, if any, or interest on
such Note on or after the respective due dates expressed in such Note.
The Holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the Holders of all of the Notes, waive
any past defaults under the Indenture, except a default in the payment of the
principal of (and premium, if any) or interest on any Note, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each Holder notice of the Default or
Event of Default within 90 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of (and premium, if
any, on) or interest on any Notes, the Trustee may withhold the notice to the
Holders if a committee of its trust officers in good faith determines that
withholding such notice is in the interests of the Holders.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five days of any Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor, as such, shall have any
liability for any obligations of the Company or the Subsidiary Guarantors under
the Notes, the Indenture or the Subsidiary Guarantees, as applicable, or any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Subsidiary Guarantors with respect to the outstanding
Notes ("legal defeasance"). Such legal defeasance means that the Company will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes, except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of (and premium, if any, on) and
interest on such Notes when such payments are due, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or
agency for payments in respect of the Notes and segregate and hold such payments
in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee
and (iv) the legal defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to terminate the obligations
of the Company and any Subsidiary Guarantor with respect to certain covenants
forth in the Indenture and described under "Certain Covenants" above, and any
omission to comply with such obligations would not constitute a Default or an
Event of Default with respect to the Notes ("covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance: (a)
the Company must irrevocably deposit or cause to be deposited with the Trustee,
as trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the Holders, money in an amount, or U.S. Government
Obligations (as defined in the Indenture) that through the scheduled payment of
principal and interest thereon will provide money in an amount, or a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of (and
premium, if any, on) and interest on the outstanding Notes at maturity (or upon
redemption, if applicable) of such principal or installment of interest; (b) no
Default or Event of Default has occurred and is continuing on the date of such
deposit or, insofar as an event of bankruptcy under clause (h) of "Events of
Default" above is concerned, at any time during the period ending on the 91st
day after the date of such deposit; (c) such legal defeasance or covenant
defeasance may not result in a breach or violation of, or constitute a default
under, the Indenture or any material agreement or instrument to which the
Company or any Subsidiary Guarantor is a party or by which it is bound; (d) in
the case of legal defeasance, the Company must deliver to the Trustee an opinion
of counsel stating that the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or since the date hereof,
there has been a change in applicable federal income tax law, to the effect, and
based thereon such opinion must confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such legal defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such legal defeasance had not occurred; (e) in the case of covenant
defeasance, the Company must have delivered to the Trustee an opinion of counsel
to the effect that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; and (f) the Company must have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to either the
legal defeasance or the covenant defeasance, as the case may be, have been
complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer document and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note for a
period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Modifications and amendments of the Indenture and any Subsidiary Guarantee
may be made by the Company, any affected Subsidiary Guarantor and the Trustee
with the consent of the Holders of a majority in aggregate outstanding principal
amount of the Notes; provided, however, that no such modification or amendment
may, without the consent of the Holder of each outstanding Note affected
thereby:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon the redemption
thereof, or change the coin or currency in which any Note or any premium or
the interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment after the Stated Maturity thereof (or,
in the case of redemption, on or after the redemption date);
(b) amend, change or modify the obligation of the Company to make and
consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the covenant described under the covenant entitled
"Repurchase at the Option of the Holders -- Asset Sales" or the obligation
of the Company to make and consummate a Change of Control offer in the
event of a Change of Control in accordance with the covenant entitled
"Repurchase at the Option of the Holders -- Change of Control," including,
in each case, amending, changing or modifying any definition relating
thereto;
(c) reduce the percentage in principal amount of outstanding Notes,
the consent of whose Holders is required for any waiver of compliance with
certain provisions of, or certain defaults and their consequences provided
for under, the Indenture;
(d) waive a default in the payment of principal of, or premium, if
any, or interest on the Notes or reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults;
(e) modify the ranking or priority of the Notes or the Subsidiary
Guarantee of any Subsidiary Guarantor;
(f) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the Indenture other than in accordance with the
terms of the Indenture; or
(g) release any Collateral from the Lien created by the Security and
Pledge Agreement except in accordance with the terms thereof and the terms
of the Indenture.
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture and the Pledge Agreement.
Without the consent of any Holders, the Company and the Trustee, at any
time and from time to time, may enter into one or more indentures supplemental
to the Indenture for any of the following purposes: (1) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Notes; or
(2) to add to the covenants of the Company for the benefit of the Holders, or to
surrender any right or power herein conferred upon the Company; or (3) to add
additional Events of Defaults; or (4) to provide for uncertificated Notes in
addition to or in place of the certificated Notes; or (5) to evidence and
provide for the acceptance of appointment under the Indenture by a successor
Trustee; or (6) to further secure the Notes; or (7) to cure any ambiguity, to
correct or
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supplement any provision in the Indenture that may be defective or inconsistent
with any other provision in the Indenture, or to make any other provisions with
respect to matters or questions arising under the Indenture, provided that such
actions pursuant to this clause do not adversely affect the interests of the
Holders in any material respect; or (8) to comply with any requirements of the
Commission in order to effect and maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
PNC Bank, National Association, the Trustee under the Indenture, will be
the initial paying agent and registrar for the Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. Under the Indenture, the Holders of a majority in outstanding
principal amount of the Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that, if it acquires any conflicting
interest (as defined), it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the third succeeding paragraph, the Notes to be
resold as set forth herein will initially be issued in the form of one or more
global notes. The global notes will be deposited on the Closing Date with, or on
behalf of, The Depository Trust Company (the "Depositary") and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred to
herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes and (ii) ownership of the Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Notes will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Notice to Investors."
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So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Notes will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Notes in accordance with the normal procedures of DTC and in
accordance with the procedures set forth in the Indenture.
Certificated Notes
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture then, upon surrender by
the Global Note Holder of the Global Notes, Certificated Notes will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any, and
interest by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. Secondary trading in long-term
notes and debentures of corporate issues is generally settled in clearinghouse
or next-day funds. In contrast, Notes represented by the Global Notes are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Senior Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
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Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear or Cedel) immediately following the
settlement date of DTC. DTC has advised the Company that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
and/or the Security and Pledge Agreement without charge by writing to Shop at
Home, Inc., 3100 West End Avenue, Suite 880, Nashville, Tennessee 37203,
Attention: George J. Phillips.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person is merged with or into the Company or becomes a Subsidiary or
(b) assumed in connection with the acquisition of assets from such Person.
"Affiliate" means, with respect to any specified person, (a) any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person or (b) any other person that
owns, directly or indirectly, 5% or more of such specified person's Capital
Stock or any executive officer or director of any such specified person or other
person or, with respect to any natural person, any person having a relationship
with such person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified person, means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of merger, consolidation or
similar arrangement) (collectively, a "transfer") by the Company or any
Restricted Subsidiary other than in the ordinary course of business and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Shares of
Capital Stock of any of the Company's Restricted Subsidiaries (which shall be
deemed to include the sale, grant or conveyance of any interest in the income,
profits or proceeds therefrom), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (x) that
have a fair market value in excess of $1.0 million or (y) for Net Cash Proceeds
in excess of $1.0 million. For the purposes of this definition, the term "Asset
Sale" does not include any transfer of properties or assets (i) that is governed
by the provisions of the Indenture described under "-- Certain
Covenants -- Consolidation, Merger and Sale of Assets," (ii) between or among
the Company and its Restricted Subsidiaries pursuant to transactions that do not
violate any other provision of the Indenture, (iii) representing obsolete or
permanently retired equipment and facilities or transfers or other dispositions
of assets in which the Company or a Subsidiary Guarantor receives assets that
(A) are used or useful in a Permitted Line of Business and (B) have a value
equal to the value of the assets so transferred or disposed of.
"Attributable Debt" means, in respect of a Sale and Leaseback Transaction,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such Sale and Leaseback Transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Authority" means any federal, state, municipal or local government or
quasi-governmental agency or authority.
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"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"Capital Stock" of any Person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such Person's equity interest (however designated), whether now
outstanding or issued after the Closing Date.
"Capitalized Lease Obligation" means, with respect to any Person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, in accordance with GAAP, has been recorded as a
capitalized lease.
"Casualty" with respect to any Collateral, means loss of, damage to or
destruction of all or any part of such Collateral.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
more than 50% of the voting power of all classes of Voting Stock of the
Company;
(b) the Company, either individually or in conjunction with one or
more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise
disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties of the
Company and the Subsidiaries, taken as a whole (either in one transaction
or a series of related transactions), including Capital Stock of the
Subsidiaries, to any person (other than the Company or a Restricted
Subsidiary);
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Common Stock Offering" means the public offering of Common Stock of the
Company scheduled to close on the Closing Date.
"Condemnation" means any taking of the Collateral or any part thereof, in
or by condemnation, expropriation or similar proceedings, eminent domain
proceedings, seizure or forfeiture, pursuant to any law, general or special, or
by reason of the temporary requisition of the use or occupancy of the
Collateral, or any part thereof, by any Authority.
"Condemnation Proceeds" means any awards, proceeds, payment or other
compensation arising out of a Condemnation.
"Consolidated EBITDA" means, for any period, the sum of, without
duplication, Consolidated Net Income for such period, plus (or, in the case of
clause (d) below, plus or minus) the following items to the extent included in
computing Consolidated Net Income for such period (a) Consolidated Interest
Expense for such period, plus (b) the provision for federal, state, local and
foreign income taxes of the Company and its Restricted Subsidiaries for such
period, plus (c) the aggregate depreciation and amortization expense of the
Company and its Restricted Subsidiaries for such period, plus (d) any other
non-cash charges for such period, and minus non-cash credits for such period,
other than non-cash charges or credits resulting from changes in prepaid assets
or accrued liabilities in the ordinary course of business; provided that fixed
charges, income tax expense, depreciation and amortization expense and non-cash
charges and credits of a Restricted Subsidiary will be included in Consolidated
EBITDA only to the extent (and in the same proportion) that the net income of
such Subsidiary was included in calculating Consolidated Net Income for such
period.
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"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the amount that, in conformity with GAAP, would be set forth
opposite the caption "interest expense" (or any like caption) on a consolidated
statement of operations of the Company and its Restricted Subsidiaries for such
period, including, without limitation, (i) amortization of debt discount, (ii)
the net cost of interest rate contracts (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation, (iv) amortization
of debt issuance costs, and (v) the interest component of Capitalized Lease
Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified
Stock by the Company and any Restricted Subsidiary (to any Person other than the
Company and its Restricted Subsidiaries), computed on a tax effected basis, plus
(c) all interest on any Indebtedness of any Person guaranteed by the Company or
any of its Restricted Subsidiaries or secured by a lien on the assets of the
Company or any of its Restricted Subsidiaries; provided, however, that
Consolidated Interest Expense will not include (i) any gain or loss from
extinguishment of debt, including the write-off of debt issuance costs, and (ii)
the Consolidated Interest Expense of a Restricted Subsidiary to the extent (and
in the same proportion) that the net income of such Subsidiary was excluded in
calculating Consolidated Net Income pursuant to clause (e) of the definition
thereof for such period.
"Consolidated Net Income" means, for any period, the net income (or net
loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary gains or losses (less all fees and expenses relating
thereto), (b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to Asset Sales, (c) the portion of net income (or
loss) of any Person (other than the Company or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which the Company or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any Restricted
Subsidiary in cash during such period, (d) the net income (or loss) of any
Person combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination and
(e) the net income (but not the net loss) of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary is at the date of determination restricted, directly
or indirectly, except to the extent that such net income is actually paid to the
Company or a Restricted Subsidiary thereof by loans, advances, intercompany
transfers, principal repayments or otherwise.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the Company
and its Restricted Subsidiaries, less any amounts attributable to Disqualified
Stock or any equity security convertible into or exchangeable for Indebtedness,
the cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries and less to the extent included in calculating such
stockholders' equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors, to make a finding or otherwise
take action under the Indenture, a member of the Board of Directors who does not
have any material direct or indirect financial interest in or with respect to
such transaction or series of transactions.
"Disqualified Stock" means any class or series of Capit of any security
into which it is convertible or exchangeable or by contract or otherwise (i) is
or upon the happening of an event or passage of time would be, required to be
redeemed prior to the date that is six months after the final Stated Maturity of
the Notes, (ii) is redeemable at the option of the Holder thereof, at any time
prior to such date or (iii) at the option of the Holder thereof is convertible
into or exchangeable for debt securities at any time prior to such date;
provided that any Capital Stock that would not constitute Disqualified Stock but
for provisions therein giving Holders
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thereof the right to cause the issuer thereof to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes will not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the Holders of such
Capital Stock than the provisions contained in the covenants described under the
captions "Repurchase at the Option of Holders -- Change of Control" and
"-- Asset Sales" described herein and such Capital Stock specifically provides
that the issuer will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Notes as are required to be
repurchased pursuant to the provisions contained in the covenants described
under the captions "Repurchase at the Option of Holders -- Change of Control"
and "-- Asset Sales."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries (other than the Notes, the Subsidiary Guarantees or
Indebtedness under a Senior Credit Facility) outstanding on the date of the
Indenture and listed on a schedule to the Indenture, until such amounts are
repaid.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person entered into in the ordinary course of business under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and other similar financial agreements or arrangements designed to
protect such Person against, or manage the exposure of such Person to,
fluctuations in interest rates, and (ii) forward exchange agreements, currency
swap, currency option and other similar financial agreements or arrangements
designed to protect such Person against, or manage the exposure of such Person
to, fluctuations in foreign currency exchange rates.
"Holder" means the Person in whose name a Note is, at the time of
determination, registered on the Registrar's books.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed, (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (d) every obligation of such Person issued or
assumed as the deferred purchase price of property or services, (e) the
attributable value of every Capitalized Lease Obligation of such Person, (f) all
Disqualified Stock of such Person valued at its maximum fixed repurchase price,
plus accrued and unpaid dividends, (g) all obligations of such Person under or
in respect of Hedging Obligations, and (h) every obligation of the type referred
to in clauses (a) through (g) of another Person and all dividends of another
Person the payment of which, in either case, such Person has guaranteed. For
purposes of this definition, the "maximum fixed repurchase price" of any
Disqualified Stock that does not have a fixed repurchase price will be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Indebtedness is required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Stock, such fair market
value will be determined in good faith by the board of directors of the issuer
of such Disqualified Stock. Notwithstanding the foregoing, trade accounts
payable and accrued liabilities arising in the ordinary course of business and
any liability for federal, state or local taxes or other taxes owed by such
Person will not be considered Indebtedness for purposes of this definition.
"Indebtedness to EBITDA Ratio" means, with respect to any date, the ratio
of (a) the aggregate principal amount of all outstanding Indebtedness of the
Company and its Subsidiaries as of such date on a consolidated basis, plus the
aggregate liquidation preference or redemption amount of all outstanding
Disqualified Stock of the Company and its Subsidiaries as of such date
(excluding any such Disqualified Stock
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held by the Company of a Wholly Owned Subsidiary), to (b) Consolidated EBITDA
for the four most recent full fiscal quarters ending immediately prior to such
date for which financial statements have been made publicly available (but in no
event ending more than 135 days prior to the date of determination), determined
on a pro forma basis after giving effect to each acquisition or disposition of
assets made by the Company and its Subsidiaries, outside of the ordinary course
of business, from the beginning of such four-quarter period through such date as
if such acquisition or disposition had occurred at the beginning of such
four-quarter period.
"Insurance Proceeds" mean any payment, proceeds or other amounts received
at any time under any insurance policy as compensation in respect of a Casualty
provided, that business interruption insurance proceeds shall not constitute
Insurance Proceeds.
"Investment" in any Person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to such Person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities issued by such Person, the acquisition (by purchase or otherwise) of
all or substantially all of the business or assets of such Person, or the making
of any investment in such Person, (ii) the designation of any Restricted
Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the
Capital Stock (or any other Investment), held by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary. Investments exclude (i) extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices and (ii)
acquisitions of assets, equity interests or other securities of other Persons
for consideration consisting solely of Common Stock of the Company.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon, or with respect to, any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired. A Person will be deemed to own subject to a Lien any
property that such Person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Loss Event" means a Condemnation or Casualty involving an actual or
constructive total loss or agreed or compromised actual or constructive total
loss of all or substantially all of any Collateral, except where the Company
reasonably concludes that restoration of such Collateral can be made in
accordance with this Indenture and elects to do so in an Officers' Certificate
delivered to the Trustee within 90 days of the relevant Condemnation or
Casualty.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or cash equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (a) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (b) provisions for all taxes payable as a result of
such Asset Sale, (c) payments made to retire Indebtedness where such
Indebtedness is secured by the assets that are the subject of such Asset Sale,
(d) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with such Asset Sale
and retained by the seller after such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Other Broadcast Subsidiaries" means MFP, Inc., the owner and operator of
WMFP(TV) in Boston and Urban Broadcasting Systems, Inc., the owner and operator
of KZJL(TV) in Houston.
"Other Subsidiaries" means any Subsidiary of the Company other than SAH
Acquisition II.
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"Permitted Investments" means any of the following:
(a) Investments in (i) securities with a maturity of one year or less
issued or directly and fully guaranteed or insured by the United States or
any agency or instrumentality thereof (provided that the full faith and
credit of the United States is pledged in support thereof); (ii) U.S.
dollar denominated (or fully hedged foreign currency) time deposits,
certificates of deposit, Eurodollar time deposits or Eurodollar
certificates of deposit or acceptances with a maturity of one year or less
of any financial institution that is a member of the Federal Reserve System
having combined capital and surplus of not less than $500,000,000 or any
bank (an "Approved Lender") whose short term commercial paper rating from
Standard & Poor's Ratings Group is at least A-1 or the equivalent thereof
or from Moody's Investors Service, Inc. is at least P-1 or the equivalent
thereof; (iii) any shares of money market mutual or similar funds having
assets in excess of $500,000,000 which are invested in instruments of the
kind described in clauses (i), (ii) and (iv) hereof; and (iv) commercial
paper with a maturity of one year or less issued by an Approved Lender that
not an Affiliate of the Company and is organized under the laws of any
state of the United States or the District of Columbia and having a rating
(A) from Moody's Investors Service, Inc. of at least P-2 or (B) from
Standard & Poor's Ratings Group of at least A-2;
(b) Investments by the Company or any Wholly Owned Restricted
Subsidiary in another Person, if as a result of such Investment (i) such
other Person becomes a Restricted Subsidiary that is a Subsidiary Guarantor
or (ii) such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, the Company
or a Restricted Subsidiary that is a Subsidiary Guarantor;
(c) Investments by the Company or a Restricted Subsidiary in the
Company or a Restricted Subsidiary;
(d) Investments in existence on the Closing Date; and
(e) promissory notes or other evidence of Indebtedness received as a
result of Asset Sales permitted under the covenant entitled "Repurchase at
the Option of Holders -- Asset Sales."
"Permitted Liens" means (i) Liens on the capital stock of the Other
Broadcast Subsidiaries and the accounts receivable, inventory and general
intangibles of the Company (excluding from general intangibles any Collateral
for the Notes), of the Company securing Indebtedness under a Senior Credit
Facility in principal amount not to exceed $20.0 million at any one time
outstanding; (ii) Liens on any property or assets of a Restricted Subsidiary
granted in favor of the Company or a Wholly-Owned Restricted Subsidiary; (iii)
Liens securing the Notes or any Subsidiary Guarantee; (iv) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (v) Liens on property existing at
the time of acquisition thereof by the Company or any Restricted Subsidiary of
the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any other assets; (vi)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vii) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (vii) of the second paragraph of
the covenant entitled "Incurrence of Indebtedness and Issuance of Disqualified
Stock" covering only the assets acquired with such Indebtedness; (viii) Liens
existing on the date of the Indenture; and (ix) any extension, renewal or
replacement, in whole or in part, of any Lien described in the foregoing clauses
(i), (iv) and (v); provided that any such extension, renewal or replacement is
no more restrictive in any material respect than the Lien so extended, renewed
or replaced and does not extend to any additional property or assets.
