<PAGE> 1
---------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
December 31, 1997 0-25596
--------------------- ----------------------
SHOP AT HOME, INC.
------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1282758
--------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5210 Schubert Road
P. O. Box 12600
Knoxville, Tennessee 37912
--------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (423) 688-0300
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock $.0025 par value 11,762,991
- ----------------------------- ---------------------
(Title of class) (Shares outstanding at
February 12, 1998)
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SHOP AT HOME, INC. AND SUBSIDIARIES
INDEX
THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6-7
Notes to Condensed Consolidated Financial Statements 8-12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-21
PART II OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 22
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SHOP AT HOME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Cash $ 532,463 $ 5,077,641
Accounts receivable 5,857,554 3,295,925
Inventories 4,105,171 3,262,080
Prepaid expenses 1,363,696 458,243
Deferred tax assets 1,350,747 1,342,450
------------ ------------
Total current assets 13,209,631 13,436,339
Related party - Notes receivable, net of discount
of $160,000 640,000
Property & equipment, net 4,748,097 4,433,767
FCC and NFL Licenses, net 13,042,102 13,423,182
Goodwill, net 2,590,023 1,989,529
Other assets 4,742,793 1,127,493
------------ ------------
Total assets $ 38,972,646 $ 34,410,310
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 16,004,376 $ 15,518,828
Current portion - capital leases and long term debt 2,264,686 2,451,331
Deferred revenue 67,114 107,619
------------ ------------
Total current liabilities 18,336,176 18,077,778
Long-term debt 8,592,204 7,522,131
Deferred income taxes 3,913,329 3,613,410
Redeemable Preferred Stock
$10 par value, 1,000,000 shares authorized,
137,943 shares issued and outstanding at
December 31, 1997 and June 30, 1997 1,393,430 1,393,430
Stockholders' equity:
Common stock - $.0025 par value,
30,000,000 shares authorized,
11,742,991 and 10,714,414 shares issued at
December 31, 1997 and June 30, 1997, respectively 29,357 26,786
Additional paid in capital 11,874,499 10,066,555
Accumulated deficit (5,166,349) (6,289,780)
------------ ------------
Total liabilities and stockholders' equity $ 38,972,646 $ 34,410,310
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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SHOP AT HOME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues $22,463,039 $16,054,772 $43,421,074 $ 29,796,265
Cost of sales 12,896,586 9,671,430 25,244,184 18,146,217
----------- ----------- ----------- ------------
Gross profit 9,566,453 6,383,342 18,176,890 11,650,048
Other operating income 292,697 229,985 563,585 456,819
Operating expenses 8,712,680 5,979,373 16,939,233 11,169,892
----------- ----------- ----------- ------------
Operating income 1,146,470 633,954 1,801,242 936,975
Interest expense 171,416 201,684 454,985 388,504
Other income 374,433 42,666 478,767 67,958
----------- ----------- ----------- ------------
Income before income taxes 1,349,487 474,936 1,825,024 616,429
Income tax expense/(benefit) 593,211 15,000 701,593 (10,000)
----------- ----------- ----------- ------------
Net income $ 756,276 $ 459,936 $ 1,123,431 $ 626,429
=========== =========== =========== ============
Basic earnings per share $ 0.06 $ 0.04 $ 0.10 $ 0.06
=========== =========== =========== ============
Diluted earnings per share $ 0.05 $ 0.04 $ 0.08 $ 0.05
=========== =========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 5
SHOP AT HOME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997, AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,123,431 $ 626,429
Non-cash expenses included in net income
Depreciation and amortization 779,690 415,396
Deferred income taxes 291,622 (10,000)
Provision for bad debts and returns 230,826 --
Changes in current and non-current items
Accounts receivable (3,073,022) (156,389)
Inventories (1,011,737) (287,941)
Prepaid expenses and other assets (204,217) (79,153)
Accounts payable and accrued expenses 485,549 3,277,295
Deferred revenue (40,505) (1,437,436)
----------- -----------
Net cash provided by (used in) operations (1,418,363) 2,348,201
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Goodwill (50,702) --
Related party notes receivable (800,000) --