"Permitted Line of Business" means the businesses of: (i) the selling of
goods and merchandise by electronic media, including television broadcasting,
use of the internet and by telephone, (ii) the operation of commercial broadcast
television stations and the sale of broadcast time thereon; (iii) the selling of
goods and merchandise by means of printed media, such as magazine and
catalogues; (iv) the manufacture, production
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and sale of sports trading cards; and (v) the private branding or contract
manufacture of products sold by the Company by means of any of the foregoing.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accredit value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount (or
accredit value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded plus the lesser of the amount of any
premium required to be paid in connection with such refinancings pursuant to the
terms of such indebtedness or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary of the Company that is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participation, rights in or other equivalents
(however designated) of such Person's preferred or preference stock, whether now
outstanding or issued after the Closing Date, and including, without limitation,
all classes and series of preferred or preference stock of such Person.
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any Person means any and all Capital Stock of such
Person, other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which a person sells or transfers any property or asset
in connection with the leasing, or the resale against installment payments, of
such property or asset to the seller or transferor.
"Security and Pledge Agreement" means the agreement, dated the Closing
Date, among the Company, certain among the Company, certain Subsidiary
Guarantors and the Trustee, relating to the Collateral.
"SATH Transaction" means of the Company in exchange for payments to
Partner-SATH, L.L.C. or members thereof in an amount not to exceed $6.5 million
the acquisition fo the new Facility.
"Senior Credit Facility" means any senior credit facility of the Company or
any Restricted Subsidiary with one or more banks or other commercial financial
institutions, and any amendments, renewals, replacements or modifications,
thereof.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness or any installment of interest
thereon is due and payable.
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"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment to the Notes or
the Subsidiary Guarantees issued by such Subsidiary Guarantor, as the case may
be.
"Subsidiary" means any Person if Voting Stock representing a majority of
the voting power of the Voting Stock of which is at the time owned, directly or
indirectly, by the Company and/or one or more other Subsidiaries of the Company.
"Subsidiary Guarantors" means, collectively, all Restricted Subsidiaries
that are incorporated in the United States or a State thereof or the District of
Columbia; provided that any Person that becomes an Unrestricted Subsidiary in
compliance with the "Restricted Payments" covenant shall not be included in
"Subsidiary Guarantors" after becoming an Unrestricted Subsidiary.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors of the Company as an Unrestricted Subsidiary in
accordance with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary
of an Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the Holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes has, or might have, voting power by reason of the
happening of any contingency).
"Weighted Average Life" means, as of the date of determination with respect
to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a)
the sum of the products of (i) the number of years from the date of
determination to the date or dates of each successive scheduled principal or
liquidation value payment of such Indebtedness or Disqualified Stock,
respectively, multiplied by (ii) the amount of each such principal or
liquidation value payment by (b) the sum of all such principal or liquidation
value payments.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all
of the outstanding voting securities (other than directors' qualifying shares or
shares of Foreign Subsidiaries required to be owned by foreign nationals
pursuant to applicable law) of which are owned, directly or indirectly, by the
Company.
DESCRIPTION OF SENIOR CREDIT FACILITY
The Indenture permits the Company to incur indebtedness under one or more
Senior Credit Facilities up to an aggregate principal amount of $20.0 million.
The Company and one of its Restricted Subsidiaries, MFP, Inc., are parties
to a working capital facility with a commercial bank pursuant to which MFP, Inc.
may borrow up to $5.0 million. The Company has guaranteed the indebtedness of
MFP, Inc. The working capital facility constitutes a portion of the Senior
Credit Facility permitted under the Indenture. The working capital facility is
secured by a first priority lien on substantially all of the assets of MFP,
Inc., the capital stock of MFP, Inc. and the accounts receivable, inventory and
general intangibles of the Company (excluding from general intangibles any
Collateral for the Notes). The current outstanding principal balance of the
working capital facility is approximately $3.0 million, which amount will be
repaid with the proceeds of the Offering.
The working capital facility contains certain covenants and agreements of
the Company and MFP, Inc., including without limitation, financial covenants,
limits on incurrence of additional indebtedness, limits on liens, limits on
acquisitions, asset sales, sale leasebacks, mergers or consolidations, limits on
acquisitions, limits on repayments or prepayments of other indebtedness, limits
on changes of control and other covenants and agreements. Certain of the
covenants and agreements contained in the working capital facility are more
restrictive than those of the Indenture. The Company may enter into one or more
Senior Credit Facilities subsequent to the Closing Date for the Notes, which
facilities may contain covenants and agreements similar, or in addition, to
those of the current working capital facility, including covenants more
restrictive than those of the Indenture.
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DESCRIPTION OF CAPITAL STOCK
The Company's charter currently authorizes the issuance of 30,000,000
shares of common stock, par value $.0025 per share ("Common Stock"), and
1,000,000 shares of preferred stock, par value $10.00 ("Preferred Stock").
COMMON STOCK
As of December 31, 1997, 11,742,991 shares of the Company's Common Stock
were outstanding and held of record by approximately 688 shareholders. Shares of
Common Stock may be issued at such time or times and for such consideration (but
not less than par value) as the Board of Directors of the Company deems
advisable, subject to limitations set forth in the laws of the State of
Tennessee, or the Company's charter or bylaws. Holders of Common Stock are not
entitled to preemptive or other subscription rights, and are not subject to
assessment or further call. Each share of Common Stock is entitled to one vote
on all matters on which holders of common stock are entitled to vote. Holders of
Common Stock are not entitled to convert the shares to any other securities of
the Company. Holders of the Common Stock are entitled to receive such dividends
as may be declared, from time to time, by the Board of Directors of the Company
out of funds legally available therefor. The Company has the right to, and may
from time to time, enter into borrowing arrangements or issue other debt
instruments, the provisions of which may contain restrictions on payment of
dividends and other distributions on the Common Stock. In the event of the
voluntary or involuntary liquidation, dissolution, distribution of assets or
winding-up of the Company, holders of Common Stock are entitled to receive
ratably in proportion to the number of shares held, those amounts or assets
available after payment or provision for payment of amounts due to holders of
any outstanding Preferred Stock and of all indebtedness or other liabilities to
any other person.
The Board of Directors proposed adoption by the shareholders of the Company
at its annual meeting to be held on March 6, 1998, of an amendment to the
charter of the Company to authorize the Board of Directors to implement a
1-for-2 reverse stock split. The Board had assessed that a reverse stock split
could facilitate a listing of the Company on the Nasdaq National Market (among
the listing criteria is a $5.00 per share stock price). However, the Board has
determined not to proceed with the amendment and has acted to withdraw the
proposed amendment due to the potential disadvantages, including a possible
reduction in the liquidity of the stock. The Board may consider a listing on the
Nasdaq National Market in the future when and if the Company achieves the
required listing criteria.
The Board of Directors has proposed adoption by the shareholders of the
Company at its annual meeting to be held on March 6, 1998, an amendment to the
charter of the Company to authorize the issuance of 30,000,000 shares of
Non-Voting Common Stock, par value $.0025 per share. The shares of Non-Voting
Common Stock would have the same preferences, limitations and relative rights as
the Company's voting Common Stock, except that the shares of Non-Voting Common
Stock have no voting rights, unless indefeasibly granted by statute. The Board
of Directors has no current plans to issue shares of Non-Voting Common Stock,
and the charter amendment is intended to provide flexibility to the Company with
respect to its consideration in the future of the issuance of additional capital
stock.
PREFERRED STOCK
Under the terms of the Company's charter, the Company's Board of Directors
has the authority to issue shares of Preferred Stock in one or more series, and
to fix the number, designation, preferences, limitations and relative rights of
the shares of such series, without the further vote or action of the
shareholders. The Company's Board of Directors, without shareholder approval,
can issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of holders of Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of the Company. The Company will not offer shares of Preferred Stock to
any of its affiliates except on the same terms as it is offered to all other
existing and new shareholders, unless the issuance is approved by a majority of
the Company's disinterested independent directors who have access, at the
Company's expense, to the Company's legal counsel or independent legal counsel.
The bylaws of the Company provide that the Company
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will not offer Preferred Stock to affiliates of the Company except on the same
terms as the Preferred Stock is offered to all other existing shareholders or
new shareholders, unless the issuance is approved by a majority of the Company's
disinterested independent directors who have access, at the Company's expense,
to the Company's legal counsel or independent legal counsel.
At December 31, 1997, there were 137,943 shares of Series A Preferred Stock
("Series A Preferred Stock"), par value $10.00 per share, outstanding and held
by approximately 37 shareholders of record. The Series A Preferred Stock ranks
ahead of the Common Stock with respect to dividends, preferences,
qualifications, limitations, restrictions and the distribution of assets upon
liquidation. Holders of shares of Series A Preferred Stock are not entitled to
preemptive rights with respect to any shares or other securities of the Company
which may be issued, and such shares are not subject to assessment.
Holders of Series A Preferred Stock are entitled to receive, but only when,
as and if declared by the Board of Directors of the Company, cash dividends at
the rate of 1% per annum of par value per share (i.e., $.10 per share per
annum). Dividends on each share of Series A Preferred Stock accrue and are
cumulative. No dividends may be paid or declared 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 Preferred 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 that full cumulative dividends on the Series A Preferred Stock shall
not have been declared and paid when due, or set apart for payment, then, until
such aggregate deficiency shall have been declared and paid, or set apart for
payment, the Company may not (A) declare or pay any dividends or make other
distributions on the Common Stock other than (i) dividends payable in shares of
Common Stock or other stock of the Company junior to the Series A Preferred
Stock ("Junior Stock") or (ii) options, warrants or rights to subscribe for or
purchase shares of Common Stock or Junior Stock or (B) purchase, redeem or
otherwise acquire (i) any share of Common Stock or Junior Stock or (ii) any
other shares of capital stock of the Company ranking on a parity with the Series
A Preferred Stock, except by conversion into or exchange for Common Stock or
Junior Stock.
In the event of a liquidation, dissolution and winding up of the Company,
whether voluntary or involuntary, the holders of shares of Series A Preferred
Stock shall be entitled to receive out of the assets of the Company, before any
distributions to the holders of Common Stock or any Junior Stock, an amount
equal to $10.00 per share, plus dividends accrued and unpaid. After receipt of
this amount, the holders of shares of Series A Preferred Stock will not be
entitled to any further participation in any distributions of the assets of the
Company. For these purposes, a sale of substantially all of the assets of the
Company to a third party, or the consummation by the Company or its shareholders
of any transaction with any single purchaser whereby a change in control of more
than fifty (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 such payment.
So long as 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. At any time after February 28, 2000, any holder of any shares of
Series A Preferred Stock may require the Company to redeem all or any portion of
the Series A Preferred Stock, for a redemption price per share of $10.00 plus
accrued and unpaid dividends. The Series A Preferred Stock is convertible at any
time into shares of Common Stock at a ratio of 1.00 share of Common Stock for
1.00 share of Series A Preferred Stock.
Except as provided in the following sentence or as expressly required by
applicable law, the holders of Series A Preferred Stock are not entitled to
vote. So long as any shares of Series A Preferred Stock remain outstanding, the
affirmative consent of the holders of a majority of the shares of Series A
Preferred Stock outstanding (voting separately as a class) shall be necessary to
permit (i) the authorization, creation or issuance of a new class of capital
stock or series of Preferred Stock having rights, preferences or privileges
senior to the Series A Preferred Stock, or any increase in the number of
authorized shares of any class of capital stock or series of Preferred Stock
having rights, preferences or privileges senior to the Series A
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Preferred Stock, or (ii) the amendment of any provision of the Company's charter
which would materially and adversely affect any right, preference, privilege or
voting power of the Series A Preferred Stock.
OPTIONS AND WARRANTS
As of February 18, 1998, the Company had issued and outstanding options and
warrants to the following persons:
- Kent E. Lillie, President and CEO of the Company, currently holds options
to purchase 765,000 shares of Common Stock, of which options for 315,000
shares are currently exercisable. Of these 315,000 shares, 100,000 may be
purchased at $1.00 per share, 210,000 at $2.875 per share, and 5,000 at
$3.75 per share.
- Other employees of the Company have been issued options for a total of
958,100 shares of Common Stock, of which options for 174,100 shares are
currently exercisable. Each of these options was issued at the market
price of the Common Stock on the date the option was issued or repriced.
- Directors of the Company, not including Mr. Lillie, have been issued
options to purchase 75,000 shares of Common Stock, all of which are
currently exercisable. Of these 75,000 shares, 50,000 are exercisable at
$2.875 per share and 25,000 at $3.75 per share.
- A vendor of the Company has been issued an option to purchase 600,000
shares of Common Stock, all of which are currently exercisable at a price
of $2.50 per share.
- A consultant for the Company has been issued an option to purchase 30,000
shares, of which 20,000 shares are currently exercisable at a price of
$1.00 per share.
- The Company has issued warrants to purchase a total of 3,000,000 shares
of Common Stock at a price of $1.135 per share, all of which are
currently exercisable. The exercise price of these warrants increases by
13.5% per annum for each year that they are not exercised. Of the
warrants, J.D. Clinton and his affiliates hold warrants to purchase a
total of 2,192,500 shares.
The exercise of all of the above options and warrants would result in the
issuance of a total of 5,428,100 shares of Common Stock, of which a total of
4,184,100 shares could be issued under rights that are currently exercisable. In
addition, of these rights to acquire 4,184,100 shares of Common Stock, options
and warrants for a total of 4,154,100 shares are currently exercisable at prices
below $3.50.
Of the total number of options issued to employees, options for a total of
758,100 shares were issued as qualified incentive options under the Company's
Omnibus Stock Incentive Plan. Assuming the exercise of all options and warrants,
but excluding from the calculation the qualified options, and assuming the
issuance of 10,000,000 shares as a result of the Common Stock Offering, the
remaining options and warrants, if fully exercised, would represent 17.1% of the
issued and outstanding shares of the Company (16.3% if the Over-allotment Option
is fully exercised).
Of the foregoing options and warrants, options and warrants to purchase a
total of 3,950,000 shares of Common Stock may have exercise prices that were
less than 85% of the fair market value of the Company's underlying shares of
Common Stock on the date of grant. These options and warrants include an option
issued to Kent E. Lillie at the date of his employment with the Company in
September 1993 for 500,000 shares at $1.00 per share, and an option issued to
another executive officer of the Company in October 1993 for 100,000 shares at
$1.00 per share. In addition, the Company issued warrants between June and
October 1993 for 3,300,000 shares having an exercise price of $1.00 per share.
In June 1994, the Company issued an option to a consultant for 50,000 shares
issued $1.00 per share. Of the foregoing, warrants and options to purchase an
aggregate of 700,000 shares of Common Stock have been exercised.
Beginning in June 1995, the Common Stock of the Company has been reported
on the Nasdaq SmallCap Market. Prior to that date, the Common Stock was traded
in the over-the-counter market. Although the above options and warrants were
issued at less than 85% of the then published bid and ask quotations for the
Common Stock, given the amount of Common Stock involved, the size, financial
condition and lack of
86
<PAGE> 88
profitable operations of the Company at the time and the fact that the
transactions were private issuances of unregistered securities, the actual fair
market value of the Common Stock is difficult to ascertain with any degree of
certainty, and the exercise prices of these warrants and options may have
exceeded the actual fair market value of the Common Stock.
The bylaws of the Company now provide that the Board of Directors will not
issue any additional warrants or options having an exercise price of less than
85% of the fair market value of the underlying securities on the date of grant.
APPLICATION OF CERTAIN TENNESSEE TAKEOVER STATUTES
Under the Tennessee Business Combination Act, T.C.A. Sections 48-103-201 et
seq., Tennessee "resident domestic corporations" may not enter into a "business
combination" with an "interested shareholder" until the expiration of a
five-year period after the person becomes an interested shareholder. Under the
definitions set out in the statute, the Company is a "resident domestic
corporation." "Business combination" generally refers to a merger, share
exchange, sale of substantially all of the assets of a corporation, certain
issuances of securities, adoption of a plan of liquidation, and certain loan
transactions. An "interested shareholder" is generally defined to include a
person who owns, directly or indirectly, 10% or more of the stock of the
corporation. The five-year limitation is not applicable if the shareholder's
becoming an interested shareholder is approved by the board of directors of the
resident domestic corporation prior to the stock acquisition date or a specific
exemption is applicable. One of the exemptions provides that the shareholders of
the corporation can vote to provide that the statute is not applicable to the
corporation, but the action is not effective until two years after the
shareholder vote.
In 1989, the United States Court of Appeals in Tyson Foods, Inc. v.
McReynolds, ruled that this statute was unconstitutional when applied to a
corporation not organized under Tennessee law, but which had substantial nexus
to Tennessee.
The Department of Corporations of the State of California (the
"Department") has advised the Company that the provisions of the above statute
are inconsistent with the Department's shareholder democracy standards. As a
condition to the registration of the securities covered by the Offerings in
California, the Department has requested that the Company take whatever actions
are necessary to no longer be subject to the above law. The Board of Directors
of the Company determined in February 1998 to conform with the request of the
State of California by submitting to the Company's shareholders at the next
annual meeting a proposal that the statute be made inapplicable to the Company.
The Board intends to recommend that the shareholders approve such action.
The Tennessee Control Share Act, T.C.A. Sections 48-103-301 et seq.,
generally provides that any person who acquires control shares of a corporation
may have voting rights only if such rights are approved by the shareholders at
an annual or special meeting. "Control shares," for purposes of the statute,
include various thresholds of ownership, beginning at 20%. This statute,
however, is not applicable to a corporation unless its charter or bylaws contain
an express declaration that control shares are governed by the statute. The
Company's charter and bylaws do not contain such a declaration. The Department
has indicated that it also considers this statute to be inconsistent with its
shareholder democracy standards.
87
<PAGE> 89
MARKET INFORMATION
The Common Stock is currently listed on the Nasdaq SmallCap Market under
the trading symbol "SATH." The range of high and low bid quotations for the
Company's Common Stock reported by fiscal quarters during the two most recent
fiscal years and for the quarter ended December 31, 1997, reported by the Nasdaq
SmallCap Market is shown below.
<TABLE>
<CAPTION>
PERIOD HIGH BID LOW BID
- ------ -------- -------
<S> <C> <C>
07/01/95 -- 09/30/95........................................ $3.00 $2.63
10/01/95 -- 12/31/95........................................ 5.19 2.38
01/01/96 -- 03/31/96........................................ 3.25 2.00
04/01/96 -- 06/30/96........................................ 3.88 2.94
07/01/96 -- 09/30/96........................................ 4.06 3.25
10/01/96 -- 12/31/96........................................ 3.75 2.50
01/01/97 -- 03/31/97........................................ 3.38 2.38
04/01/97 -- 06/30/97........................................ 3.56 2.25
07/01/97 -- 09/30/97........................................ 4.12 2.50
10/01/97 -- 12/31/97........................................ 4.69 3.63
</TABLE>
PAYMENT OF DIVIDENDS
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.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, Denver, Colorado.
88
<PAGE> 90
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated March , 1998 (the "Underwriting Agreement") between the Company and the
Underwriters, the Company has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase, the following respective aggregate
principal amounts of the Notes at the public offering price, less underwriting
discounts and commissions, set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC....................... $
Friedman, Billings, Ramsey & Co., Inc. .....................
--------
Total............................................. $
========
</TABLE>
The Underwriting Agreement provides that, subject to the terms and
conditions set forth therein, the Underwriters are to purchase all of the Notes
if any are purchased. The Company and the Underwriters have also entered into a
separate underwriting agreement that provides that, subject to the terms and
conditions set forth therein, the Underwriters are obligated to purchase all of
the shares of Common Stock in the Common Stock Offering if any are purchased.
The Underwriters propose to offer the Notes directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of % of
the principal amount of the Notes. The Underwriters may allow, and such dealers
may re-allow, a concession not in excess of % of the principal amount of
the Notes on sales to certain other dealers. The offering of the Notes is made
for delivery when, as and if accepted by the Underwriters and is subject to
prior sale and to withdrawal, cancellation or modification of the offer without
notice. The Underwriters reserve the right to reject any offer for the purchase
of the Notes. After the initial public offering of the Notes, the public
offering price and other selling terms may be changed by the Underwriters.