Purchase of equipment (487,610) (534,139)
Other assets (334,452) --
Payment of deposit on proposed acquisition (3,963,750) --
FCC licenses -- (84,071)
----------- -----------
Net cash used in investing activities (5,636,514) (618,210)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants 619,650 20,000
Repayments of debt (1,109,951) (420,689)
Additional long-term debt 3,000,000 --
----------- -----------
Net cash provided by (used in) financing activities 2,509,699 (400,689)
----------- -----------
NET INCREASE (DECREASE) IN CASH (4,545,178) 1,329,302
Cash beginning of period 5,077,641 1,914,759
----------- -----------
Cash end of period $ 532,463 $ 3,244,061
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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SHOP AT HOME, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1997, AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Stock issued for inventory and reduction
of accounts payable -- $ 57,477
========== ==========
Note payable issued for acquisition
of FCC license -- $1,400,000
========== ==========
Assets acquired through capital lease
$ 149,099 --
========== ==========
Conversion of note payable into shares of
common stock $1,332,532 --
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial information included herein is unaudited: however, such
information reflects all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of financial condition and results of operations of the interim
periods. The condensed consolidated balance sheet data for the fiscal year ended
June 30, 1997 was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
In February, 1997 the Company acquired Collector's Edge of Tennessee, Inc.
("Collectors"). Consequently, the operating results of Collectors are not
included in the 1996 periods.
The accounting policies followed by the Company are set forth in the Company's
financial statements in the Shop at Home, Inc. and Subsidiaries Annual Report on
Form 10-K for the fiscal year ended June 30, 1997.
NOTE 2 - INVENTORY
The components of inventory at December 31, 1997 and June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
----------------- -------------
<S> <C> <C>
Work in process $ 362,014 $ 389,159
Finished goods 4,286,154 3,570,855
---------- ----------
4,648,168 3,960,014
Allowance (542,997) (697,934)
---------- ----------
Total $4,105,171 $3,262,080
========== ==========
</TABLE>
NOTE 3 - RELATED PARTY - NOTE RECEIVABLE
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 non interest 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 the
agreement. Interest has been imputed at a rate of 5.6%, resulting in a discount
of $160,000 and will be charged as compensation expense on the life of the loan.
8
<PAGE> 8
NOTE 4 - NOTE PAYABLE - NATIONSBANK
In November, the Company obtained a $3 million loan from a commercial bank in
connection with the Acquisition (see Note 8). The proceeds from this loan, along
with $1 million from cash flow was paid as a good faith deposit. The note bears
interest at the bank's prime interest rate plus 3/4% and interest only is
payable through August 1998. Principal plus interest payments start in
September, 1998 continuing until maturity in September, 2003.
NOTE 5 - NET INCOME PER SHARE
Effective December 31, 1997, the Company has 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 by the weighted average number of shares of
common stock outstanding. Diluted income per share was computed by dividing the
net income by the weighted average number of shares of common stock and assumed
conversions of dilutive securities and potential common shares outstanding
during the respective periods. Dilutive securities are represented by options,
warrants, redeemable preferred stock and convertible debt outstanding have been
included in the computation.
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 756,256 $ 459,936 $ 1,123,431 $ 626,429
Preferred stock dividends (3,449) (3,449) (11,495) (11,495)
--------- ----------- ----------- ---------
Numerator for basic
earnings per share-income
available to common
stockholders 752,807 456,487 1,111,936 614,934
Effect of dilutive securities:
Preferred stock dividends 3,449 3,449 11,495 11,495
Interest on convertible debt 11,824 44,710 49,750 92,185
Numerator for diluted
earnings per share-income
available to common
stockholders after assumed --------- ----------- ----------- ---------
conversions $ 768,080 $ 504,646 $ 1,173,181 $ 718,614
========= =========== =========== =========
</TABLE>
9
<PAGE> 9
Continued...