There currently is no existing trading market for the Notes, and although
the Underwriters have advised the Company that they currently intend to make a
market in the Notes, they are not obligated to do so and any such market making
may be discontinued at any time, without notice, in the sole discretion of the
Underwriters. Accordingly, there can be no assurance as to the development or
liquidity of any market that may develop for the Notes. The Senior Secured Notes
are not listed on a national securities exchange or authorized for trading on
the Nasdaq Stock Market. Accordingly, no assurance can be given as to the
liquidity of, or the existence of trading markets for, the Senior Secured Notes.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce an offering of, any debt
securities issued or guaranteed by the Company (other than the Senior Notes) for
a period of 180 days from the consummation of the Offering without the prior
written consent of the Underwriters.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
FBR has filed a proof of claim in the Bankruptcy Proceeding of Global in
the approximate amount of $2.0 million. The claim relates to unpaid placement
agent fees and expenses in connection with a bridge loan facility provided to
Global prior to its bankruptcy. FBR has also filed a proof of claim for an
acquisition fee to be owed by the bankruptcy estate to FBR in the amount of
1.75% of the proceeds of the sale under the Asset Purchase Agreement if the sale
is completed. The lenders who advanced the bridge loan are also creditors in the
Bankruptcy Proceeding and have filed proofs of claim in the aggregate amount of
approximately $35 million in unpaid principal plus accrued interest, fees and
penalties. In connection with the resolution of the Bankruptcy Proceeding, FBR
and the bridge lenders may be paid in whole or in part on their claims against
Global. See "Business -- Recent Development."
89
<PAGE> 91
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the federal securities laws, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The legality of the Notes Offering will be passed upon for the Company by
Wyatt, Tarrant & Combs, Nashville, Tennessee. Charles W. Bone, a partner of
Wyatt, Tarrant & Combs, is the beneficial owner of warrants issued by the
Company under which he has the right to purchase a total of 82,500 shares of
Common Stock of the Company at a current exercise price of $1.135. Certain legal
matters relating to the Notes Offering will be passed upon for the Underwriters
by Jenkens & Gilchrist, a Professional Corporation, Washington, D.C. and
Shearman & Sterling, New York, New York.
EXPERTS
The consolidated balance sheets as of June 30, 1996 and 1997 and December
31, 1997 and the consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997, and
the six months ended December 31, 1997, included in this Prospectus have been
included herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to the Offerings.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Offerings, reference is made to
the Registration Statement and the exhibits and schedules filed as part thereof.
Statements contained in this Prospectus as to the contents of any contract or
any other document are not necessarily complete, and, in each instance, if such
contract or documents is filed as an exhibit, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified an all respects by such reference to such
exhibit. In addition, the Company is subject to the informational requirements
of the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, is required to file periodic reports, proxy statements and other
information with the SEC relating to its business, financial condition and other
matters.
All such information referred to above is available for inspection at the
public reference facilities of the SEC at 450 Fifth Street, NW, Washington, DC
20549, and at the regional offices of the SEC located at Seven World Trade
Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Copies of such information are
obtainable, by mail, upon payment of the SEC's customary charges, by writing to
the SEC's principal office at 450 Fifth Street, NW, Washington, DC 20549. Such
material is also available for inspection at the library of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. The SEC maintains a World
Wide Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants such as the Company that
file documents electronically with the SEC. The Registration Statement,
including all exhibits thereto and amendments thereof, is available on this
World Wide Web site. The Common Stock is listed and traded on the Nasdaq
SmallCap Market under the symbol "SATH."
90
<PAGE> 92
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets at June 30, 1996 and 1997 and
December 31, 1997......................................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1996 (unaudited) and 1997.................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1995, 1996 and 1997 and the six
months ended December 31, 1997............................ F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1996 (unaudited) and 1997.................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 93
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, 1996 and 1997 and December 31, 1997,
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 and the
six months ended December 31, 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, 1996 and 1997 and December 31, 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1997 and the six months ended
December 31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 18, 1998
F-2
<PAGE> 94
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1,914,759 $ 5,077,641 $ 532,463
Accounts receivable -- trade.......................... 380,077 3,292,925 5,857,554
Accounts receivable -- related parties................ 7,680 3,000 --
Inventories........................................... 2,611,142 3,262,080 4,105,171
Prepaid expenses...................................... 279,505 458,243 1,363,696
Deferred tax assets................................... 80,000 1,342,450 1,350,747
----------- ----------- -----------
Total current assets.......................... 5,273,163 13,436,339 13,209,631
Note receivable -- related party, net of unamortized
discount of $160,000.................................. -- -- 640,000
Property and equipment, net............................. 3,470,226 4,433,767 4,748,097
FCC and NFL licenses, net............................... 10,516,041 13,423,182 13,042,102
Goodwill, net........................................... 605,154 1,989,529 2,590,023
Deposit on proposed acquisition......................... -- -- 3,963,750
Other assets............................................ 422,086 1,127,493 779,043
----------- ----------- -----------
Total assets.................................. $20,286,670 $34,410,310 $38,972,646
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion -- capital leases..................... $ 109,444 $ 171,498 $ 231,122
Current portion of long-term debt..................... 741,262 2,279,833 2,033,564
Accounts payable -- trade............................. 3,201,320 6,821,654 9,068,642
Accounts payable -- related party..................... 449,550 631,621 518,167
Credit due to customers............................... 1,100,120 3,121,503 2,743,530
Other payables and accrued expenses................... 1,865,806 4,944,050 3,674,037
Deferred revenue...................................... 1,512,291 107,619 67,114
----------- ----------- -----------
Total current liabilities..................... 8,979,793 18,077,778 18,336,176
Long-term liabilities:
Capital leases, less current portion.................. 53,649 305,666 396,436
Long-term debt, less current portion.................. 5,669,063 7,216,465 8,195,768
Deferred income taxes................................. 2,082,336 3,613,410 3,913,329
Redeemable preferred stock; $10 par value, 1,000,000
shares authorized, 137,943 issued and outstanding in
1996 and 1997, respectively........................... 1,393,430 1,393,430 1,393,430
COMMITMENTS (Notes 5, 6, 9, 11, 17 and 21)
Stockholders' equity:
Common stock; $.0025 par value, 30,000,000 shares
authorized, 10,575,255 and 10,714,414 shares issued
at June 30, 1996 and 1997, respectively; 11,742,991
at December 31, 1997............................... 26,438 26,786 29,357
Additional paid-in capital............................ 9,927,787 10,066,555 11,874,499
Accumulated deficit................................... (7,845,826) (6,289,780) (5,166,349)
----------- ----------- -----------
Total liabilities and stockholders' equity.... $20,286,670 $34,410,310 $38,972,646
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 95
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $26,787,013 $40,016,114 $67,817,460 $29,796,266 $43,421,074
Cost of sales................... 17,120,791 24,516,348 40,626,134 18,146,218 25,244,184
----------- ----------- ----------- ----------- -----------
Gross profit.......... 9,666,222 15,499,766 27,191,326 11,650,048 18,176,890
----------- ----------- ----------- ----------- -----------
Other operating income.......... 189,000 659,461 1,014,888 456,819 563,585
----------- ----------- ----------- ----------- -----------
Operating expenses:
Promotion and advertising
costs...................... 269,420 241,170 468,255 223,631 316,396
Salaries and wages............ 3,356,624 4,112,858 5,564,089 2,701,381 3,521,648
Transponder and cable
charges.................... 3,226,481 6,024,743 12,118,305 5,027,469 8,082,360
Other general operating and
administrative expenses.... 3,639,749 5,673,540 6,675,322 2,802,015 4,239,133
Depreciation and
amortization............... 517,523 877,861 1,056,492 415,396 779,696
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 11,009,797 16,930,172 25,882,463 11,169,892 16,939,233
----------- ----------- ----------- ----------- -----------
Income (loss) from operations... (1,154,575) (770,945) 2,323,751 936,975 1,801,242
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest, net................. (216,486) (794,558) (1,079,529) (388,504) (454,985)
Miscellaneous................. 89,072 56,637 231,824 67,958 478,767
----------- ----------- ----------- ----------- -----------
Total other income
(expense)........... (127,414) (737,921) (847,705) (320,546) 23,782
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (1,281,989) (1,508,866) 1,476,046 616,429 1,825,024
Income tax expense (benefit).... -- (103,394) (80,000) (10,000) 701,593
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $(1,281,989) $(1,405,472) $ 1,556,046 $ 626,429 $ 1,123,431
=========== =========== =========== =========== ===========
Basic earnings (loss) per
share......................... $ (0.14) $ (0.14) $ 0.14 $ 0.06 $ 0.10
=========== =========== =========== =========== ===========
Diluted earnings (loss) per
share......................... $ (0.14) $ (0.14) $ 0.12 $ 0.05 $ 0.08
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 96
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
AND THE SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT
------- ----------- -----------
<S> <C> <C> <C>
Balance, June 30, 1994 (8,904,118 shares).................. $22,260 $ 5,883,682 $(5,158,365)
Issuance of common stock (389,215 shares)................ 973 999,027 --
Retirement of treasury stock............................. (115) (40,135) --
Issuance 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)
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 (126,000 shares)...... 315 127,125 --
Issuance 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)
Exercise of stock options (100,000 shares)............... 250 99,750 --
Exercise of employee stock options (20,000 shares)....... 50 19,950 --
Issuance 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)
Exercise of stock warrants (200,000 shares).............. 500 226,500 --
Exercise of employee stock options (384,400 shares)...... 961 391,689 --
Issuance of common stock in payment of a note (444,177
shares)............................................... 1,110 1,189,755 --
Net income............................................... -- -- 1,123,431
------- ----------- -----------
Balance, December 31, 1997 (11,742,991 shares)............. $29,357 $11,874,499 $(5,166,349)
======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 97
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(1,281,989) $(1,405,472) $ 1,556,046 $ 626,429 $ 1,123,431
Noncash expenses included in net income
(loss):
Depreciation and amortization............... 517,523 877,861 1,056,492 415,396 779,690
Loss on sale of equipment................... -- 19,165 3,053 -- --
Deferred income taxes....................... -- (103,394) (80,000) (10,000) 291,622
Change in provision for inventory
obsolescence.............................. -- (88,122) -- -- --
Provision for bad debt...................... -- -- 18,800 -- 230,826
Changes in current and noncurrent items:
Accounts receivable....................... (38,135) 119,409 (2,926,968) (156,389) (3,073,022)
Inventories............................... (110,577) (230,024) (650,938) (287,941) (1,011,737)
Prepaid expenses and other assets......... 102,563 (197,019) (241,321) (79,153) (204,217)
Accounts payable and accrued expenses..... 2,759,182 805,455 8,914,889 3,277,295 485,549
Deferred revenue.......................... (5,888) 1,016,954 (1,404,672) (1,437,436) (40,505)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operations.... 1,942,679 814,813 6,245,381 2,348,201 (1,418,363)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Related party note receivable................. -- -- -- -- (800,000)
Cash payment for acquisitions................. (1,289,072) -- (1,838,360) -- (50,702)
Purchase of equipment......................... (2,370,582) (507,494) (1,056,581) (534,139) (487,610)
Proceeds from sale of equipment............... -- 400,000 -- -- --
Other assets.................................. -- -- (1,856,744) (84,071) (334,452)
Payment of deposit on proposed acquisition.... -- -- -- -- (3,963,750)
FCC licenses.................................. -- (38,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used by investing activities..... (3,659,654) (145,494) (4,751,685) (618,210) (5,636,514)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends.......................... -- -- (13,742) -- --
Exercise of stock options and warrants........ -- 127,440 120,000 20,000 619,650
Repayments of debt............................ (662,115) (985,851) (1,233,467) (420,689) (1,109,951)
Additional long-term debt..................... 1,620,488 2,056,380 2,919,440 -- 3,000,000
Capital lease payments........................ (114,278) (154,675) (123,045) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing
activities.............................. 844,095 1,043,294 1,669,186 (400,689) 2,509,699
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash................. (872,880) 1,712,613 3,162,882 1,329,302 (4,545,178)
Cash beginning of period........................ 1,075,026 202,146 1,914,759 1,914,759 5,077,641
----------- ----------- ----------- ----------- -----------
Cash end of period.............................. $ 202,146 $ 1,914,759 $ 5,077,641 $ 3,244,061 $ 532,463
=========== =========== =========== =========== ===========
Schedule of noncash financing activities:
Stock issued for inventory and reduction of
accounts payable............................ $ -- $ 609,523 $ 33,116 $ 33,116 $ --
=========== =========== =========== =========== ===========
Cost of equipment purchased through capital
lease obligations........................... $ 290,561 $ 31,450 $ 437,116 $ -- $ 149,099
=========== =========== =========== =========== ===========
Notes payable issued for acquisitions of BCST
and MFP, Inc................................ $ 3,750,000 $ -- $ 1,400,000 $ 1,400,000 $ --
=========== =========== =========== =========== ===========
Common and preferred stock issued for
acquisitions of BCST and MFP, Inc........... $ 4,500,000 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Conversion of note payable into shares of
common stock................................ $ -- $ -- $ -- $ -- $ 1,190,865
=========== =========== =========== =========== ===========
Stock issued in connection with financing..... $ -- $ 250,000 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest.................................... $ 139,097 $ 795,125 $ 997,671 $ 363,504 $ 486,335
=========== =========== =========== =========== ===========
Taxes....................................... $ 27,000 $ 30,000 $ 140,000 $ 70,000 $ 107,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 98
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
include December 31, 1996 financial information which is unaudited; however, in
the opinion of management such information reflects all adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
results of operations and cash flows of the interim period.
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"), Collector's Edge of
Tennessee, Inc. ("Collector's"), RF Scientific Transportables, Inc. ("RFS"), and
SAH Acquisition Corporation II ("SAH Acquisition II") (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. SAH Acquisition II currently has no
operations. All material intercompany balances and transactions have been
eliminated in consolidation.
Operations. The Company markets various consumer products through a
televised "shop at home" service. 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, Texas. BCST was
acquired in December 1994 (Note 15).
MFP, Inc., operates a commercial television station, WMFP, Channel 62,
serving the Boston television market area. MFP, Inc. was acquired in February
1995 (Note 16).
Collector's Edge of Tennessee, Inc. ("Collector's"), formed in February
1997, is a trading card manufacturer whose main assets are licenses from
National Football League Properties, Inc. and NFL Players, Inc. (Note 17).
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 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>
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 $53,761, $268,562 and $306,918 for the fiscal years ended
June 30, 1995, 1996 and 1997, respectively, and $147,500 and $159,419 for the
six months ended December 31, 1996 and 1997, respectively.
F-7
<PAGE> 99
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NFL Licenses. During fiscal year 1997, the Company acquired Collector's
Edge of Tennessee, Inc. a wholly owned subsidiary engaged in the business of
manufacturing and selling sports trading cards under license with National
Football League Players, Inc. and National Football League Properties, Inc. The
value ascribed to these licenses in connection with the acquisition is being
amortized over the remaining life of 3 years. Amortization of these licenses was
$161,667 for the fiscal year ended June 30, 1997 and $221,664 for the six months
ended December 31, 1997.
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 $532,
$15,517 and $60,803 for fiscal years ended June 30, 1995, 1996 and 1997,
respectively, and $7,759 and $53,878 for the six months ended December 31, 1996
and 1997, respectively.
Sales Returns. The Company allows customers to return merchandise for full
credit or refund within 30 days from the date of receipt. Collector's sells to
wholesalers and retailers; terms of sale and return privileges are negotiated on
an individual basis. At June 30, 1995, 1996 and 1997, and December 31, 1996 and
1997, the Company had recorded credits due to customers of $618,000, $1,100,000,
$3,122,000, $1,587,000 and $1,752,000, 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.
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.
Accounts Receivable -- Trade. The Company has reduced accounts receivable
to the net realizable value through recording allowances for doubtful accounts
and returns. At June 30, 1996 and 1997 and December 31, 1997, the Company had
recorded allowances of $0, $191,250 and $702,643, respectively.
Earnings (Loss) Per Share. Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share.
The standard replaces the presentation of primary EPS with a presentation of
basic EPS and replaces the presentation of fully diluted EPS with diluted EPS.
Basic income per share is computed by dividing net income available for common
shareholders by the weighted average number of shares of common stock
outstanding. Diluted income per share is computed by dividing adjusted net
income by the weighted average number of shares of common stock and, assumed
conversions of dilutive securities outstanding during the respective periods.
Dilutive securities represented by options, warrants, redeemable preferred stock
and convertible debt outstanding have been included in the computation. The
Company uses the treasury stock method for calculating the dilutive effect of
options and warrants and the if converted method with respect to the effect of
convertible securities.
Use of Estimates. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 100
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets. The Company follows Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which 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.
Stock-Based Compensation. The Company follows the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of the Company's employee stock options
equal the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Certain pro forma disclosures as required by
Statement of Financial Accounting Standards No. 123, Accounting and Disclosure
of Stock-Based Compensation, are included in Footnote 11.
Recent Accounting Pronouncements. Effective December 31, 1997, the Company
implemented Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure. The Statement consolidates disclosures
required by several existing pronouncements regarding an entity's capital
structure. The Company's disclosures are already in compliance with such
pronouncements and, accordingly, SFAS No. 129 does not require any change to
existing disclosures.
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 fiscal years beginning after December 31, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. The Company is evaluating SFAS No. 131 to determine the impact, if
any, on its reporting and disclosure requirements.
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.
Reclassifications. Certain amounts in the prior years' consolidated
financial statements have been reclassified for comparative purposes to conform
with the current year presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following major classifications:
<TABLE>
<CAPTION>
JUNE 30,
------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Leasehold improvements.......................... $ 285,074 $ 318,416 $ 345,219
Operating equipment............................. 4,736,119 5,819,654 6,444,535
Furniture and fixtures.......................... 194,651 190,656 198,034
----------- ----------- -----------
5,215,844 6,328,726 6,987,788
Accumulated depreciation........................ (1,745,618) (1,894,959) (2,239,691)
----------- ----------- -----------
Property and equipment, net .................... $ 3,470,226 $ 4,433,767 $ 4,748,097
=========== =========== ===========
</TABLE>
F-9
<PAGE> 101
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense totaled $463,496, $585,995 and $527,103 for the fiscal
years ended June 30, 1995, 1996 and 1997, respectively, and $260,137 and
$344,734 for the six months ended December 31, 1996 and 1997.
3. INVENTORY
The components of inventory at June 30, 1996 and 1997 and December 31,
1997, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Work in process................................... $ -- $ 389,159 $ 362,014
Finished goods.................................... 2,699,265 3,570,855 4,286,154
---------- ---------- ----------
2,699,265 3,960,014 4,648,168
Allowance......................................... (88,123) (697,934) (542,997)
---------- ---------- ----------
Total................................... $2,611,142 $3,262,080 $4,105,171
========== ========== ==========
</TABLE>
4. 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>
JUNE 30,
--------------------- DECEMBER 31,
1996 1997 1997
--------- --------- ------------
<S> <C> <C> <C>
Operating equipment................................ $ 660,032 $ 660,032 $ 836,843
Less accumulated depreciation...................... (396,267) (551,074) (636,106)
--------- --------- ---------
$ 263,765 $ 108,958 $ 200,737
========= ========= =========
</TABLE>
Future minimum lease payments under capitalized leases are as follows at
December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 297,230
1999........................................................ 271,949
2000........................................................ 175,537
---------
Total minimum lease payments................................ 744,716
Less amount representing interest........................... (117,158)
---------
Present value of minimum lease payments..................... 627,558
Less current portion........................................ (231,122)
---------
Long-term portion........................................... $ 396,436
=========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ DECEMBER 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <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......... $1,000,000 $ 750,000 $ 625,000
</TABLE>
F-10
<PAGE> 102
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
------------------------ DECEMBER 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
Notes payable due in April 2000, with interest
payable at 12% quarterly, collateralized by
certain equipment.............................. $ 800,000 $ 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...................... 2,399,858 2,310,763 2,262,952
Note payable bearing interest at 15% due in
monthly installments of $9,700, collateralized
by certain equipment........................... 435,101 380,302 349,682
Note payable to related party bearing interest at
10.75%, converted into 444,177 shares of common
stock in October 1997.......................... 1,775,366 1,425,077 --
Note payable bearing interest at 6%. The first
twelve payments consist of interest only while
the remainder of the payments consist of
principal and interest totaling $15,543. The
final payment is scheduled for September
2007........................................... -- 1,400,000 1,374,243
Assumption note payable to financial institution
bearing interest at 1.75% plus prime (8.5% at
12/31/97) due in equal monthly installments of
principal of $75,047 plus interest through
March 1999..................................... -- 1,575,992 1,171,624
Term note payable to financial institution
bearing interest at 10% due in equal monthly
installments of principal of $41,667 (with the
exception of first and last payment) plus
interest through February 1999................. -- 854,164 645,831
Note payable to financial institution bearing
interest at .75% over prime (8.5% at 12/31/97).