<TABLE>
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 11,640,756 10,605,284 11,283,237 10,596,621
---------- ---------- ---------- ----------
Effect of dilutive securities:
Employee stock options 524,409 458,524 565,667 537,485
Contingent stock-acquisition 229,598 147,243 191,465 192,570
Warrants 2,410,688 2,229,614 2,322,981 2,326,118
Convertible preferred stock 137,943 137,943 137,943 137,943
Convertible debt 0 563,146 237,513 590,815
---------- ---------- ---------- ----------
Dilutive potential common
shares 3,302,638 3,536,470 3,455,569 3,784,931
========== ========== ========== ==========
Denominator for diluted
earnings per share-adjusted
weighted-average shares
and assumed conversions 14,943,394 14,141,754 14,738,806 14,381,552
========== ========== ========== ==========
Basic earnings per share $ .06 $ .04 $ .10 $ .06
========== ========== ========== ==========
Diluted earnings per share $ .05 $ .04 $ .08 $ .05
========== ========== ========== ==========
</TABLE>
NOTE 6 - MANAGEMENT STOCK OPTIONS OUTSTANDING
At December 31, 1997, options to purchase up to 1,438,100 shares of common stock
at prices ranging from $1.00 to $4.38 per share were outstanding to employees
and members of management. Options vest annually over a period of up to five
years. The options expire the earlier of 5 years from date of vesting or 30 days
after termination of employment.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure," which is effective for periods ending after December 15, 1997. The
Statement consolidates disclosures required by several existing pronouncements
regarding an entities 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.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This
10
<PAGE> 10
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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement establishes standards for reporting comprehensive income and its
components in a full set of financial statements. The Statement is effective for
fiscal years beginning after December 15, 1997. The Company currently has no
items that would be classified as other comprehensive income.
NOTE 8 - PENDING TRANSACTIONS
GLOBAL TRANSACTION
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").
11
<PAGE> 11
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 no 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 on March 10, 1998 assuming no party files a timely
objection thereto.
The Company plans to use the proceeds from public offerings of debt and equity
securities to fund the obligations under the Asset Purchase Agreement and the
Executory Contracts. The Company has filed a registration statement with the SEC
covering up to 8,625,000 shares of Common Stock (the "Stock Offering") and up to
$60,000,000 of its Secured Notes (the "Notes Offering")
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 following matters which are
pending approval by shareholders at the Annual Meeting to be held March 6, 1998:
a) a 1 for 2 reverse stock split of the Company's common stock, b) the
authorization of 30,000,000 shares of non-voting common stock and c) staggered
three year terms for directors.
12
<PAGE> 12
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 herein.
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 catalogs, 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 whom 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 the direct carriage on cable television
systems under agreements with cable system operators and by the direct reception
of the Company satellite transmission by individuals which 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, which is
engaged 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 February, 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 49.1 million cable households, of
which approximately 4.3 million cable households receive the programming on
essentially a full-time basis (20 or more hours per day) and the remaining 44.8
million cable households receive 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, which is 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 affiliates. Accordingly, the
Company utilizes the revenue per average FTE Cable Household as a measure of
pricing new affiliates 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 have decreased in
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<PAGE> 13
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 from
its vendors. Transponder and cable costs include expenses related to carriage
under affiliation and transponder agreements. Carriage costs have increased on
both 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 in part 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.