Interest only is due monthly starting January
1, 1998 through September 1, 2003. Principal is
due in equal monthly installments of $50,000
starting September 1, 1998 through September 1,
2003........................................... -- -- 3,000,000
---------- ----------- -----------
Total long-term debt............................. 6,410,325 9,496,298 10,229,332
Less current maturities.......................... (741,262) (2,279,833) (2,033,564)
---------- ----------- -----------
Long-term debt less current portion.............. $5,669,063 $ 7,216,465 $ 8,195,768
========== =========== ===========
</TABLE>
The aggregate future required principal payments at December 31, 1997, for
the above liabilities are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 2,033,564
1999........................................................ 1,668,062
2000........................................................ 1,861,985
2001........................................................ 971,579
2002 and beyond............................................. 3,694,142
-----------
$10,229,332
===========
</TABLE>
F-11
<PAGE> 103
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The $3,000,000 note contains restrictive covenants that require, among
other things, the Company maintain a EBITDA ratio less than 3.5 to 1 at the end
of each fiscal year, loan proceeds are restricted for only the purchase of
assets in the proposed acquisition, and payment of dividends is restricted to
only the required 1% on preferred stock.
6. 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.
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 by 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, 1996 and 1997 and December 31, 1997, 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.
F-12
<PAGE> 104
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK
In August 1995, 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
5); in September the Company issued 2,000 shares in conversion of its Redeemable
Preferred Stock (Note 6); 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 11); 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 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. By agreement, the stock was valued at $3.00 per share or
$477,525.
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 15 and 16. In October 1997, the Company issued 444,177 shares of common
stock in connection with the conversion of a 10.75% note payable in the amount
of $1,190,865. This note was being amortized in monthly installments of $43,494
and was due September 2000. The conversion of this note will reduce interest
expense by approximately $75,000 in the fiscal year ending June 30, 1998.
8. 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, 1996 and
1997 and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards and AMT
credits.................................... $ 2,324,269 $ 389,126 $ 95,000
Accruals...................................... 384,495 1,342,450 1,350,747
Valuation allowance........................... (1,263,991) -- --
----------- ----------- -----------
Total deferred tax assets.................. 1,444,773 1,731,576 1,445,747
----------- ----------- -----------
Deferred tax liabilities:
Licenses...................................... 3,331,736 3,726,985 3,685,138
Depreciation.................................. 115,373 275,551 323,191
----------- ----------- -----------
Total deferred tax liabilities............. 3,447,109 4,002,536 4,008,329
----------- ----------- -----------
Net deferred tax liabilities............... $(2,002,336) $(2,270,960) $(2,562,582)
=========== =========== ===========
Current deferred tax asset...................... $ 80,000 $ 1,342,450 $ 1,350,747
Long-term deferred tax liabilities.............. (2,082,336) (3,613,410) (3,913,329)
----------- ----------- -----------
Net deferred tax liabilities.................... $(2,002,336) $(2,270,960) $(2,562,582)
=========== =========== ===========
</TABLE>
At December 31, 1997, the Company had $95,000 of AMT credits available for
use in future periods.
F-13
<PAGE> 105
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) varies from the amount computed by applying
the federal corporate income tax rate of 34% to income (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------- ----------------------
1995 1996 1997 1996 1997
--------- --------- ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" income tax
expense (benefit)............ $(435,876) $(499,732) $ 501,855 $ 209,586 $620,508
Increase (decrease) in income
taxes resulting from:
State income tax expense
(benefit), net of federal
effect.................... (51,279) (58,792) 74,102 24,657 73,001
Change in valuation
allowance................. 476,582 362,411 (1,042,816) (428,713) --
Nondeductible portion of
meals and entertainment... 11,794 8,480 16,529 8,265 13,243
Other........................ (1,221) 84,239 370,330 176,205 (5,159)
--------- --------- ----------- --------- --------
Actual income tax expense
(benefit).................... $ -- $(103,394) $ (80,000) $ (10,000) $701,593
========= ========= =========== ========= ========
</TABLE>
The components of income tax expense (benefit) for the years ended June 30,
1995, 1996 and 1997 and the six months ended December 31, 1996 and 1997, are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------- ----------------------
1995 1996 1997 1996 1997
------- --------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
State........................... $ -- $ -- $ -- $ -- $ 50,000
Federal......................... -- -- -- -- 359,971
------- --------- --------- -------- --------
-- -- -- -- 409,971
------- --------- --------- -------- --------
Deferred:
State........................... -- (58,792) 74,102 24,657 30,697
Federal......................... -- (44,602) (154,102) (34,657) 260,925
------- --------- --------- -------- --------
-- (103,394) (80,000) (10,000) 291,622
------- --------- --------- -------- --------
Total expense
(benefit)............. $ -- $(103,394) $ (80,000) $(10,000) $701,593
======= ========= ========= ======== ========
</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.
F-14
<PAGE> 106
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. 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 increasing to $105,000 and $115,000 in
years two and three, respectively. Transponder expense was $1,281,000,
$1,379,000 and $1,330,000 in the fiscal years ended June 30, 1995, 1996 and
1997, respectively, and $697,000 for the six months ended December 31, 1997.
Purchase Commitments. Collector's Edge of Tennessee, Inc. had original
minimum contractual commitments to NFL Players, Inc. and NFL Properties, Inc. of
$2.2 million. Commitments remaining at December 31, 1997, include $1.2 million
in fiscal year 1998 and $0.7 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 $132,592, $143,325
and $139,763, in the fiscal years ended June 30, 1995, 1996 and 1997,
respectively, and $69,881 and $73,456 for the six months ended December 31, 1996
and 1997.
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
$1,945,000, $4,646,000 and $10,789,000 for fiscal years ended June 30, 1995,
1996 and 1997, respectively, and $5,395,000 and $7,385,000 for the six months
ended December 31, 1996 and 1997.
Rental expense for the office and studio and miscellaneous equipment
inclusive of the Knoxville office and studio expense of $73,456 referred to
above, was $184,434, $483,059 and $529,484 for the fiscal years ended June 30,
1995, 1996 and 1997, respectively, and $264,742 and $317,327 for the six months
ended December 31, 1996 and 1997.
10. RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 1995, 1996 and 1997 and the six
months ended December 31, 1997, 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>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
-------- ---------- ---------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Purchases -- merchandise:
V.J.M. (Victor Mueller)....... $989,272 $ 795,689 $1,077,925 $ 468,389 $650,381
Howards Sports Collectibles... 553,462 2,116,088 3,136,470 1,517,665 748,000
Combine International, Inc.... 98,843 452,348 706,674 106,634 164,755
Other operating expenses:
Lakeway Container............. 81,827 63,978 5,559 4,249 7,786
Airbank....................... 27,673 37,604 22,213 4,798 30,126
MediaOne...................... 224,359 157,567 -- -- --
</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.
F-15
<PAGE> 107
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1997, $300,000 of a total commitment of $800,000 was loaned to an
officer of the Company in accordance with the officer's employment agreement.
This note is noninterest bearing and is repayable at 10% of any additional
compensation above the officer's base salary. Any unpaid amount becomes due on
the earlier of termination of employment or June 30, 2002. In October 1997, the
Company advanced the additional $500,000 to this officer under the terms of this
agreement. Interest has been imputed at a rate of 5.6%, resulting in a discount
of $160,000. Interest income recognized for the six months ended December 31,
1997, was $27,000. The compensation expense related to the discount will be
recognized over the life of the note.
11. STOCK OPTIONS AND WARRANTS
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.
No options or SAR's may be granted after October 15, 2001. No option that
is an incentive stock option and any corresponding SAR that is 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. A maximum of 1,500,000
shares of common stock may be issued under the plan upon the exercise of options
and SARs. No SAR's have been issued under the plan.
No compensation expense has been recognized for options granted under the
plan. Had compensation expense 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 in the
following table.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------- -----------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).... $(1,281,989) $(1,292,259) $(1,405,472) $(1,431,467) $1,556,046 $1,466,058
Basic earnings (loss)
per share........... (0.14) (0.14) (0.14) (0.14) 0.14 0.14
Diluted earnings
(loss) per share.... (0.14) (0.14) (0.14) (0.14) 0.12 0.11
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
----------------------------------------------
1996 1997
-------------------- -----------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss).... $626,429 $581,435 $1,123,431 $1,070,176
Basic earnings (loss)
per share........... 0.06 0.06 0.10 0.10
Diluted earnings
(loss) per share.... 0.05 0.04 0.08 0.07
</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 grants in the year ended June 30, 1997 and the six
months ended December 31, 1997, respectively: dividend yield of 0%; expected
volatility of 65%; risk-free interest rate of 6% and 6.47%; and expected life of
7.5 years.
F-16
<PAGE> 108
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's options as of June 30, 1995, 1996
and 1997 and December 31, 1996 and 1997, and changes during the periods ending
on those dates is presented below:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............. 1,460,000 $1.69 1,630,000 $1.77 1,785,000 $2.01
Granted................. 170,000 2.44 325,000 2.84 639,500 2.88
Exercised............... -- -- (126,000) 1.00 (120,000) 1.00
Forfeited............... -- -- (44,000) 2.44 (112,000) 2.81
--------- ----- --------- ----- --------- -----
Outstanding at end of
period................ 1,630,000 $1.77 1,785,000 $2.01 2,192,500 $2.20
========= ========= =========
Options exercisable at
period end............ 943,000 1,012,000 1,493,500
========= ========= =========
Weighted-average fair
value of options
granted during the
year.................. $ 1.72 $ 2.02 $ 2.04
========= ========= =========
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------
1996 1997
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............. 1,785,000 $2.01 2,192,500 $2.20
Granted................. 634,500 2.88 328,000 3.38
Exercised............... (120,000) 1.00 (384,400) 1.02
Forfeited............... (112,000) 2.81 (48,000) 2.88
--------- ----- --------- -----
Outstanding at end of
period................ 2,187,500 $2.20 2,088,100 $2.53
========= =========
Options exercisable at
period end............ 1,498,500 1,064,100
========= =========
Weighted-average fair
value of options
granted during the
year.................. $ 2.04 $ 2.36
========= =========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.99 250,000 8 years $1.00 240,000 $1.00
$2.00 - $2.99 1,717,100 7 years 2.70 824,100 2.56
$3.00 - $4.99 121,000 10 years 3.90 --
----------- -----------
2,088,100 1,064,100
=========== ===========
</TABLE>
During the period ended December 31, 1997, 60,000 options were granted to
directors. The compensation expense related to these grants were $2,040 for the
six months ended December 31, 1997.
At December 31, 1997, warrants to purchase 3,000,000 shares of common stock
at $1.13 per share are outstanding. These warrants expire June 30, 2001.
12. EARNINGS PER SHARE
The following table sets forth for the periods indicated the calculation of
net earnings (loss) per share included in the Company's Consolidated Statements
of Operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)............... $(1,281,989) $(1,405,472) $ 1,556,046 $ 626,429 $ 1,123,431
Preferred stock dividends....... (4,598) (13,794) (13,794) (6,897) (6,897)
----------- ----------- ----------- ----------- -----------
Numerator for basic earnings per
share -- income available to
common stockholders........... (1,286,587) (1,419,266) 1,542,252 619,532 1,116,534
Effect of dilutive securities:
Preferred stock dividends..... 4,598 13,794 13,794 6,897 6,897
Interest on convertible
debt........................ -- -- 174,555 92,185 49,750
----------- ----------- ----------- ----------- -----------
</TABLE>
F-17
<PAGE> 109
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------------- -------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator for diluted earnings
per share -- income available
to common stockholders after
assumed conversions........... $(1,281,989) $(1,405,472) $ 1,730,601 $ 718,614 $ 1,173,181
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic earnings
per share -- weighted-average
shares........................ 9,436,870 10,284,085 10,651,472 10,596,621 11,283,237
Effect of dilutive securities:
Employee stock options........ -- -- 528,463 537,485 565,667
Non employee options.......... -- -- 149,677 192,570 191,465
Warrants...................... -- -- 2,268,020 2,326,118 2,322,981
Convertible preferred stock... -- -- 137,943 137,943 137,943
Convertible debt.............. -- -- 532,920 590,815 237,513
----------- ----------- ----------- ----------- -----------
Denominator for diluted earnings
per share -- adjusted
weighted-average shares and
assumed conversions............. 9,436,870 10,284,085 14,268,495 14,381,552 14,738,806
=========== =========== =========== =========== ===========
Basic earnings per share.......... $ (0.14) $ (0.14) $ 0.14 $ .06 $ .10
=========== =========== =========== =========== ===========
Diluted earnings per share........ $ (0.14) $ (0.14) $ 0.12 $ .05 $ .08
=========== =========== =========== =========== ===========
</TABLE>
13. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all full-time
employees who have one year of service and are age twenty-one or older.
Participants are permitted to make contributions in an amount equal to 1% to 15%
of their compensation actually paid or received. Employer contributions are
discretionary and allocated to each eligible employee in proportion to his or
her compensation as a percentage of the compensation of all eligible employees.
During 1996 and 1997, the Company did not make contributions to the plan.
14. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk include cash on deposit in financial
institutions and accounts receivable. Receivables are due from credit card
companies and ultimate customers. The Company maintains reserves which
management believes are adequate to provide for losses. Management believes the
financial institutions holding the cash to be financially sound.
The home shopping industry is sensitive to general economic conditions and
business conditions affecting consumer spending. The Company's product lines
include jewelry, sports cards, sports memorabilia, collectibles and other unique
items that may make it more sensitive to economic conditions. Collector's
products include various sports cards and memorabilia, some of which are sold
through Shop At Home, Inc.
15. 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 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.
F-18
<PAGE> 110
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. The additional purchase price was added to the
amount of FCC License originally recorded.
16. ACQUISITION 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.
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 and equipment...................................... 615,000
Deferred tax liability...................................... (2,376,000)
-----------
$ 7,199,813
===========
</TABLE>
17. ACQUISITION OF COLLECTOR'S EDGE OF TENNESSEE, INC.
On February 25, 1997, Collector's Edge of Tennessee, Inc. was formed to
acquire the assets of a former trading card manufacturer. Collector's is a
trading card manufacturer whose principal assets are licenses from National
Football League Properties, Inc. and National Football League Players, Inc.
F-19
<PAGE> 111
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Collector's 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 was subsequently converted into common stock of Collector's. In
addition, Collector's assumed a term note in the amount of $1.9 million, and
borrowed an additional $1.0 million from a financial institution. The note is
guaranteed by the Company and collateralized by BCST.
The acquisition of Collector's has been accounted for under the purchase
method. Accordingly, the operating results of Collector's have been included in
the consolidated operating 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 Collector's,
occurred on the first day of each year presented are set forth below.
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................... $50,666,000 $74,987,000
Net income (loss)........................................... (1,432,000) 1,178,000
Net income (loss) per share:
Basic..................................................... $ (.14) $ .11
Diluted................................................... $ (.14) $ .08
</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.
18. 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.
F-20
<PAGE> 112
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. INDUSTRY SEGMENTS
As a result of the acquisition of Collector's Edge of Tennessee, Inc.
discussed in Note 17, the Company operates principally in two segments;
retailing and manufacturing. The retailing segment consists of home shopping,
which primarily includes the sale of merchandise through electronic retailing.
The manufacturing segment includes the operations of Collector's Edge of
Tennessee, Inc. which manufacturers and sells sports trading cards to
unaffiliated customers. The Company operates almost exclusively in the United
States.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1997 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Revenue:
Retailing................................................. $66,857,751 $40,376,212
Manufacturing............................................. 959,709 3,044,862
Other..................................................... 1,014,888 563,585
----------- -----------
$68,832,348 $43,984,659
=========== ===========
Operating profit:
Retailing................................................. $ 2,304,643 $ 1,498,900
Manufacturing............................................. 19,108 302,342
----------- -----------
$ 2,323,751 $ 1,801,242
=========== ===========
Assets:
Retailing................................................. $29,772,304 $31,538,091
Manufacturing............................................. 4,638,006 7,434,555
----------- -----------
$34,410,310 $38,972,646
=========== ===========
Depreciation and amortization:
Retailing................................................. $ 819,356 $ 462,152
Manufacturing............................................. 237,136 317,538
----------- -----------
$ 1,056,492 $ 779,690
=========== ===========
Capital expenditures:
Retailing................................................. $ 1,046,326 $ 636,709
Manufacturing............................................. 10,255 --
----------- -----------
$ 1,056,581 $ 636,709
=========== ===========
</TABLE>
F-21
<PAGE> 113
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In contemplation of the proposed offering of Secured Notes, the following
is summarized condensed consolidating financial information for the Company,
segregating the Parent from the guarantor subsidiaries. The guarantor
subsidiaries are direct or indirect wholly owned subsidiaries of the Company and
guarantees are full, unconditional, joint and several.
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997
----------------------------------------- -----------------------------------------
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES CONSOLIDATED PARENT SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash................. $ 1,863,286 $ 51,473 $ 1,914,759 $ 4,757,083 $ 320,558 $ 5,077,641
Accounts
receivable.......... 3,353,708 878 387,757 7,937,696 243,902 3,295,925
Inventories.......... 2,611,142 -- 2,611,142 2,777,635 484,445 3,262,080
Prepaid expenses..... 265,074 14,431 279,505 384,406 73,837 458,243
Deferred tax
assets.............. 80,000 -- 80,000 1,342,450 -- 1,342,450
----------- ----------- ----------- ----------- ----------- -----------
Total current
assets.............. 8,173,210 66,782 5,273,163 17,199,270 1,122,742 13,436,339
Notes receivable..... -- -- -- 400,000 -- --
Property and
equipment, net...... 745,960 2,724,226 3,470,226 1,321,289 3,112,478 4,433,767
FCC and NFL licenses,
net................. 1,726,335 8,789,706 10,516,041 161,782 13,261,400 13,423,182
Goodwill, net........ 605,154 -- 605,154 589,638 254,002 1,989,529
Other assets......... 320,876 101,210 422,086 438,453 1,834,929 1,127,493
Investment in
subsidiaries........ 9,609,813 -- -- 10,359,813 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total assets......... $21,181,348 $11,681,924 $20,286,670 $30,470,245 $19,585,551 $34,410,310
=========== =========== =========== =========== =========== ===========
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
GUARANTOR
PARENT SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------
<S> <C> <C> <C>
Assets:
Cash................. $ 389,018 $ 143,445 $ 532,463
Accounts
receivable.......... 9,917,257 2,160,588 5,857,554
Inventories.......... 3,041,921 1,063,250 4,105,171
Prepaid expenses..... 499,504 864,192 1,363,696
Deferred tax
assets.............. 1,350,747 -- 1,350,747
----------- ----------- -----------
Total current
assets.............. 15,198,447 4,231,475 13,209,631
Notes receivable..... 1,200,000 -- 800,000
Property and
equipment, net...... 1,711,182 3,036,915 4,748,097
FCC and NFL licenses,
net................. 159,654 12,882,448 13,042,102
Goodwill, net........ 581,879 2,008,144 2,590,023
Other assets......... 4,578,330 4,463 4,582,793
Investment in
subsidiaries........ 10,359,813 -- --
----------- ----------- -----------
Total assets......... $33,789,305 $22,163,445 $38,972,646
=========== =========== ===========
</TABLE>
NOTE: Intercompany balances have been eliminated in the consolidated totals.
F-22
<PAGE> 114
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
Liabilities and
Stockholders'
Equity:
<S> <C> <C> <C> <C> <C> <C> <C>
Accounts payable and
accrued expenses.... $ 6,556,347 $ 3,027,277 $ 6,616,796 $14,338,744 $ 6,065,657 $15,518,828 $13,385,232
Current portion --
capital leases and
long-term debt...... 850,706 -- 850,706 849,531 1,601,800 2,451,331 787,193
Deferred revenue..... 1,491,782 20,509 1,512,291 87,926 19,693 107,619 53,719
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities......... 8,898,835 3,047,786 8,979,793 15,276,201 7,687,150 18,077,778 14,226,144
Long-term debt....... 5,722,712 -- 5,722,712 5,293,773 2,628,358 7,522,131 6,753,864
Deferred income
taxes............... -- 2,082,336 2,082,336 -- 3,613,411 3,613,410 3,544,704
Redeemable preferred
stock............... 1,393,430 -- 1,393,430 1,393,430 750,000 1,393,430 1,393,430
Common stock......... 26,438 1,065 26,438 26,786 1,165 26,786 29,357
Additional paid-in
capital............. 9,927,787 9,608,748 9,927,787 10,066,555 9,608,748 10,066,555 11,874,499
Accumulated
deficit............. (4,787,854) (3,058,011) (7,845,826) (1,586,500) (4,703,281) (6,289,780) (4,032,693)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders'
equity.............. $21,181,348 $11,681,924 $20,286,670 $30,470,245 $19,585,551 $34,410,310 $33,789,305
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Liabilities and
Stockholders'
Equity:
<S> <C> <C>
Accounts payable and
accrued expenses.... $ 8,839,336 $16,004,376
Current portion --
capital leases and
long-term debt...... 1,477,493 2,264,686
Deferred revenue..... 13,395 67,114
----------- -----------
Total current
liabilities......... 10,330,224 18,336,176
Long-term debt....... 2,238,340 8,592,204
Deferred income
taxes............... 368,625 3,913,329
Redeemable preferred
stock............... 750,000 1,393,430
Common stock......... 1,165 29,357
Additional paid-in
capital............. 9,608,748 11,874,499
Accumulated
deficit............. (1,133,657) (5,166,349)
----------- -----------
Total liabilities and
stockholders'
equity.............. $22,163,445 $38,972,646
=========== ===========
</TABLE>
NOTE: Intercompany balances have been eliminated in the consolidated totals.
F-23
<PAGE> 115
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1997
----------------------------------------- ----------------------------------------- -----------
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES CONSOLIDATED PARENT SUBSIDIARIES CONSOLIDATED PARENT
----------- ------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $26,787,013 $ -- $26,787,013 $40,016,114 $ -- $40,016,114 $66,857,751
Cost of sales........ 17,120,791 -- 17,120,791 24,516,348 -- 24,516,348 40,327,908
Other operating
income.............. -- 488,952 189,000 -- 2,317,481 659,461 --
Operating expenses... 10,971,182 469,417 11,009,797 17,127,961 2,510,787 16,930,172 24,943,748
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.......... (1,304,960) 19,535 (1,154,575) (1,628,195) (193,306) (770,945) 1,586,095
Interest expense,
net................. (216,486) -- (216,486) (793,648) (910) (794,558) (929,568)
Other income......... 219,922 -- 89,072 1,106,632 561 56,637 1,282,380
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
taxes............... (1,301,524) 19,535 (1,281,989) (1,315,211) (193,655) (1,508,866) 1,938,907
Income tax expense
(benefit)........... -- -- -- (103,394) -- (103,394) (100,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).... $(1,301,524) $ 19,535 $(1,281,989) $(1,211,817) $ (193,655) $(1,405,472) $ 2,038,907
=========== =========== =========== =========== =========== =========== ===========
CASH FLOWS
Cash provided (used) by
operations.......... $ 1,537,042 $ 405,637 $ 1,942,679 $(1,158,506) $ 1,973,319 $ 814,813 $ 2,926,057
Cash provided (used)
by investing
activities.......... 6,378,736 (10,038,390) (3,659,654) 1,753,411 (1,898,905) (145,494) 2,514,970
Cash provided (used)
by financing
activities.......... (8,797,854) 9,641,949 844,095 1,075,430 (32,136) 1,043,294 (2,547,230)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Increase (decrease)
in cash............. (882,076) 9,196 (872,880) 1,670,335 42,278 1,712,613 2,893,797
Cash at beginning of
period.............. 1,075,026 -- 1,075,026 192,951 9,195 202,146 1,863,286
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash at end of
period.............. $ 192,950 $ 9,196 $ 202,146 $ 1,863,286 $ 51,473 $ 1,914,759 $ 4,757,083
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
JUNE 30, 1997
---------------------------
GUARANTOR
SUBSIDIARIES CONSOLIDATED
------------ ------------
<S> <C> <C>
Net revenues......... $ 959,709 $67,817,460
Cost of sales........ 298,226 40,626,134
Other operating
income.............. 2,017,728 1,014,888
Operating expenses... 2,992,111 25,882,463
----------- -----------
Income (loss) from
operations.......... (312,900) 2,323,751
Interest expense,
net................. (149,961) (1,079,529)
Other income......... -- 231,824
----------- -----------
Income (loss) before
taxes............... (462,861) 1,476,046
Income tax expense
(benefit)........... 20,000 (80,000)
----------- -----------
Net income (loss).... $ (482,861) $ 1,556,046
=========== ===========
CASH FLOWS
Cash provided (used) by
operations.......... $ 3,319,324 $ 6,245,381
Cash provided (used)
by investing
activities.......... (8,016,755) (4,751,685)
Cash provided (used)
by financing
activities.......... 4,966,516 1,669,186
----------- -----------
Increase (decrease)
in cash............. 269,085 3,162,882
Cash at beginning of
period.............. 51,473 1,914,759
----------- -----------
Cash at end of
period.............. $ 320,558 $ 5,077,641
=========== ===========
</TABLE>
NOTE: Intercompany balances have been eliminated in the consolidated totals.
F-24
<PAGE> 116
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 (UNAUDITED) DECEMBER 31, 1997
----------------------------------------- -----------------------------------------
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES CONSOLIDATED PARENT SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net revenues................... $29,796,265 $ -- $29,796,266 $40,376,212 $3,397,445 $43,421,074
Cost of sales.................. 18,146,218 -- 18,146,218 23,506,538 2,090,228 25,244,184
Other operating income......... -- 1,285,829 456,819 -- 1,400,159 563,585
Operating expenses............. 11,334,294 1,189,886 11,169,892 15,297,146 1,642,086 16,939,233
----------- ---------- ----------- ----------- ---------- -----------
Income (loss) from
operations................... 315,753 95,943 936,975 1,572,528 1,065,290 1,801,242
Interest expense (net)......... (367,171) (21,331) (388,504) (282,424) (172,561) (454,985)
Other income (expense)......... 593,235 -- 67,958 190,072 (547,881) 478,767
----------- ---------- ----------- ----------- ---------- -----------
Income before taxes............ 541,817 74,612 616,429 1,480,176 344,848 1,825,024
Income tax expense (benefit)... (50,000) 40,000 (10,000) 681,589 20,004 701,593
----------- ---------- ----------- ----------- ---------- -----------
Net income..................... $ 591,817 $ 34,612 $ 626,429 $ 798,587 $ 324,844 $ 1,123,431
=========== ========== =========== =========== ========== ===========
CASH FLOWS
Cash provided by (used in)
operations................... $ 2,038,696 $ 309,505 $ 2,348,201 $(2,011,905) $ 593,542 $(1,418,363)
Cash provided by (used in)
investing activities......... (335,947) (282,263) (618,210) (5,557,000) (79,514) $(5,636,514)
Cash provided by (used in)
financing activities......... (367,601) (33,088) (400,689) 3,200,840 (691,141) 2,509,699
----------- ---------- ----------- ----------- ---------- -----------
Increase (decrease) in cash.... 1,335,148 (5,846) 1,329,302 (4,368,065) (177,113) (4,545,178)
Cash at beginning of period.... 1,863,286 51,473 1,914,759 4,757,083 320,558 5,077,641
----------- ---------- ----------- ----------- ---------- -----------
Cash at end of period.......... $ 3,198,434 $ 45,627 $ 3,244,061 $ 389,018 $ 143,445 $ 532,463
=========== ========== =========== =========== ========== ===========
</TABLE>
NOTE: Intercompany balances have been eliminated in the consolidated totals.
21. PENDING TRANSACTIONS
Proposed Asset Purchase. SAH Acquisition II entered into an Asset Purchase
Agreement dated as of September 23, 1997 (the "Asset Purchase Agreement") with
Global Broadcasting Systems, Inc., a Delaware corporation, under which SAH
Acquisition II agreed to acquire certain broadcast television assets (the
"Acquisition"). Global Broadcasting Systems, Inc. and its affiliate are
currently subject to a proceeding (the "Bankruptcy Proceeding") under Chapter 11
of Title 11 of the United States Code in the United States Bankruptcy Court for
the Southern District of New York (the "Bankruptcy Court") (as debtors in the
Bankruptcy Proceeding, Global Broadcasting Systems, Inc. and its affiliate are
referred to as "Global").
Under the Asset Purchase Agreement, SAH Acquisition II has agreed to
acquire two broadcast television stations owned by Global, KCNS (TV) located in
San Francisco, California ("KCNS"), and WRAY (TV) located in the Raleigh-Durham,
North Carolina market ("WRAY"). Under the Asset Purchase Agreement, SAH
Acquisition II has agreed to assume the legal right and obligation of Global
under executory purchase contracts (the "Executory Contracts") to acquire two
additional broadcast television stations, WOAC (TV) in the Cleveland, Ohio
market ("WOAC") and WPMC (TV) in the Knoxville, Tennessee market ("WPMC"). The
Company contemplates a sale of the right to acquire WPMC to an unaffiliated
entity. The Company has guaranteed the performance of SAH Acquisition II under
the Asset Purchase Agreement. An order of the Bankruptcy Court approved the
Asset Purchase Agreement on November 20, 1997.
The total purchase price payable by SAH Acquisition II to Global in
connection with the Acquisition is $52,350,000 (the "Global Purchase Price"), of
which the Company has paid a total of $3,963,750 into an escrow account held by
the Bankruptcy Trustee and which will be applied to the Global Purchase Price at
the closing. The escrow payment was funded through $1,000,000 of internal funds
and a $3,000,000 borrowing.
F-25
<PAGE> 117
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balance of $48,886,250 is payable by the Company to Global at the closing.
In connection with the assignment of the Executory Contract for WOAC, SAH
Acquisition II is obligated to purchase WOAC for a total purchase price of
$23,500,000. SAH Acquisition II is entitled to a credit for an escrow deposit
previously paid by Global to the sellers of WOAC in the amount of $2,350,000 and
will make a cash payment of $21,150,000 in connection with the closing of the
purchase of WOAC.
The Company will account for the Acquisition as a purchase of assets rather
than the acquisition of a business because, with the exception of a de minimus
period of time, these stations were operated as commercial broadcast stations
and not as broadcast outlets for home shopping programming. The Company has
concluded that because there is not continuity of revenues from these stations
from which to derive relevant historical operation information, pro forma
financial information is not meaningful and has not been provided.
The obligations of the parties under the Asset Purchase Agreement and the
Executory Contract for WOAC are subject to receipt of the approval of the
Federal Communications Commission ("FCC") of the Applications for Consent to
Assignment of Broadcast Station Licenses (collectively, the "Applications")
filed with respect to the broadcast licenses to be transferred to SAH
Acquisition II. The FCC published public notice of its approval of the
Applications for KCNS and WRAY on December 15, 1997, and such approval became a
final order on January 25, 1998. The FCC published public notice of its approval
of the Application for WOAC on January 29, 1998, and such approval is expected
to become a final order March 10, 1998, assuming no party files a timely
objection thereto.
The Company plans to use proceeds from public offerings of debt and equity
securities to fund the obligations under the Asset Purchase Agreement and the
Executory Contracts.
In the event the Company is unable to close the Acquisition, under certain
conditions, the escrow account balance could be forfeited.
Other Matters. The Company's Board of Directors has approved the
authorization of 30,000,000 shares of nonvoting common stock which is pending
approval by shareholders at the Annual Meeting to be held March 6, 1998.
On January 7, 1998, the Company guaranteed a note made by a related party
to a financial institution for the purchase of land and a building in Nashville,
Tennessee. Upon completion of the pending debt and equity offering, the Company
intends to purchase the building at the amount invested by the related party,
and retire the related indebtedness.
F-26
<PAGE> 118
======================================================
No dealer, salesman or other person is authorized in connection with any
offering made hereby to give any information or to make any representations not
contained in this Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or by the Underwriters. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any security other than the securities offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby to any person in any jurisdiction in
which it is unlawful to make such an offer or solicitation to such person.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances create an implication that the information contained herein is
correct as of any date subsequent to the date hereof.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 11
Use of Proceeds....................... 20
Capitalization........................ 21
Selected Historical and Pro Forma
Financial Data...................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 31
Management............................ 46
Certain Relationships and Related
Transactions........................ 53
Security Ownership of Certain
Beneficial Owners................... 55
Description of Notes.................. 57
Description of Senior Credit
Facility............................ 83
Description of Capital Stock.......... 84
Underwriting.......................... 89
Legal Matters......................... 90
Experts............................... 90
Additional Information................ 90
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
[SHOP AT HOME LOGO]
SHOP AT HOME, INC.
$75,000,000
% SENIOR
SECURED NOTES
DUE 2005
--------------------
PROSPECTUS
--------------------
NationsBanc Montgomery
Securities LLC
Friedman, Billings,
Ramsey & Co., Inc.
, 1998
======================================================
<PAGE> 119
[ALTERNATE PAGE FOR COMMON STOCK PROSPECTUS]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH 2, 1998
PROSPECTUS
[SHOP AT HOME LOGO]
10,000,000 SHARES
SHOP AT HOME, INC.
COMMON STOCK
---------------------
All of the 10,000,000 shares of voting Common Stock, par value $0.0025 per
share (the "Common Stock"), offered hereby (the "Common Stock Offering") are
being sold by Shop at Home, Inc. (the "Company"). Concurrent with the Common
Stock Offering, the Company is offering $75,000,000 in aggregate principal
amount of its % Senior Secured Notes due 2005 (the "Notes") by a separate
prospectus (the "Notes Offering" and together with the Common Stock Offering,
the "Offerings"). The Common Stock Offering is contingent upon the completion of
the Notes Offering, and the Notes Offering is contingent upon the completion of
the Common Stock Offering.
See "Underwriting" for information relating to the factors considered in
determining the public offering price.
The Common Stock is quoted on the Nasdaq SmallCap Market ("Nasdaq") under
the symbol "SATH." On February 27, 1998 the last reported sale of the Common
Stock was $3.50 per share. See "Description of Capital Stock -- Market
Information."
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
ARE SPECULATIVE SECURITIES. SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREOF FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
==================================================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
==================================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 1,500,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities LLC on or about ,
1998.
---------------------
NationsBanc Montgomery Securities LLC Friedman, Billings, Ramsey & Co., Inc.
The date of this Prospectus is , 1998
ALT-1
<PAGE> 120
[ALTERNATE PAGE FOR COMMON STOCK PROSPECTUS]
[Graphic showing a television set with two handles configured to make the
television appear to be a shopping bag with the words "Shop At Home" appearing
above the graphic and the words "Watch. Call. Buy." below it]
[Graphic showing a map of United States with five stars marked at Boston,
Cleveland, Raleigh, Houston, and San Francisco, and approximately 150 black dots
marked at various locations around the country, and containing a logo reading:
"[dot] Cable Affiliates"; [star] "Owned & Operated Stations."]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ALT-2
<PAGE> 121
THE OFFERING
COMMON STOCK OFFERED
HEREBY..................... 10,000,000 shares
COMMON STOCK TO BE
OUTSTANDING AFTER THE
COMMON STOCK OFFERING...... 21,762,991 shares(1)(2)
USE OF PROCEEDS............ The Company intends to use the net proceeds from
the Common Stock Offering, together with the net
proceeds from the Notes Offering in the following
manner: (i) to pay the purchase price to Global
under the Asset Purchase Agreement and the purchase
price to close the Executory Contract for WOAC (See
"Business -- Recent Development"), (ii) to purchase
the real estate and building for the Company's new
main offices and studios in Nashville, Tennessee
(the "Facility"), (iii) to purchase equipment for
the Facility, (iv) to complete interior renovation
of the Facility, (v) to acquire equipment necessary
to upgrade and improve the broadcast television
stations acquired through the Acquisition, (vi) to
repay substantially all of the currently existing
indebtedness of the Company, (vii) as working
capital of the Company, which may be used to
acquire additional television stations that may be
available in the future, and (viii) to pay
transaction fees and expenses. The closings of the
Acquisition and the Executory Contract will occur
contemporaneously with the consummation of the
Offerings. See "Use of Proceeds."
NASDAQ SYMBOL.............. "SATH"
- ---------------
(1) Does not include (i) 1,500,000 shares of Common Stock reserved for issuance
pursuant to options granted or to be granted under the Company's Omnibus
Stock Incentive Plan, (ii) 137,943 shares of Common Stock issuable upon
conversion of outstanding shares of Series A Preferred Stock, or (iii)
4,658,100 shares of Common Stock issuable upon exercise of other
outstanding options and warrants. As of December 31, 1997, options to
purchase a total of 638,100 shares of Common Stock were outstanding under
the Omnibus Stock Incentive Plan.
(2) If the Over-allotment Option is exercised, 11,500,000 shares of Common Stock
will be sold in the Common Stock Offering and 23,262,991 shares of Common
Stock will be outstanding after the Common Stock Offering.
CONCURRENT OFFERING
Concurrently with the Common Stock Offering, the Company is offering
$75,000,000 in aggregate principal amount of its % Senior Secured Notes due
2005 to the public. The Common Stock Offering is contingent upon the completion
of the Notes Offering, and the Notes Offering is contingent upon the completion
of the Common Stock Offering.
RISK FACTORS
Investments in the Common Stock involve a high degree of risk. Prior to
making an investment in the Common Stock offered hereby, prospective purchasers
should carefully review the information set forth under the caption "Risk
Factors" as well as other information set forth in this Prospectus.
ALT-3
<PAGE> 122
RISK FACTORS
Prior to making an investment decision with regard to the Company,
prospective investors should carefully consider the following Risk Factors in
addition to the other information and financial data presented in the various
filings made by the Company with the Securities and Exchange Commission. Many of
the statements in this Prospectus are forward-looking in nature and,
accordingly, whether or not they prove to be accurate is subject to many risks
and uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Prospectus. Factors that
could cause or contribute to such difference include, but are not limited to,
those discussed below and those contained elsewhere in this Prospectus.
SIGNIFICANT LEVEL OF INDEBTEDNESS
Following the Offerings, the Company will have a significant level of
indebtedness. As of December 31, 1997, on a pro forma basis, after giving effect
to the Offerings and the application of the net proceeds therefrom as described
in "Use of Proceeds," the Company's consolidated debt and capitalized lease
obligations would have been approximately $75.6 million, including the Notes.
Subject to the restrictions on indebtedness contained in the Indenture, the
Company may incur additional indebtedness, including under a Senior Credit
Facility, for capital expenditures or for other purposes.
The level of the Company's indebtedness following the Offerings could have
material consequences to the Company and the holders of the Company's
securities, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for acquisitions, working
capital, capital expenditures, general corporate or other purposes may be
impaired, (ii) a substantial portion of the Company's cash flow from operations,
if any, will be dedicated to the payment of the principal and interest on its
indebtedness and will not be available for other purposes, (iii) the Company's
ability to react to changes in its industry or economic conditions could be
limited, and (iv) certain of the Company's borrowings may be at variable rates
of interest, which could result in higher interest expense in the event of
increases in interest rates.
The Company's ability to service its indebtedness, including the Notes,
will depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business, and other factors,
certain of which are beyond its control, as well as the availability of
borrowings under a Senior Credit Facility. As of December 31, 1997, the Company
had an accumulated deficit of approximately $(5.2 million). The Company will
require substantial amounts of cash to fund scheduled payments of principal and
interest on its outstanding indebtedness, including the Notes, as well as future
capital expenditures and any working capital requirements, which will increase
as a result of the Acquisitions. If the Company is unable to meet its cash
requirements out of cash flow from operations and its available borrowings,
there can be no assurance that it will be able to obtain alternative financing
or that it will be permitted to do so under the terms of a Senior Credit
Facility, the Indenture or its other indebtedness. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to make future acquisitions, to absorb adverse operating results, to
fund capital expenditures or to pay interest on the Notes may be adversely
affected. If the Company does not generate sufficient increases in cash flow
from operations to repay its indebtedness at maturity, including the Notes, it
could attempt to refinance such indebtedness; however, no assurance can be given
that such refinancing would be available on terms acceptable to the Company, if
at all.