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
Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.4 60.2 58.1 60.9
Gross profit 42.6 39.8 41.9 39.1
Other operating income 1.3 1.4 1.3 1.5
Salaries & wages 7.9 8.9 8.1 9.1
Transponder & cable 18.8 17.0 18.6 16.8
Other general operating and
administrative expense 10.3 10.1 10.5 10.2
Depreciation & amortization 1.8 1.2 1.8 1.4
Total operating expenses 38.8 37.2 39.2 37.5
Interest expense 0.8 1.3 1.1 1.3
Other income 1.7 0.3 1.1 0.3
Net income before income taxes 6.0 3.0 4.2 2.1
Income tax expense 2.6 0.1 1.6 --
Net income 3.4 2.9 2.6 2.1
- ------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 14
THREE MONTHS ENDED DECEMBER 31, 1997 VS. THREE MONTHS ENDED DECEMBER 31, 1996
NET SALES. The Company's net sales for the quarter ended December 31,
1997, were $22,463,000, an increase of 40% from net sales of $16,055,000 for the
same quarter in 1996. The core business of the shopping network accounted for
93% of net sales and was based on an average of 9.8 million FTE Cable Households
in the quarter ended December 31, 1997 compared to an average of 6.4 million FTE
Cable Households in the 1996 quarter, representing a 53% increase in FTEs. In
the quarter ended December 31, 1997, the Company generated broadcast sales per
FTE Cable Household of approximately $9.27 compared with approximately $10.00
per FTE Cable Household for the same quarter of the prior year. The major reason
for this decrease in sales per household is due to the addition of 1,317,000
FTEs during the 1997 quarter and these new households have not yet matured to
the point where they will produce their full potential of per household sales.
The normal period of household maturation averages between 90 and 150 days. The
remaining 7% of the 1997 increase in net sales resulted from the inclusion of
approximately $1,599,000 in sales from Collector's Edge, which was acquired in
February 1997, and therefore its operations were not included in the 1996
results.
GROSS PROFITS. As a result of management's continuing focus on
improving margins, the gross profit margin for the quarter ended December 31,
1997 was 42.6% compared to 39.8% for the comparable 1996 quarter. This increase
represents a continuation of a favorable trend of increasing gross margins and
has been accomplished primarily through improved buying power as the Company has
grown and also a shift towards product lines with higher gross margins during
the holiday season.
OTHER OPERATING INCOME. The Company had infomercial income generated by
its broadcast operations in Boston and Houston of $293,000 compared to $230,000
in the comparable 1996 quarter representing a 27% increase. The increase
represents a stronger effort to sell time during hours where demand for home
shopping products is weaker.
SALARIES AND WAGES. Salaries and wages for the quarter ended December
31, 1997, were $1,783,000, an increase of 25.2% compared to the comparable 1996
quarter. Salaries and wages as a percent of sales, however, decreased to 7.9%
from 8.9%. 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 and have been outpaced by the rapid increase in
sales.
TRANSPONDER AND CABLE. Transponder and cable costs for the quarter
ended December 31, 1997 were $4,228,000, an increase of $1,494,000 or 54.6%
compared to the comparable 1996 quarter. Carriage costs increased as a
percentage of sales from 17.0% to 18.8%. This is a continuation of a trend which
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. 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.
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<PAGE> 15
OTHER GENERAL OPERATING AND ADMINISTRATIVE EXPENSES. Other general,
operating and administrative expenses for the quarter ended December 31, 1997
were $2,312,000, an increase of $694,000 or 42.9% compared to the comparable
1996 quarter. This constituted an increase as a percentage of sales from 10.1%
in 1996 to 10.3% 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
quarter ended December 31, 1997 were $393,000, an increase of $189,000 or 92.7%
compared to the comparable 1996 quarter 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 quarter ended December 31, 1997 was
$171,000, a decrease of $30,000 or 15% compared to the comparable 1996 quarter.
This decrease was the result of the conversion of $1,333,000 of debt on October
1, 1997 into 444,177 shares of common stock which reduced interest expense for
the quarter by $38,000. This reduction was offset by $54,000 in interest in
connection with $1,818,000 of working capital debt for Collector's Edge and
$3,000,000 of additional bank debt incurred in mid-November in connection with
the deposit on the Global stations.
OTHER INCOME. Shop at Home sold approximately $309,000 of broadcast
time to certain vendors during the 1997 period. As a result, other income
increased to $374,000 for the quarter ended December 31, 1997, from $65,000 for
the same period in 1996, representing a 475% increase.
INCOME TAX EXPENSE. Income tax expense for the quarter ended December
31, 1997 was $593,000, an increase of $578,000 compared to the comparable 1996
quarter. For the quarter 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 $756,000 for the quarter ended December 31, 1997,
compared to net income of $460,000 for the comparable 1996 quarter, an increase
of 64%.
16
<PAGE> 16
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 46% 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 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 $8.68 compared with approximately $9.61 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 3,100,000 FTEs during
the six months ended December 1997 compared to the same period in 1996,
representing a 54% 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
placed an emphasis on 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.
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 61%
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.
17
<PAGE> 17
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 $1,530,000 or 51% compared to the six months
ended December 31, 1996. This constituted an increase as a percentage of sales
from 10.2% in 1996 to 10.5% 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 $364,000 or 88%
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% 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. Shop at Home 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% 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. For the six months ended December
30, 1997, tax expense was higher due to the impact of state taxes.
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%.
18
<PAGE> 18
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, 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 combined annual
interest rates of 8.9% and 9.8%, respectively. The Company also incurred
additional debt, which had a balance of $1,817,000 as of December 31, 1997, in
connection with its acquisition of Collector's Edge.
In November, the Company obtained a $3 million loan from a commercial
bank in connection with the Global Acquisition discussed in the following
paragraphs. The remaining $503,000 of debt as of December 31, 1997 relates to
fixed asset leases on new equipment acquired within the past two years. The
total monthly payments of principal and interest on all debt approximate
$163,000 per month. In October 1997, a note payable of the Company in the amount
of $1,333,000 was converted into 444,177 shares of Common Stock at the
conversion price of $3.00 per share as provided in the original 1995 note.
As of December 31, 1997, the Company had total current assets of
$13,226,000 and total current liabilities of $18,336,000 for negative working
capital of $5,126,000. The Company's negative working capital position has
remained relatively unchanged from June 30, 1997, and is partially attributable
to low inventory requirements for the core business due to the Company's
extensive use of drop shipment arrangements with suppliers and "just in time"
inventory practices. The Company believes that it enjoys strong, long-term
relationships with its vendors.
As discussed in Note 8 to the Condensed Consolidated Financial
Statements, the Company 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 $52,850,000 (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 borrowing consummated subsequent to September 30, 1997. 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
19
<PAGE> 19
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.
In addition to the capital expenditures necessary to close the
Acquisition, the Company expects to incur capital expenditures of approximately
$12,500,000 during the 1998 fiscal year. These expenditures are expected to
include (i) $4,000,000 to upgrade the equipment at the stations acquired in the
Acquisition in order to increase the power and quality of the broadcast signals
of the stations, (ii) $4,000,000 to equip new studio facilities for the Company
to be located in Nashville, Tennessee, (iii) $3,000,000 for build out and tenant
improvements at the Company's new facility and (iv) $1,500,000 for normal
recurring capital expenditures for the Company's currently owned facilities. Of
these expenditures, the Company expects the $8,000,000 to upgrade the stations
acquired in the Acquisition and to equip the new facility will be funded from
the proceeds of a stock offering and a notes offering, the $3,000,000 for the
build out and tenant improvements will be funded by a bank line of credit and
normal maintenance expenses will be funded out of cash flow from operations and
working capital.
The Company expects that the notes offering and the Acquisition and the
resulting discontinuation of the recently commenced time brokerage agreements
with KCNS, WRAY and WOAC will impact the results of operations as follows: (i)
costs of carriage will decrease due to the termination of the time brokerage
agreements, (ii) costs related to station operation will increase, (iii)
depreciation and amortization will increase as a result of the Acquisition, (iv)
interest expense will increase as a result of the notes offering and any other
additional indebtedness incurred, (v) infomercial income will increase and (vi)
net revenues will increase as a result of additional households. Notwithstanding
the increase in the interest expense resulting from the notes offering, the
Company believes that funds necessary to meet the Company's capital requirements
for the foreseeable future will be available from the proceeds of the stock
offering and the notes offering, funds from operations (after giving effect of
the items listed in (i) through (vi) above and additional financings, if
necessary or desirable. The indenture associated with the notes offering is
expected to permit 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.