MANAGEMENT OF GROWTH AND RELATED EXPENSES
The Company has experienced rapid growth in net sales in recent years. For
the Company's fiscal years ended June 30, 1994, June 30, 1995, June 30, 1996 and
June 30, 1997, net sales of the Company increased by 9%, 23%, 49% and 69%,
respectively, over net sales for the prior fiscal year. Almost all of the growth
in net sales has resulted from expanded carriage of the Company's programming on
cable systems and broadcast television stations. In connection with the expanded
carriage of its programming, the amounts payable to cable systems and television
broadcasters for the carriage of the Company's programming have increased
substantially. The Company has also incurred other increased expenses associated
with its growth, including increased
ALT-4
<PAGE> 123
personnel costs. The Company must effectively control expenses in order to
operate profitably and the failure to effectively control expenses could have an
adverse impact on the Company's financial condition and results of operations.
COST OF ACQUISITION
As a result of the Notes Offering, the Company is incurring a substantial
debt service obligation. In the event that the increased revenues associated
with increased broadcast television carriage of the Company's programming do not
exceed the additional costs and expenses associated with the Acquisition, the
purchase of WOAC and the Company's expansion, including interest payable on the
Notes, the Company's profitability will be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
NET LOSSES; ACCUMULATED DEFICIT
For its fiscal years ended June 30, 1993, 1994, 1995, and 1996, the Company
had net losses of approximately $(2.4 million), $(1.1 million), $(1.3 million)
and $(1.4 million), respectively. For the fiscal year ended June 30, 1997 and
for the six month period ended December 31, 1997, the Company had net income of
approximately $1.6 million and $1.1 million, respectively. As of December 31,
1997, the Company had an accumulated deficit of approximately $(5.2 million). At
June 30, 1997 and at December 31, 1997, the Company had negative working capital
of approximately $(4.6 million) and $(5.1 million), respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" for a discussion of working capital and
liquidity.
RELOCATION OF PRINCIPAL FACILITY
The Company is in the process of relocating its principal facility,
including its offices and studios from Knoxville, Tennessee to Nashville,
Tennessee. The Company anticipates that the expense of the relocation, including
the costs of acquiring the real estate and building, completing the interior
buildout and equipping the new Facility, will be approximately $13.4 million,
but there can be no assurance that the actual expense will not exceed such
amount. In addition, certain other transitional matters related to the
relocation could negatively impact the operations and earnings of the Company,
including the transition of the programming origination to the Facility, the
possible transition of telephone call center operations to the Facility, the
possible loss of personnel and lost productivity due to management resources
devoted to the relocation. See "Business -- Properties."
RISK OF INABILITY TO INCREASE DISTRIBUTION OF THE COMPANY'S PROGRAMMING
The Company's strategy involves continued growth through increased
distribution of its programming. Increasing distribution of the Company's
programming may require that the Company raise additional debt or equity capital
subsequent to the Offerings. There can be no assurance, however, that any such
capital would be available to the Company on acceptable terms, if at all. In
addition to the Acquisition and the purchase of WOAC, the Company's strategy
involves the acquisition of additional broadcast television stations. There can
be no assurances that the Company will be successful in acquiring additional
broadcast stations. If the Company is unable to raise additional capital or is
unable to consummate additional acquisitions, the Company may be unable to
increase distribution of its programming. See "Business -- Business Strategy."
NEED FOR CAPITAL EXPENDITURES RELATED TO THE ASSETS ACQUIRED IN THE ACQUISITION
The Company plans certain capital expenditures to acquire and to install
equipment at KCNS and WRAY. Such capital expenditures are required in order for
the broadcast television stations to operate at full power in accordance with
their respective FCC licenses. In particular, WRAY is currently operating under
a construction permit and a full license for the station has not been obtained
due to the operation of the station at a power level substantially below that
authorized by the FCC. The Company expects to incur capital expenditures of
approximately $4 million for the acquisition and installation of new equipment,
but there can
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be no assurance that the actual expenditures will not exceed that amount. See
"Business -- Recent Development."
CONTROL BY PRINCIPAL SHAREHOLDER; CHANGE IN CONTROL
J.D. Clinton is the beneficial owner, directly and indirectly, of 3,227,700
shares of the Common Stock representing approximately 27.4% of the outstanding
shares of Common Stock as of December 31, 1997. In addition, Mr. Clinton and his
affiliates hold options and warrants for the right to acquire additional shares
of Common Stock of the Company. On a fully diluted basis after the exercise of
all options and warrants held and after giving effect to the Common Stock
Offering (assuming an issuance of 10,000,000 shares), Mr. Clinton would own,
directly or indirectly, 5,435,200 shares of the Common Stock representing
approximately 22.7% (21.4% if the Over-allotment is exercised) of the shares of
Common Stock of the Company. Mr. Clinton's ownership is substantially greater
than that of any other shareholder, and his ownership could give him de facto
control over any shareholder vote, including a vote for election of all of the
members of the Company's Board of Directors, a vote for the adoption of
amendments to the Company's charter and bylaws and a vote for the approval of a
merger, consolidation, asset sale or other corporate transaction requiring
approval of the shareholders of the Company. The concentration of ownership
could have the effect of delaying or preventing a change in control of the
Company, even when a change of control would be in the best interests of the
Company's other shareholders. See "Security Ownership of Certain Beneficial
Owners."
The Company currently has an employment agreement with Kent E. Lillie, who
is the Company's President and Chief Executive Officer. In the event of a change
of control of the Company (as defined in the employment agreement), the
employment agreement grants Mr. Lillie certain rights, including the right to
resign at any time during the 12 months following the occurrence of the change
of control, and the right to receive an amount equal to his base salary and
monthly allowances for the 12 months preceding such resignation. In addition,
any options to purchase stock not yet vested will automatically vest on the date
of his resignation. The provisions of Mr. Lillie's employment agreement may have
the effect of discouraging a change in control of the Company. See "Management
- -- Employment Agreements."
The provisions of the Indenture that give the holders of the Notes the
right to require the Company to repurchase their Notes upon a Change of Control
(as defined in the Indenture) may discourage, delay or prevent a Change in
Control of the Company that shareholders might consider to be in the Company's
best interests.
The Company's Board of Directors, without shareholder approval, can issue
Preferred Stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the rights of the holders of Common Stock. The
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company that
shareholders might consider to be in the Company's best interests. See
"Description of Capital Stock -- Preferred Stock."
DEPENDENCE ON AFFILIATION AGREEMENTS
The Company's business is dependent upon affiliation agreements and time
brokerage agreements with television broadcast stations and cable system
operators. A significant number of the Company's customers are reached through
the broadcasting of the Company's programming pursuant to such agreements. These
agreements contain various provisions, including agreements to carry the
Company's programming for a number of hours daily or to carry the programming on
substantially a full-time basis. These agreements are subject to renegotiation
and renewal from time to time. Certain agreements provide the station or cable
system operator with the right to terminate the agreement at any time or to
preempt the Company's programming in certain events.
The failure of the Company to maintain distribution of its programming in
particular markets could have a material adverse effect on the Company. The
ability of the Company to maintain these agreements is dependent on the
Company's ability to negotiate renewals of these agreements. There can be no
assurance, however, that any such agreements can be renewed on acceptable terms,
if at all. The home shopping market
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is highly competitive and there can be no assurance that the Company can match
the prices its competitors may be willing to pay for broadcast time. See
"Business -- Affiliations."
In recent years, consumers have increasingly begun to subscribe to direct
satellite broadcast systems ("DBS") as an alternative to subscription to a local
cable system. DBS is expected to continue to attract new customers in the
future. To date the Company has not secured carriage of its programming by a DBS
system. There can be no assurance that such carriage can be obtained on
acceptable terms, if at all.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the ability of the Company and
its Restricted Subsidiaries to incur additional indebtedness, pay dividends,
make certain other restricted payments, incur liens, issue or sell stock of
Restricted Subsidiaries, apply net proceeds from certain asset sales, merge or
consolidate with any other person, sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company, enter into
certain transactions with affiliates or encumber the assets of the Company or
its Restricted Subsidiaries.
The loan agreements relating to any other indebtedness of the Company or
any of its Subsidiaries, including a Senior Credit Facility, may contain
extensive restrictive covenants and may require the Company to maintain
specified financial ratios and to satisfy certain financial condition tests. The
Company's ability to meet financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those ratios or tests. In addition, the Company's operating and financial
flexibility will be limited by covenants that, among other things, restrict the
ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions to its stockholders or make certain other
restricted payments, create certain liens upon assets, apply the proceeds from
the dispositions of certain assets or enter into certain transactions with
affiliates. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interests of the
Company. Upon the occurrence of an event of default under the other indebtedness
of the Company or any of its Subsidiaries , the lenders could elect to declare
all amounts outstanding thereunder, including accrued interest or other
obligations, to be immediately due and payable or proceed against the collateral
granted to them to secure that indebtedness. If any other indebtedness of the
Company or any of its Subsidiaries were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
that indebtedness and the other indebtedness of the Company, including the
Notes.
As a result of these covenants, the ability of the Company to respond to
changing business and economic conditions and to secure additional financing, if
needed, may be significantly restricted, and the Company may be prevented from
engaging in transactions that might otherwise be considered beneficial to the
Company. See "Description of Notes -- Certain Covenants."
RISKS RELATED TO THE NOTES OFFERING AND SENIOR CREDIT FACILITY
The ability of the Company to make payments of interest and principal on
the Notes and a Senior Credit Facility will depend on the cash reserves and
other liquid assets held by the Company and any proceeds from any future
financings. If the Company were unable to make such payments, it would result in
a default under the Indenture or a Senior Credit Facility, as well as a default
under certain of the Company's other agreements, which would have a material
adverse effect on the Company's financial condition. The Indenture restricts,
and a Senior Credit Facility may restrict, among other things, the ability of
the Company and its Subsidiaries to incur additional indebtedness, pay dividends
or make certain other restricted payments, incur liens, sell stock of
subsidiaries, apply net proceeds from certain asset sales, merge or consolidate
with any other person, sell, assign, transfer, lease, convey or otherwise
dispose of substantially all of the assets of the Company, enter into certain
transactions with affiliates, or encumber substantially all of the assets of the
Company. If the Company does not comply with these covenants, the holders of the
Notes and a Senior Credit Facility will be entitled, under certain
circumstances, to declare the Notes or a Senior Credit Facility, as the case may
be, immediately due and payable, which would have a material adverse effect on
the
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Company's financial condition. In addition, the Indenture provides that, upon
certain events constituting a Change of Control of the Company, the holders of
the Notes would be entitled to require the Company to repurchase up to all of
the outstanding Notes, plus accrued and unpaid interest, if any, to the date of
repurchase. The Company's failure to repurchase the Notes would result in a
default under the Indenture, which would have a material adverse effect on the
Company's financial condition.
RISK OF ENFORCEMENT AGAINST SECURITY
The Notes will be secured by a lien on all of the issued and outstanding
capital stock and assets of SAH Acquisition II and the capital stock of the
Other Broadcast Subsidiaries, which shall be pledged to the Trustee, for the
benefit of the Noteholders. In the event of a default under the Notes, the
Trustee may enforce the lien against the capital stock or assets of SAH
Acquisition II and capital stock of the Other Broadcast Subsidiaries. In the
event of such enforcement, one or more of such entities could be sold and the
proceeds applied to payment of the Notes. Such an event would result in the
Company ceasing to own (through a Subsidiary) one or more broadcast television
stations and failing to retain important distribution of the Company's
programming, which would have a material adverse effect on the Company's
financial condition. See "Description of Notes -- Security."
DEPENDENCE ON KEY PERSONNEL
The business of the Company depends upon the ability and expertise of
certain key employees, including Kent E. Lillie, its President and Chief
Executive Officer. If the Company loses the services of one or more key
employees of the Company through death, disability or termination of employment,
the Company's operations could be adversely affected. Mr. Lillie is employed
pursuant to an employment and non-compete agreement that expires in June 2002
and certain other key executive officers are employed pursuant to employment or
non-compete agreements. While the Company has endeavored to recruit and to
retain certain key employees through employment agreements, there can be no
assurance that one or more key employees will not resign from employment with
the Company. See "Management -- Executive Officers and Directors" and "--
Employment Agreements." The Company is the beneficiary of a $5 million key man
life insurance policy on Mr. Lillie.
DEPENDENCE ON ECONOMIC FACTORS
Because the Company derives substantially all of its revenues from the sale
of merchandise, its revenues may be adversely affected by economic conditions
which impact potential customers and suppliers. In particular, operating results
in individual geographic markets will generally be adversely affected by local
or regional economic downturns. Such economic downturns could have an adverse
impact on the Company's financial condition and results of operations.
DEPENDENCE ON PRODUCT VENDORS
The Company has endeavored to position itself in the home shopping market
as the seller of certain unique products, including sports memorabilia. The
Company depends upon a limited number of product suppliers for such products.
The Company believes that there are sufficient product suppliers to allow the
Company to continue to offer such products consistently, but such supply cannot
be assured. If the Company is not able to obtain certain products currently
offered to customers, such event could have an adverse impact on the Company's
financial condition and results of operations. See "Business -- Products and
Customers."
AUTHENTICITY AND PRICING OF COLLECTIBLE PRODUCTS
A portion of the products sold by the Company consists of collectibles and
memorabilia, including sports related products, the price of which is dependent
upon their unique nature and authenticity. The Company endeavors to take
precautions necessary to insure the authenticity of these products; however, the
Company's ability to sell collectible products could be impaired as a result of
real or perceived customer concern about the authenticity of such products. In
addition, the market price of collectible products depends upon a number of
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factors, many of which are not within the control of the Company. A reduction in
the amount of collectibles sold by the Company or a reduction in the
desirability of collectibles could have an adverse impact on the Company's
financial condition and results of operations.
SATELLITE TRANSPONDER ARRANGEMENTS
The Company's business depends upon the availability of transponder time or
satellite capacity. An interruption or termination of transponder service could
have a material adverse effect on the Company. The Company's programming is
transmitted via Telstar 402R, a preemptible satellite transponder, under an
agreement with B&P The SpaceConnection, Inc. ("Services Agreement"), expiring on
November 30, 1998. Currently, the Company's right to use the transponder may be
preempted at any time to restore (i) another failed transponder that is entitled
to protection, (ii) a satellite failure, or (iii) other service offerings of the
operator of the transponder. The Services Agreement may be terminated by B&P The
SpaceConnection upon the occurrence of certain defaults specified therein. The
Company has recently accepted an offer to extend the terms of the Services
Agreement for the life of the transponder (estimated to be eight years) and to
make the service non-preemptible. The extension of the Services Agreement is
subject to the completion of documentation. See "Business -- Distribution of
Programming -- Programming Origination."
LITIGATION
The Company is a party to a lawsuit in an Illinois Federal District Court
concerning the competing claims of the Company and another firm to use the name
"Shop at Home." The Company is also a defendant in a lawsuit filed in a Florida
Federal District Court in which an affiliate of the National Basketball
Association has filed suit against a number of defendants, including the
Company, alleging the sale by the defendants of basketball trading cards that
were not authentic and that infringed on certain NBA trademarks. The Company is
party to a lawsuit in a Tennessee Chancery Court filed by an insurance company
for the Company seeking a judgment that the insurance company is not liable for
certain attorneys fees and expenses in connection with previously settled
litigation involving the Company. While the Company does not believe that any of
these lawsuits will result in a judgment or settlement that is materially
adverse to the Company, the results of litigation are difficult to predict and
could be materially adverse to the Company. See "Business -- Legal Proceedings."
COMPETITION
The Company operates in an industry dominated by two established
competitors, the Home Shopping Network and the QVC Network, both of which have
substantially more television and cable carriage than the Company, as well as
greater financial, distribution, and marketing resources. The Company also must
compete with store and catalogue retailers, many of whom have substantially
greater financial, distribution and marketing resources. In addition, the
Company competes with new media businesses, such as computer on-line shopping
services. See "Business -- Competition."
COMPETITION IN THE TELEVISION INDUSTRY; IMPACT OF NEW TECHNOLOGIES
The television broadcasting industry has become increasingly competitive in
recent years, as television stations compete for viewers and advertising
revenues with other broadcast television stations, as well as other media,
including cable television, satellite dishes, multichannel multipoint
distribution systems, pay-per-view programs and the proliferation of video
recorders and video movie rentals. Furthermore, new television networks such as
the United Paramount Network and the Warner Brothers Network have created
additional competition. These changes have fractionalized television viewing
audiences. Through technological developments, such as direct broadcast
satellite, video compression and programming delivered through fiber optic
telephone lines, this trend toward fractionalization will likely continue,
putting additional competitive pressures on the Company.
Additionally, the FCC has adopted rules for implementing digital (including
high-definition) television ("DTV") service in the United States. The FCC also
has adopted a table of allotments for DTV, which will
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provide eligible existing broadcasters with a second channel on which to provide
DTV service. Television broadcasters will be allowed to use their channels
according to their best business judgment. Such uses can include multiple
standard definition program channels, data transfer, subscription video,
interactive materials, and audio signals, although broadcasters will be required
to provide a free digital video programming service that is at least comparable
to today's analog service. Broadcasters will not be required to air "high
definition" programming or, initially, to simulcast their analog programming on
the digital channel. All commercial broadcasters must be on the air with a
digital signal by May 1, 2002. Implementation of DTV is expected to improve the
technical quality of television. Under certain circumstances, however,
conversion to DTV operations may reduce a station's geographical coverage area
or provide a competitive advantage to one or more competing stations in the
market. In connection with the conversion to DTV, the Company will incur
expenses which cannot be quantified at this date, but which may be substantial,
and the Company cannot predict the extent or timing of consumer demand for any
such DTV services.
REGULATORY MATTERS
The Company's television operations are subject to significant regulation
by the FCC under the Communications Act of 1934, as amended (the "Communications
Act") and most recently amended by the Telecommunications Act of 1996 (the
"Telecommunications Act"). The Communications Act permits the operation of
television broadcast stations only in accordance with a license issued by the
FCC. The Communications Act empowers the FCC, among other things: to determine
the frequencies, location and power of broadcast stations; to issue, modify,
renew and revoke station licenses; to approve the assignment or transfer of
control of broadcast licenses; to regulate the equipment used by stations; to
impose penalties for violations of the Communications Act or FCC regulations;
and, to some extent, to regulate a licensee's programming content. Failure to
observe these or other rules and policies can result in the imposition of
various sanctions, including monetary forfeitures or, for particularly egregious
violations, the revocation of a license. The Company's business will be
dependent upon its continuing ability to hold television broadcasting licenses
from the FCC.
FCC television licenses are generally granted or renewed for terms of eight
years, although licenses may be renewed for a shorter period. The Company must
apply for renewal of each broadcast license. At the time an application is made
for renewal of a license, parties in interest may file petitions to deny the
renewal, and such parties, as well as members of the public, may comment upon
the service the station has provided during the preceding license term and urge
denial of the application. While broadcast licenses are typically renewed by the
FCC, even when petitions to deny are filed against renewal applications, there
can be no assurance that the licenses for the Company's stations will be renewed
at their expiration dates or, if renewed, that the renewal terms will be for the
maximum eight-year period. The non-renewal or revocation of one or more of the
Company's primary FCC licenses could have a material adverse effect on the
Company's operations.
The U.S. Congress and the FCC currently have under consideration, and may
in the future adopt, new laws, regulations and policies regarding a wide variety
of matters which could, directly or indirectly, affect the operation and
ownership of the Company's broadcast properties. Such matters include, for
example: changes in the FCC's multiple ownership restrictions; spectrum use
fees; political advertising rates; free political time; potential restrictions
on the advertising of alcoholic beverages; the rules and policies to be applied
in enforcing the FCC's equal opportunity regulations; the standards to govern
the evaluation of television programming directed toward children, and violent
and indecent programming. The Company is unable to predict the outcome of future
federal legislation or the impact of any such laws or regulations on the
Company's operations.
The 1992 Cable Act includes signal carriage or "must carry" provisions that
require cable operators to carry the signals of local commercial television
stations. A cable system is generally required to devote up to one-third of its
aggregate activated channel capacity for the mandatory carriage of local
commercial television stations without charge. The 1992 Cable Act also includes
a retransmission consent provision that prohibits cable operators and other
multi-channel video programming distributors from carrying the signal of
commercial broadcast stations and certain low power stations without obtaining
their consent in certain circumstances. In March 1997, the United States Supreme
Court upheld the constitutionality of the "must
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carry" requirements. The current strategy of the Company with respect to the
broadcast of its programming by television broadcast stations has been developed
based on the present status of the "must carry" provisions. While no serious
efforts appear to be developing to change these provisions, there is always a
possibility that Congress might elect to do so. Under the Communications Act,
for purposes of the "must carry" provisions, a broadcast station's market is
determined by the FCC using commercial publications which delineate television
markets based on viewing patterns. The FCC may, however, consider, on a case by
case basis and acting on specific written requests, changes in the station's
market areas (currently defined by the ADI, Arbitron's Area of Dominant
Influence, to which the station has been designated), including the exclusion of
communities from a television station's market. In considering requests for a
change in a station's market area, the FCC takes into account a number of
factors including whether or not the station in question provides coverage to
the community and evidence of the viewing patterns in cable and non-cable
households in that community. In recent months, the FCC has ruled on several
such requests and in many of these cases has excluded particular communities
from an ADI. The Company is unable to predict the impact of any future rulings
of the FCC with respect to the exclusion of the carriage of the Company's
broadcast stations from any particular cable systems in its markets. See
"Business -- Regulatory Matters."
POTENTIAL CONFLICT BETWEEN DEBT AND EQUITY HOLDERS
Certain decisions concerning the operations or financial structure of the
Company may present conflicts between the owners of the Company's capital stock
and the holders of the Notes. For example, if the Company encounters financial
difficulties, or is unable to pay its debts as they mature, the interest of the
Company's equity owners might conflict with those of the holders of the Notes.
In addition, the equity owners may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that could enhance their equity
investment, even though such transactions might adversely affect the ability of
the Company to pay principal and interest on the Notes.
SUBSTANTIAL DILUTION
Purchasers of Common Stock will experience substantial dilution in pro
forma net tangible book value per share of Common Stock from the offering price.
As of December 31, 1997, the Company had a net tangible book value per share of
$0.25, the net pro forma tangible book value would have been $1.61 assuming
completion of the Offerings on that date. The new shareholders in the Common
Stock Offering would be diluted by $1.89 per share, or 54.0%, from the public
offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following consummation of the Offerings, assuming 10,000,000
shares of Common Stock are issued at an offering price of $3.50 per share, there
will be outstanding 21,762,991 shares of Common Stock (23,262,991 shares if the
Over-allotment Option is exercised in full). The 10,000,000 shares of Common
Stock offered hereby (11,500,000 shares if the Over-allotment Option is
exercised in full) will be freely tradeable without restriction or registration
under the Securities Act by persons other than "affiliates" (as defined in the
Securities Act) of the Company. The remaining 11,762,991 shares of Common Stock
to be outstanding immediately following the Common Stock Offering are also
freely transferable without restriction or registration under the Act, except
for those shares which have been issued by the Company without registration
within the past two years or those which are held by "affiliates" of the
Company. Affiliates of the Company are persons which control, are controlled by
or are under common control with the Company, and generally include executive
officers, directors and principal shareholders of the Company. Shares which have
been issued without registration within the past two years or which are held by
affiliates are restricted and may only be sold in the public market if such
shares are registered under the Act or sold in accordance with Rule 144
promulgated under the Act. As of January 20, 1998, the Company had outstanding
5,316,892 shares of Common Stock beneficially owned by persons who might be
deemed to be "affiliates" of the Company and 1,066,511 shares of Common Stock
that were issued by the Company during the two-year period prior to that date
without registration (of which 400,000 shares were issued to persons who may be
deemed to be affiliates of the Company). These shares may only be sold in the
public through a registered offering under the Act or
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through a transaction complying with Rule 144. Certain of the Company's
directors, executive officers and other stockholders who beneficially own
5,206,391 outstanding shares of Common Stock have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock that they own or may acquire for
a period of 180 days after the closing of the Offerings without the prior
written consent of the Underwriters. See "Shares Eligible For Future Sale." No
prediction can be made as to the effect, if any, that future sales of shares of
Common Stock or the availability of shares for future sale will have on the
market price of shares of Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issuable upon the exercise
of stock options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.
LISTING MAINTENANCE CRITERIA FOR SECURITIES; PENNY STOCK RULES
The Company's Common Stock is quoted on the Nasdaq SmallCap Market. There
can be no assurance that the Company in the future will meet the requirements
for continued listing on the Nasdaq SmallCap Market with respect to the Common
Stock. If the Common Stock fails to maintain such listing, the market value of
the Common Stock likely would decline and purchasers in this offering likely
would find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of the Common Stock.
In addition, if the Company fails to maintain a Nasdaq SmallCap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is available, then any broker engaging in a transaction in the
Company's equity securities, including the Common Stock, would be required to
provide any customer with a risk disclosure document, disclosure of market
quotations, if any, disclosure of the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market values of the Company's equity securities held in the customer's
accounts. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer's confirmation. If brokers become subject to the "penny stock" rules
when engaging in transactions in the Common Stock, they would become less
willing to engage in such transactions, thereby making it more difficult for
purchasers in the Common Stock Offering to dispose of the Common Stock. See
"Index to Consolidated Financial Statements."
POSSIBLE FLUCTUATIONS OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. Such fluctuations, and general
economic and market conditions, may adversely affect the market price of the
Common Stock. See "Description of Capital Stock -- Market Information."
LIMITED LIABILITY OF DIRECTORS
The Company's charter expressly limits the liability of directors for
monetary damages to the Company and its shareholders arising as a result of
errors in judgment or any acts or omissions if the directors acted in good
faith.
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DILUTION
As of December 31, 1997, the net tangible book value of the Company was
$2.9 million in the aggregate, or $0.25 per share of Common Stock. "Net tangible
book value per share" represents the amount of total tangible assets of the
Company reduced by the amount of total liabilities and divided by the number of
shares of Common Stock outstanding. After giving effect to the sale of the
shares of Common Stock offered hereby, at an offering price of $3.50 per share,
net of Underwriters' discount and estimated offering expenses aggregating
$2,950,000, the net pro forma tangible book value of the Common Stock as of
December 31, 1997 would have been $35.0 million in the aggregate, or $1.61 per
share. This represents an immediate increase in net tangible book value of $1.36
per share of Common Stock to existing stockholders as a result of the Common
Stock Offering and an immediate dilution of $1.89 per share to new stockholders
purchasing shares of Common Stock in the Common Stock Offering. "Dilution per
share" represents the difference between the price per share to be paid by new
stockholders for the shares of Common Stock issued in the Common Stock Offering
and the net pro forma tangible book value per share as of December 31, 1997. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $3.50
Net tangible book value per share before the Common Stock
Offering(1)............................................... 0.25
Increase per share attributable to the Common Stock
Offering............................................... 1.36
-----
Net tangible book value per share as adjusted to reflect the
Common Stock Offering(1).................................. 1.61
-----
Dilution per share to new shareholders...................... $1.89
=====
Percentage Dilution......................................... 54.0%
=====
</TABLE>
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(1) Neither the net tangible book value per share before the Common Stock
Offering nor the net tangible book value per share as adjusted to reflect
the Common Stock Offering give effect to the Notes Offering. Giving effect
thereto, net tangible book value per share before the Common Stock Offering
and net tangible book value per share as adjusted to reflect the Notes
Offering would have been $(.09) and $1.43, respectively.
DIVIDEND POLICY
The Company currently intends to retain all earnings and other cash
resources, if any, to fund the development and growth of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Indenture contains significant restrictions on the
Company's ability to declare and pay dividends.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Common Stock Offering, assuming 10,000,000 shares
of Common Stock are issued at an offering price of $3.50 per share, the Company
will have 21,762,991 shares of Common Stock outstanding (23,262,991 shares if
the Over-allotment Option is exercised in full). Of those shares, the 10,000,000
shares sold in the Common Stock Offering (11,500,000 shares if the
Over-allotment Option is exercised in full) will be freely transferable without
restriction or registration under the Act, unless purchased by persons deemed to
be "affiliates" of the Company (as that term is defined under the Act). The
remaining 11,762,991 shares of Common Stock to be outstanding immediately
following the Common Stock Offering are also freely transferable without
restriction or registration under the Act, except for those shares that have
been issued by the Company without registration or those which are held by
"affiliates" of the Company. Affiliates of the Company are persons which
control, are controlled by or are under common control with the Company, and
generally include executive officers, directors and principal shareholders of
the Company. Shares issued without registration or which are held by affiliates
are restricted and may only be sold in the public market if such shares sold in
a registered offering under the Act or sold in accordance with Rule 144
promulgated under the Act.
In general, for shares issued without registration by the Company, a period
of one year must elapse since the date of the later of the acquisition of the
shares from the Company or its "affiliate" before the shares may be resold under
Rule 144. If the one-year test is satisfied, a person (or persons whose shares
are aggregated), including a person who may be deemed an "affiliate" of the
Company, may sell in the open market within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 217,629 shares immediately after
the Common Stock Offering or 232,630 shares if the Over-allotment Option is
exercised in full) or (ii) the average weekly trading volume in the Common Stock
in the Nasdaq market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain limitations on the manner of sale,
notice requirements and availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is deemed not to
have been an "affiliate" of the Company at any time during the 90 days preceding
a sale by such person and who has beneficially owned his shares for at least two
years, may sell such shares in the public market under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, notice requirements
or availability of current information referred to above. Restricted shares
properly sold in reliance upon Rule 144 are thereafter freely tradeable without
restrictions or registration under the Act, unless thereafter held by an
"affiliate" of the Company.
Messrs. Clinton, Cowell, Lillie, Jolley and Overholt, SAH Holdings, L.P.
and certain other stockholders have agreed not to offer, sell, contract to sell,
pledge or otherwise dispose of or transfer any shares of Common Stock that they
own or may acquire for a period of 180 days after the closing of the Offering
without the prior written consent of the Underwriters. These persons
beneficially own 5,206,392 outstanding shares of Common Stock and options and
warrants pursuant to which they may acquire 2,567,500 shares of Common Stock.
As of January 20, 1998, the Company had outstanding 5,316,892 shares of
Common Stock beneficially owned by persons who might be deemed to be
"affiliates" of the Company and 1,066,511 shares of Common Stock that were
issued by the Company during the two-year period prior to that date without
registration (of which 400,000 were issued to persons who may be deemed to be
affiliates of the Company). These shares may only be sold in the public market
through a registered offering under the Act or through a transaction complying
with Rule 144.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares for future sale will have
on the market price of shares of Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock (including shares issuable upon the
exercise of stock options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.
ALT-14
<PAGE> 133
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
dated March , 1998 (the "Underwriting Agreement") between the Company and the
Underwriters, the Company has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase, the following respective numbers of shares
of Common Stock, at the public offering price, less underwriting discounts and
commissions, set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
NationsBanc Montgomery Securities LLC.......................
Friedman, Billings, Ramsey & Co., Inc.......................
-----------
Total..................................................
===========
</TABLE>
The Underwriting Agreement provides that, subject to the terms and
conditions set forth therein, the Underwriters are obligated to purchase all of
the shares of Common Stock if any are purchased.
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public on the terms set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to other dealers. After the initial offering, the public offering price and such
concessions may be changed. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted the Over-allotment Option, exercisable within 30
days after the date of this Prospectus, to purchase up to 1,500,000 additional
shares of Common Stock at the public offering price, less the underwriting
discounts and commissions, set forth on the cover page of this Prospectus. The
Underwriters may exercise this option only to cover over-allotments, if any. To
the extent that the Underwriters exercise this option, the Underwriters will
have a firm commitment, subject to certain conditions, to purchase such
additional shares. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which all shares are being offered in the
Common Stock Offering.
Certain directors, executive officers and other stockholders who, at
January 20, 1998, beneficially owned 5,206,392 outstanding shares of Common
Stock have agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of or transfer any shares of Common Stock that they own or may acquire
for a period of 180 days after the closing of the Offering without the prior
written consent of the Underwriters. See "Shares Eligible for Future Sale."
In connection with the Common Stock Offering, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. The Underwriters also may create a short position by selling
more Common Stock in connection with the Common Stock Offering than they are
committed to purchase from the Company and in such case may purchase Common
Stock in the open market following completion of the Common Stock Offering to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position by exercising the Underwriters'
Over-allotment Option referred to above. The transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. The
Underwriters have no obligation to engage in such transactions and such
transactions, if commenced, may be discontinued with out notice and at any time.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
FBR has filed a proof of claim in the Bankruptcy Proceeding of Global in
the approximate amount of $2.0 million. The claim relates to unpaid placement
agent fees and expenses in connection with a bridge loan facility provided to
Global prior to its bankruptcy. FBR has also filed a proof of claim for an
acquisition fee to be owed by the bankruptcy estate to FBR in the amount of
1.75% of the proceeds of the sale under the Asset Purchase Agreement if the sale
is completed. The lenders who advanced the bridge loan are also creditors in the
Bankruptcy Proceeding and have filed proofs of claim in the aggregate amount of
approximately
ALT-15
<PAGE> 134
$35 million in unpaid principal plus accrued interest, fees and penalties. In
connection with the resolution of the Bankruptcy Proceeding, FBR and the bridge
lenders may be paid in whole or in part on their claims against Global.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the federal securities laws, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
The initial public offering price for the Common Stock has been determined
by negotiations between the Company and the Underwriters. The primary factor
considered in such negotiations was the recent trading price history for the
Common Stock on the Nasdaq SmallCap Market. Other factors considered by the
parties in determining the price were the history and prospects of the Company,
the present state of the Company's development and the industry in which it
competes, an assessment of the Company's management and prevailing market
conditions.
LEGAL MATTERS
The legality of the Common Stock Offering will be passed upon for the
Company by Wyatt, Tarrant & Combs, Nashville, Tennessee. Charles W. Bone, a
partner of Wyatt, Tarrant & Combs, is the beneficial owner of warrants issued by
the Company under which he has the right to purchase a total of 82,500 shares of
Common Stock of the Company at a current exercise price of $1.135. Certain legal
matters relating to the Common Stock Offering will be passed upon for the
Underwriters by Jenkens & Gilchrist, a Professional Corporation, Washington,
D.C. and Shearman & Sterling, New York, New York.
EXPERTS
The consolidated balance sheets as of June 30, 1996 and 1997 and December
31, 1997 and the consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997, and
the six months ended December 31, 1997, included in this Prospectus have been
included herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ALT-16
<PAGE> 135
======================================================
No dealer, salesman or other person is authorized in connection with any
offering made hereby to give any information or to make any representations not
contained in this Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or by the Underwriters. This Prospectus does not constitute an offer to sell or
a solicitation of an offer to buy any security other than the securities offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby to any person in any jurisdiction in
which it is unlawful to make such an offer or solicitation to such person.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances create an implication that the information contained herein is
correct as of any date subsequent to the date hereof.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 19
Dilution.............................. 20
Dividend Policy....................... 20
Capitalization........................ 21
Selected Historical and Pro Forma
Financial Data...................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 31
Management............................ 46
Certain Relationships and Related
Transactions........................ 53
Security Ownership of Certain
Beneficial Owners................... 55
Description of Notes.................. 56
Description of Senior Credit
Facility............................ 83
Description of Capital Stock.......... 83
Shares Eligible for Future Sale....... 87
Underwriting.......................... 89
Legal Matters......................... 90
Experts............................... 90
Additional Information................ 90
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
10,000,000 SHARES
(LOGO)
SHOP AT HOME, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
NationsBanc Montgomery
Securities LLC
Friedman, Billings,
Ramsey & Co., Inc.
, 1998
======================================================
ALT-17
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The Registrant estimates that expenses in connection with the offerings
described in this registration statement will be as follows:
<TABLE>
<CAPTION>
Description Amount
<S> <C>
Securities and Exchange Commission registration fee.................................................... $ 33,030
Printing expenses...................................................................................... 100,000
Accounting fees and expenses........................................................................... 75,000
Legal fees and expenses................................................................................ 400,000
Blue sky registration fees............................................................................. 60,000
NASD and Nasdaq filing and listing fees................................................................ 80,000
Transfer agent's fees and expenses..................................................................... 10,000
Indenture Trustee fees................................................................................. 11,000
Travel expenses........................................................................................ 150,000
Rating agency fees..................................................................................... 25,000
Brokerage fee for acquisition.......................................................................... 290,000
Miscellaneous.......................................................................................... 265,970
------------------------------------------------------------------------------------------------------------------
Total $1,500,000
</TABLE>
* To be filed by amendment.
All amounts except the Securities and Exchange Commission registration
fee are estimated.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
A list of the exhibits included as part of this Registration Statement
is set forth in the Exhibit Index that immediately precedes such exhibits and is
incorporated by reference.
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
Independent Accountants' Report on Financial Statement Schedule Page S-1
Schedule II Valuation and Qualifying Accounts Page S-2
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required, are inapplicable or the required
information has already been provided elsewhere in the Registration Statement.
II-1
<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Nashville,
State of Tennessee, on March 2, 1998.
SHOP AT HOME, INC.
By: /s/ Kent E. Lillie
----------------------------------------
Kent E. Lillie,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
J. D. Clinton* Chairman of the Board March 2, 1998
Paul Cowell* Director March 2, 1998
A.E. Jolley* Director March 2, 1998
Joseph I. Overholt* Director March 2, 1998
Frank A. Woods* Director March 2, 1998
*By
/s/ Kent E. Lillie, Attorney-in-Fact President and March 2, 1998
- ------------------------------------ Chief Executive Officer
Kent E. Lillie
/s/ James Bauchiero Executive Vice President and March 2, 1998
- ------------------------------------ Chief Financial Officer
James Bauchiero (principal financial officer)
/s/ Joseph Nawy
- ------------------------------------ Vice President-Finance March 2, 1998
Joseph Nawy (principal accounting officer)
</TABLE>
II-2
<PAGE> 138
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, 1996 and 1997 and December 31, 1997, and
for each of the three years in the period ended June 30, 1997 and the six months
ended December 31, 1997, is included on page F-2 of this Registration
Statement. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in the index on
page II-1 of this Registration Statement.
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.
September 18, 1997
S-1
<PAGE> 139
SHOP AT HOME, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1996, AND 1997 AND
SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE AT OTHER BALANCE
BEGINNING CHARGED ADDITIONS AT END
OF PERIOD T0 EXPENSES DEDUCTIONS OF PERIOD
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
Estimated credits due to customers $ 471,878 $ 4,863,486 $ (4,717,400)(1) $ 617,904
========== =========== ============ ==========
Allowance for bad debt $ 0 $ 0 $ 0 $ 0
========== =========== ============ ==========
Allowance for inventory obsolescence $ 0 $ 0 $ 0 $ 0
========== =========== ============ ==========
Year ended June 30, 1996:
Estimated credits due to customers $ 617,904 $10,147,556 $ (9,665,340)(1) $1,100,120
========== =========== ============ ==========
Allowance for bad debt $ 0 $ 0 $ 0 $ 0
========== =========== ============ ==========
Allowance for inventory obsolescence $ 0 $ 88,123 $ 0 $ 88,123
========== =========== ============ ==========
Year ended June 30, 1997:
Estimated credits due to customers $1,100,120 $19,503,181 $(17,481,798)(1) $3,121,503
========== =========== ============ ==========
Allowance for bad debt $ 0 $ 18,800 $ 172,450 (2) $ 191,250
========== =========== ============ ==========
Allowance for inventory obsolescence $ 88,123 $ 591,877 $ 17,934 (2) $ 697,934
========== =========== ============ ==========
Period ended December 31, 1997:
Estimated credits due to customers $3,121,503 $11,370,434 $ 12,448,408 $2,043,529
========== =========== ============ ==========
Allowance for bad debt $ 191,250 $ 230,826 $ 280,567 $ 702,643
========== =========== ============ ==========
Allowance for inventory obsolescence $ 697,934 $ 0 $ (154,937)(3) $ 542,997
========== =========== ============ ==========
</TABLE>
(1) Merchandise returned
(2) Addition through purchase accounting
(3) Write off of inventory
S-2
<PAGE> 140
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1*** Form of Underwriting Agreement between NationsBanc Montgomery Securities LLC
and Friedman, Billings, Ramsey & Co., Inc., the Company covering the Notes
Offering.
1.2*** Form of Underwriting Agreement between NationsBanc Montgomery Securities
LLC and Friedman, Billings, Ramsey & Co., Inc., the Company concerning
the Common Stock Offering.
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 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 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 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)* Bylaws of the Company, as amended.
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>
<PAGE> 141
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------- ------------
<S> <C> <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.