Upon the acquisition of WMFP by a subsidiary of the Company in February
1995, the Company concluded that it was not legally obligated to collect and
remit 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 has
collected approximately $833,000 with respect to Massachusetts sales tax
amounts.
The Company believes internally generated funds from operations, and
the sale of common stock and notes, will be sufficient to meet the Company's
capital requirements for the near future. The Company is investigating other
avenues of additional financing for the near to mid-future to set up a working
capital line.
20
<PAGE> 20
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure," which is effective for periods ending after December
15, 1997. 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.
21
<PAGE> 21
SHOP AT HOME, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Exhibit
No. Description
-------
27 Financial Data Schedule, filed as part of the Form 10-Q
(a) Reports on Form 8-K - No reports on Form 8-K were filed during the
period covered by this report.
22
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/S/ Kent E. Lillie
- ----------------------------------------
Kent E. Lillie, President
Date:
-----------------------------------
/S/ James Bauchiero
- ----------------------------------------
James Bauchiero, Chief Financial Officer
Date:
-----------------------------------
23
<PAGE> 1
EXHIBIT 11
SHOP AT HOME, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
(UNAUDITED)
The following table sets forth for the periods indicated the percentage
relationship to total revenues of certain items included in the Company's
Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 756,256 $ 459,936 $ 1,123,431 $ 626,429
Preferred stock dividends (3,449) (3,449) (11,495) (11,495)
------------ ------------ ------------ ------------
Numerator for basic earnings
per share-income available
to common stockholders 752,807 456,487 1,111,936 614,934
Effect of dilutive securities:
Preferred stock dividends 3,449 3,449 11,495 11,495
Interest on convertible debt 11,824 44,710 49,750 92,185
Numerator for diluted
earnings per share-income
available to common
stockholders after assumed ------------ ------------ ------------ ------------
conversions $ 768,080 $ 504,646 $ 1,173,181 $ 718,614
============ ============ ============ ============
Denominator:
Denominator for basic
earnings per share-weighted-
average shares 11,640,756 10,605,284 11,283,237 10,596,621
------------ ------------ ------------ ------------
Effect of dilutive securities:
Employee stock options 524,409 458,524 565,667 537,485
Contingent stock-acquisition 229,598 147,243 191,465 192,570
Warrants 2,410,688 2,229,614 2,322,981 2,326,118
Convertible preferred stock 137,943 137,943 137,943 137,943
Convertible debt 0 563,146 237,513 590,815
------------ ------------ ------------ ------------
Dilutive potential common
shares 3,302,638 3,536,470 3,455,569 3,784,931
============ ============ ============ ============
Denominator for diluted
earnings per share-adjusted
weighted-average shares
and assumed conversions 14,943,394 14,141,754 14,738,806 14,381,552
============ ============ ============ ============
Basic earnings per share $ .06 $ .04 $ .10 $ .06
============ ============ ============ ============
Diluted earnings per share $ .05 $ .04 $ .08 $ .05
============ ============ ============ ============
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 532,463
<SECURITIES> 0
<RECEIVABLES> 5,857,554
<ALLOWANCES> 377,449
<INVENTORY> 4,105,171
<CURRENT-ASSETS> 13,209,631
<PP&E> 6,987,788
<DEPRECIATION> 2,239,691
<TOTAL-ASSETS> 38,972,646
<CURRENT-LIABILITIES> 18,336,176
<BONDS> 8,592,204
1,393,430
0
<COMMON> 29,357
<OTHER-SE> 6,737,507
<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>