4.6** Form of Trust Indenture with PNC Bank, N.A., as Trustee with
regard to the Notes, containing specimen of the Note.
4.7 Form of Stock Pledge Agreement.
5* Opinion of Wyatt, Tarrant & Combs.
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.
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------- ------------
<S> <C> <C>
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.
10.5 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.
</TABLE>
<PAGE> 143
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
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.
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.
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
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.
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.
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------ ------------
<S> <C> <C>
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.
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.
10.32 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>
<PAGE> 146
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ --------------
<S> <C> <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, filed as Exhibit 10.37 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 and filed with the Commission on September 30, 1996, and
incorporated herein by this reference.
10.38 Security Agreement dated August 16, 1995, by and between the
Company, MFP, Inc., and Global Network Television, Inc., filed as
Exhibit 10.38 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 and filed with the Commission on
September 30, 1996, and incorporated herein by this reference.
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, filed as Exhibit 10.39 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 and filed with the Commission on September 30,
1996, and incorporated herein by this reference.
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., filed
as Exhibit 10.40 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996 and filed with the Commission
on September 30, 1996, and incorporated herein by this reference.
</TABLE>
<PAGE> 147
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------------- --------------
<S> <C> <C>
10.41 Promissory Note dated September 5, 1996, made by the Company and
Broadcast, Cable and Satellite Technologies, Inc., payable to Charles E.
Walker, filed as Exhibit 10.41 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996 and filed with the
Commission on September 30, 1996, and incorporated herein by this
reference.
10.42 Security Agreement dated September 5, 1996, by and between
Broadcast, Cable and Satellite Technologies, Inc., and Charles E.
Walker, filed as Exhibit 10.42 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 and filed with
the Commission on September 30, 1996, and incorporated herein by
this reference.
10.43 Employment Agreement between Kent E. Lillie and Shop at Home,
Inc. dated July 1, 1997, filed as Exhibit 10.43 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1997 and filed with the Commission on September 29, 1997, and
incorporated herein by this reference.
10.44 Asset Purchase Agreement dated September 23, 1997, between SAH
Acquisition Corporation II, Global Broadcasting Systems, Inc., and
Global Broadcasting Systems License Corp., filed as Exhibit 10.44 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997 and filed with the Commission on November 14,
1997, and incorporated herein by this reference.
10.45** Bill of Sale dated February 24, 1997 from Norwest Credit, Inc.,
to Collector's Edge of Tennessee, Inc.
10.46** Credit and Security Agreement dated as of February 24, 1997,
between Norwest Credit, Inc., and Collector's Edge of Tennessee,
Inc.
10.47** Loan Agreement dated November 28, 1997, between the Company and
NationsBank of Tennessee, N.A.
10.48** Loan Note dated November 28, 1997 made by the Company payable to
NationsBank of Tennessee, N.A.
10.49 Amendment No.1 to Company's Omnibus Stock Option Plan filed as
Appendix A to the Company's Proxy Statement on Schedule 14A for
the fiscal year ended June 30, 1996, and filed with the
Commission on November 18, 1996, and incorporated herein by this
reference.
10.50** Form of options issued to directors dated June 19, 1997.
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------------- --------------
<S> <C> <C>
10.51** Form of Transponder Use Agreement dated June 25, 1995, between the
Company and B&P The SpaceConnection.
11 Schedule of Computation of Net Income Per Share (in Note 12 to
Consolidated Financial Statements of the Company for the period
ended December 31, 1997, included herein)
12* Statements regarding computation of ratios.
21** Subsidiaries of the Company.
23.1 Consent of Wyatt, Tarrant & Combs, included as a part of Exhibit 5.
23.2* Consent of Coopers & Lybrand L.L.P.
24** Powers of attorney (included on signature pages).
25* Statement of eligibility of trustee.
27.1** Financial Data Schedule. (For SEC Use Only)
27.2* Financial Data Schedule. (For SEC Use Only)
</TABLE>
* Filed herewith
** Previously filed
*** To be filed by amendment
<PAGE> 1
Exhibit 3 (ii)
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,
are incorporated herein by this reference. The following is added as an
amendment:
The following amendment to the Bylaws of Shop at Home, Inc., was adopted by the
Board of Directors on February 23, 1998:
Add a new Article VII shall be added thereto, reading as follows:
ARTICLE VII
Affiliated and Other Transactions
7.1 Independent Directors. The Board of Directors shall at all times
have at least two (2) members who are Independent Directors. An "Independent
Director" is a member of the Board of Directors who (i) is not an officer or
employee of the Company, its subsidiaries, or their Affiliates or Associates,
and has not been such an officer or employee within the last two years, (ii) is
not a Promoter of the Company, (iii) does not legally or beneficially own,
directly or indirectly, five percent or more of any class of the Company's
equity securities, and (iv) is not an Affiliate or Associate of any of the
preceding persons. An "Affiliate" is a person who, directly or indirectly,
controls, is controlled by, or is under common control with the person
specified. An "Associate" is used to indicate a relationship with another
person, and includes (i) corporations or legal entities, other than the Company,
of which a person is an officer, director, partner, or a direct or indirect,
legal or beneficial owner of five percent or more of any class of equity
securities, (ii) trusts or estates in which a person has a substantial
beneficial interest or serves as trustee or in a similar capacity, or (iii) a
person's spouse and relatives, by blood or marriage, if the person is a Promoter
of the Company, its subsidiaries, or their Affiliates. A "Promoter" is a person
who (i) alone or together with other persons, directly or indirectly, took the
initiative in founding or organizing the Company or controls the Company, or
(ii) directly or indirectly, receives as consideration for services and/or
property rendered, five percent or more of any class of the Company's equity
securities or five percent or more of the proceeds from the sale of any class of
the Company's equity securities.
7.2 Transactions with Affiliates. All material transactions with
Affiliates or Promoters of the Company, and all loans by the Company to any of
its Affiliates or Promoters, shall be on terms which are as favorable to the
Company as those generally available from unaffiliated third parties and each
such transaction must be ratified by a majority of the Company's Independent
Directors who do not have an interest in the transaction and who had access, at
the Company's expense, to the Company's or independent legal counsel. No such
transaction shall be entered into when there are less than two disinterested
Independent Directors. These provisions with regard to loans shall not be
applicable to advances to officers, directors and employees for travel, business
expense, and similar ordinary operation expenditures. Loans made to officers,
directors and employees for the purchase of the Company's securities, or for
relocation of officers, directors and employees, shall be permissible if
approved by a majority of the Company's Independent Directors who do not have an
interest in the transaction and who had access, at the Company's expense, to the
Company's or independent legal counsel.
7.3 Issuance of Preferred Stock. The Company shall not issue shares of
Preferred
<PAGE> 2
Stock, without a vote of the holders of its Common Stock, unless: (i) the
Company does not issue such shares or Preferred Stock to Promoters or Affiliates
of the Company except on the same terms as such shares are offered to all other
existing shareholders or to new shareholders, or (ii) the issuance of the
Preferred Stock is approved by a majority of the Company's Independent Directors
who do not have an interest in the transaction and who had access, at the
Company's expense, to the Company's or independent legal counsel.
7.4 Issuance of Options and Warrants. The Company shall not issue any
options or warrants, which are not qualified under the provisions of Section 422
of the Internal Revenue Code, to any person for the purchase of Common Stock
unless the exercise price is equal to or greater than 85% of the fair market
value of the underlying Common Stock as determined by the Board of Directors on
the date of the grant of such options and warrants. The Board of Directors may
employee an independent appraiser to determine the fair market value, if deemed
advisable by the Board.
<PAGE> 1
Exhibit 5
Legal Opinion of Wyatt, Tarrant & Combs
March 4, 1998
Board of Directors
Shop at Home, Inc.
5210 Schubert Road
Knoxville, Tennessee 37912
Gentlemen:
On January 14, 1998, Shop at Home, Inc., a Tennessee corporation (the
"Company"), filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (Registration No. 333-44251) (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"). The
Registration Statement, as amendment No. 1 to be filed, relates to the sale by
the Company of up to 11,000,000 shares of its Common Stock, par value $.0025 per
share (the "Shares"), and $65,000,000 principal amount of ____% Secured Notes
due 2005 of the Company (the "Notes"). We have acted as counsel to the Company
in connection with the preparation and filing of the Registration Statement.
In connection with the Registration Statement, we have examined,
considered and relied upon copies of the following documents (collectively, the
"Documents"): (i) the Company's Charter, as amended, and Bylaws, as amended;
(ii) resolutions of the Company's Board of Directors authorizing the offering
and the issuance of the Shares and the Notes to be sold by the Company and
related matters; (iii) the Registration Statement and all amendments and
exhibits thereto; and (iv) such other documents and instruments that we have
deemed necessary for the expression of the opinions herein contained. In making
the foregoing examinations, we have assumed without investigation the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to authentic original documents of all documents
submitted to us as copies, and the veracity of the Documents. As to various
questions of fact material to the opinion expressed below, we have relied, to
the extent we deemed reasonably appropriate, upon the representations or
certificates of officers and/or directors of the Company and upon documents,
records and instruments furnished to us by the Company, without independently
verifying the accuracy of such certificates, documents, records or instruments.
Based upon the foregoing examination, and subject to the qualifications
set forth below, we are of the opinion that:
1. The Shares have been duly and validly authorized, and when
issued and delivered in accordance with the terms of the
Underwriting Agreement filed as Exhibit 1.2 to the
Registration Statement, will be validly issued, fully paid and
non-assessable.
<PAGE> 2
2. Assuming the due authorization, execution and delivery of the
Indenture by each of the parties thereto, and the due
execution of the Notes by all necessary action on the part of
the Company, and when the Notes have been validly completed
and authenticated by the Indenture Trustee and issued in
accordance with the Indenture and delivered against payment
therefor, the Notes will be validly issued, fully paid and
non-assessable, and will be binding obligations of the
Company, entitled to the benefits of the Indenture in
accordance with their terms, except that the enforceability
thereof may be subject to (a) bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent or
preferential conveyance or other similar laws now or
hereinafter in effect relating to creditors' rights generally,
and (b) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or
at law) and to the discretion of the court before which any
proceeding therefor may be brought.
Although we have acted as counsel to the Company in connection with the
preparation and filing of the Registration Statement, our engagement has been
limited to certain matters about which we have been consulted. Consequently,
there exist matters of a legal nature involving the Company in which we have not
been consulted and have not represented the Company. This opinion letter is
limited to the matters stated herein and no opinions may be implied or inferred
beyond the matters expressly stated herein. The opinions expressed herein are
given as of this date, and we assume no obligation to update or supplement our
opinions to reflect any facts or circumstances that may come to our attention or
any change in law that may occur or become effective at a later date.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the Prospectus with regard to the Shares and the Prospectus with
regard to the Notes, each comprising a part of the Registration Statement. In
giving such consent, we do not thereby admit that we are included within the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations promulgated thereunder.
Very truly yours,
/s/ WYATT, TARRANT & COMBS
<PAGE> 1
Exhibit 12
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
y/e y/e y/e y/e 7/e 6 mos
1993 1994 1995 1996 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) $(2,441) $(1,052) $(1,282) $(1,509) $1,476 $1,825
Fixed charges 103 72 216 795 1,080 455
------ ------
Ratio 2.37x 5.01x
------- ------- ------- ------- ======= =======
Deficiency $(2,544) $(1,124) $(1,498) $(2,304)
======= ======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 23.2
Consent of Independent Accountants
We consent to the inclusion in this Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-44251) of our report dated February 18,
1998, on our audits of the consolidated financial statements and our report on
the financial statement schedule of Shop at Home, Inc. and subsidiaries as of
February 18, 1998. We also consent to the reference to our firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
March 4, 1998
<PAGE> 1
Exhibit 25
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT
OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)
PNC BANK, NATIONAL ASSOCIATION
(Exact Name of Trustee as Specified in its Charter)
NOT APPLICABLE
(Jurisdiction of incorporation or
organization if not a U.S. national bank)
25-1197336
(I.R.S. Employer Identification No.)
One PNC Plaza
Fifth Avenue and Wood Street, Pittsburgh,
Pennsylvania 15222 (Address of principal
executive offices - Zip code)
Allan K. Poust, Vice President, PNC Bank, National Association
27th Floor, One Oliver Plaza, Pittsburgh, Pennsylvania 15222-2602
(412) 762-2838
(Name, address and telephone number of agent for service)
SHOP AT HOME, INC.
(Exact name of obligor as specified in its charter)
Tennessee
(State or other jurisdiction of incorporation or organization)
62-1282758
(I.R.S. Employer Identification No.)
5210 Schubert Road
Knoxville, Tennessee 37912
(Address of principal executive offices - Zip code)
% Secured Notes Due 2005
(Title of the indenture securities)
==============================================================================
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency Washington, D.C.
Federal Reserve Bank of Cleveland Cleveland, Ohio
Federal Deposit Insurance Corporation Washington, D.C.
(b) Whether it is authorized to exercise corporate trust
powers.
Yes. (See Exhibit T-1-3)
ITEM 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of
the trustee, describe each such affiliation.
Neither the obligor nor any underwriter for the obligor is an
affiliate of the trustee.
ITEM 3 THROUGH ITEM 14.
The issuer currently is not in default under any of its outstanding
securities for which PNC Bank is trustee. Accordingly, responses to
Items 3 through 14 of Form T-1 are not required pursuant to Form T-1
General Instructions B.
ITEM 15. FOREIGN TRUSTEE.
Identify the order or rule pursuant to which the foreign trustee is
authorized to act as sole trustee under the indentures qualified or to
be qualified under the Act.
Not applicable (trustee is not a foreign trustee).
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
<TABLE>
<S> <C> <C>
Exhibit T-1-1 - Articles of Association of the trustee, with all amendments
thereto, as presently in effect, filed as Exhibit 1 to Trustee's
Statement of Eligibility and Qualification, Registration No.
333-43153 and incorporated herein by reference.
Exhibit T-1-2 - Copy of Certificate of the Authority of the Trustee to
Commence Business, filed as Exhibit 2 to Trustee's Statement
of Eligibility and Qualification, Registration No. 2-58789 and
incorporated herein by reference.
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Exhibit T-1-3 - Copy of Certificate as to Authority of the Trustee to Exercise
Trust Powers, filed as Exhibit 3 to Trustee's Statement of
Eligibility and Qualification, Registration No. 2-58789, and
incorporated herein by reference.
Exhibit T-1-4 - The By-Laws of the trustee, filed as Exhibit 4 to Trustee's
Statement of Eligibility and Qualification, Registration No.
333-28711 and incorporated herein by refenence.
Exhibit T-1-5 - The consent of the trustee required by Section 321(b) of the
Act.
Exhibit T-1-6 - The copy of the Balance Sheet taken from the latest Report of
Condition of the trustee published in response to call made by
Comptroller of the Currency under Section 5211 U.S. Revised
Statutes.
</TABLE>
NOTE
The answers to this statement, insofar as such answers relate to (a) what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or are owners of 10% or more
of the voting securities of the obligor, or are affiliates or directors or
executive officers of the obligor, and (b) the voting securities of the trustee
owned beneficially by the obligor and each director and executive officer of the
obligor, are based upon information furnished to the trustee by the obligor and
also, in the case of (b) above, upon an examination of the trustee's records.
While the trustee has no reason to doubt the accuracy of any such information
furnished by the obligor, it cannot accept any responsibility therefor.
------------------------------------
Signature appears on next page
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, PNC Bank, National Association, a corporation organized and existing
under the laws of the United States of America, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Pittsburgh and Commonwealth of Pennsylvania on
February 20, 1998.
PNC BANK, NATIONAL ASSOCIATION
(Trustee)
By /s/ Richard A. Ranii
------------------------------
Richard A. Ranii
Vice President
<PAGE> 5
EXHIBIT T-1-5
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended by the Trust Indenture Reform Act of 1990, in connection
with the proposed issuance by Shop At Home, Inc. of its % Secured Notes Due
2005, we hereby consent that reports of examination by Federal, State,
Territorial, or District authorities may be furnished by such authorities to the
Securities and Exchange Commission upon request therefor.
PNC BANK, NATIONAL ASSOCIATION
(Trustee)
By /s/ Richard A. Ranii
----------------------------
Richard A. Ranii
Vice President
Dated: February 20, 1998
<PAGE> 6
EXHIBIT T-1-6
SCHEDULE RC - BALANCE SHEET
FROM
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of
PNC BANK, NATIONAL ASSOCIATION
of PITTSBURGH in the state of PENNSYLVANIA
at the close of business on
September 30, 1997
filed in response to call made by
Comptroller of the Currency,
under title 12, United States Code, Section 161
Charter Number 540
Comptroller of the Currency Northeastern District
BALANCE SHEET
<TABLE>
<CAPTION>
Thousands
of Dollars
------------
ASSETS
<S> <C>
Cash and balances due from depository institutions
Noninterest-bearing balances and currency and coin........................... $ 3,291,380
Interest-Bearing Balances.................................................... 122,778
Securities
Held-to-maturity securities.................................................. 0
Available-for-sale securities................................................ 5,669,736
Federal funds sold and securities purchased under
agreements to resell in domestic offices of the
bank and of its Edge and Agreement subsidiaries,
and in IBFs:
Federal funds sold and
Securities purchased under agreements to resell.............................. 869,038
Loans and lease financing receivables:
Loans and leases, net of unearned income $44,571,048
LESS: Allowance for loan and lease losses 812,830
LESS: Allocated transfer risk reserve 0
Loans and leases, net of unearned income,
allowance and reserve.................................................... 43,758,218
Trading assets ...............................................................134,154
Premises and fixed assets (including capitalized leases)................................ 716,561
Other real estate owned ................................................................ 50,869
Investments in unconsolidated subsidiaries and
associated companies ....................................................... 3,679
Customers' liability to this bank on acceptances
outstanding................................................................. 50,248
Intangible assets ...................................................................... 1,575,419
Other assets 1,406,879
-----------
Total Assets................................................................ $57,648,959
===========
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices................................................................. $34,197,693
Noninterest-bearing $ 8,472,726
Interest-bearing 25,724,967
In foreign offices, Edge and Agreement subsidiaries,
and IBFs......................................................................... 1,544,664
Noninterest-bearing $ 6,571
Interest-bearing 1,538,093
Federal funds purchased and securities sold under agreements
to repurchase in domestic offices of the bank and of its
Edge and Agreement subsidiaries, and in IBFs:
Federal funds purchased and
Securities sold under agreements to repurchase................................... 2,156,756
Demand notes issued to U.S. Treasury................................................... 799,995
Trading Liabilities.................................................................... 155,047
Other borrowed money
With original maturity of one year or less.......................................... 10,085,030
With original maturity of more than one year through three years.................... 882,274
With original maturity of more than one year........................................ 1,169,398
Bank's liability on acceptances executed and outstanding............................... 50,248
Subordinated notes and debentures ..................................................... 645,953
Other liabilities......................................................... 1,080,158
-----------
Total liabilities......................................................... 52,767,216
EQUITY CAPITAL
Perpetual preferred stock and related surplus.......................................... 0
Common Stock....................................................................218,919
Surplus........1,933,735
Undivided profits and capital reserves................................................. 2,760,127
Net unrealized holding gains (losses) on
available-for-sale securities....................................................... (31,038)
Cumulative foreign currency translation adjustments.................................... 0
Total equity capital................................................................... 4,881,743
-----------
Total liabilities and equity capital................................................... $57,648,959
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 532,463
<SECURITIES> 0
<RECEIVABLES> 5,857,554
<ALLOWANCES> 0
<INVENTORY> 4,105,171
<CURRENT-ASSETS> 13,209,631
<PP&E> 6,987,788
<DEPRECIATION> 2,239,691
<TOTAL-ASSETS> 30,972,646
<CURRENT-LIABILITIES> 18,336,176
<BONDS> 8,592,204
1,393,430
0
<COMMON> 29,357
<OTHER-SE> 6,708,150
<TOTAL-LIABILITY-AND-EQUITY> 38,972,646
<SALES> 43,421,074
<TOTAL-REVENUES> 44,463,426
<CGS> 25,244,184
<TOTAL-COSTS> 25,244,184
<OTHER-EXPENSES> 16,939,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454,985
<INCOME-PRETAX> 1,825,024
<INCOME-TAX> 701,593
<INCOME-CONTINUING> 1,123,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,123,431
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.08
</TABLE>
