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
September 30, 1999 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.)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-5249
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 263-8000
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 30,397,402
(Title of class) (Shares outstanding at
October 20, 1999)
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Index
Three Months Ended September 30, 1999
- --------------------------------------------------------------------------
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5-6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3 - Quantitative and Qualitative Disclosure About
Market Risk 16-17
Part II OTHER INFORMATION 18
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (For SEC use only)
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
--------------------- -------------------
(Unaudited)
<S> <C> <C>
Cash $22,535 $7,066
Restricted cash 4,881 5,433
Accounts receivable - net 9,991 8,969
Inventories - net 9,103 7,234
Prepaid expenses 1,062 919
Deferred tax assets 1,443 1,097
--------------------- -------------------
Total current assets 49,015 30,718
Related party - note receivable, net of discounts of $88 and
$96, September 30, 1999 and June 30, 1999, respectively 700 690
Property & equipment - net 38,327 35,403
FCC and NFL Licenses - net 96,365 97,020
Goodwill, net 2,357 2,367
Other assets 7,142 4,499
===================== ===================
Total assets $193,906 $170,697
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $28,539 $27,955
Current portion - capital leases and long term debt 320 20,298
Deferred revenue 345 111
--------------------- -------------------
Total current liabilities 29,204 48,364
Long-term debt 75,830 75,893
Deferred income taxes - 309
Redeemable preferred stock:
Redeemable at $10 per share,
$10 par value, 1,000,000 shares authorized;
113,858 and 82,038 shares issued and outstanding at
September 30, 1999 and June 30, 1999, respectively 1,152 834
Stockholders' equity:
Common stock - $.0025 par value,
100,000,000 shares authorized; 30,397,402 and
24,557,822 shares issued at September 30, 1999
and June 30, 1999, respectively 76 61
Additional paid in capital 96,515 53,317
Accumulated deficit (8,871) (8,081)
--------------------- -------------------
Total liabilities and stockholders' equity $193,906 $170,697
===================== ===================
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------------------------------
1999 1998
--------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues $45,282 $33,883
Operating expenses:
Cost of goods sold (excluding items
listed below) 28,448 19,921
Salaries and wages 2,695 2,631
Transponder and cable charges 7,893 5,882
Other general operating and
administrative expenses 4,174 2,814
Depreciation and amortization 1,411 1,034
Non-recurring move-related expenses - 254
--------------------- -------------------
Total operating expenses 44,621 32,536
--------------------- -------------------
Income from operations 661 1,347
Interest income 304 273
Interest expense (2,280) (2,004)
Other income 30 -
--------------------- -------------------
Loss before income taxes (1,285) (384)
Income tax benefit (495) (146)
--------------------- -------------------
Net loss $(790) $(238)
===================== ===================
Basic loss per share $(0.03) $(0.01)
===================== ===================
Diluted loss per share $(0.03) $(0.01)
===================== ===================
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1999 and 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Unaudited)
------------------- -------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(790) $(238)
Non-cash expenses/(income) included in net loss:
Depreciation and amortization 1,411 1,034
Deferred tax benefit (495) (148)
Deferred interest (10) (7)
Provision for bad debt 47 -
Changes in current and non-current items:
Accounts receivable (1,069) (433)
Inventories (1,869) (305)
Prepaid expenses and other assets (147) (579)
Accounts payable and accrued expenses 604 (2,128)
Deferred revenue 235 248
------------------- -------------------
Net cash used by operations (2,083) (2,556)
=================== ===================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (6,576) (5,086)
Net change in restricted cash 552 -
Other assets (50) -
------------------- -------------------
Net cash used in investing activities (6,105) (5,086)
=================== ===================
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock offering 44,293 -
Exercise of stock options and warrants 162 -
Payment of stock issuance costs (757) -
Purchase and retirement of common stock - (169)
Repayments of debt and capitalized leases (20,041) (415)
------------------- -------------------
Net cash provided (used) by financing activities 23,657 (584)
=================== ===================
NET INCREASE/(DECREASE) IN CASH 15,469 (8,226)
------------------- -------------------
Cash beginning of period 7,066 21,224
------------------- -------------------
Cash end of period $22,535 $12,998
=================== ===================
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
Three Months Ended September 30, 1999 and 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Stock issued for loan guarantee $ - $ 40
========================== ==========================
Reversal of conversion of preferred stock into shares of
common stock $ 318 $ -
========================== ==========================
Income tax benefit from exercise of stock options $ 159 $ -
========================== ==========================
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999 (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
All dollar values have been expressed in thousands (000s) unless otherwise noted
except for per share data. The financial information included herein is
unaudited for the quarter ended September 30, 1999; however, such information
reflects all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of the Company, necessary for a fair presentation of
financial condition and results of operations of the interim periods. The
condensed consolidated balance sheet data for the fiscal year ended June 30,
1999 was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
The accounting policies followed by the Company are set forth in the Company's
financial statements in its Annual Report on Form 10-K for the fiscal year ended
June 30, 1999.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
NOTE 2 -- INVENTORY
The components of inventory at September 30, 1999 and June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
Work in progress (Collector's Edge) $ 1,081 $ 795
Products purchased for resale 6,908 5,570
Finished goods (Collector's Edge) 1,468 1,173
-------------------- ------------------
9,452 7,538
Valuation allowance (349) (304)
-------------------- ------------------
Total $ 9,103 $ 7,234
==================== ==================
</TABLE>
NOTE 3 - NET EARNINGS/(LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted earnings
(loss) per share is computed by dividing the net income (loss) 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 and
convertible preferred stock outstanding and are included in the computation only
for periods in which net income was generated.
The following table sets forth for the periods indicated the calculation of net
loss per share:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
--------------- --------------
<S> <C> <C>
Numerator:
Net loss $ (790) $ (238)
Preferred stock dividends (3) (3)
--------------- --------------
Numerator for basic loss per share
available to common stockholders (793) (241)
Effect of dilutive securities:
Preferred stock dividends 3 3
-------------- --------------
Numerator for diluted loss per share
available to common stockholders after
assumed conversions $ (790) $ (238)
=============== ==============
Denominator:
Denominator for basic earnings per
share-weighted-average shares 29,958,728 23,297,515
--------------- --------------
Effect of dilutive securities:
a) Stock options and warrants - -
b) Convertible preferred stock - -
--------------- --------------
Dilutive potential common shares - -
--------------- --------------
Denominator for diluted earnings per share-
adjusted weighted-average shares 29,958,728 23,297,515
and assumed conversions =============== ==============
Basic loss per share $ (0.03) $ (0.01)
=============== ==============
Diluted loss per share $ (0.03) $ (0.01)
=============== ==============
</TABLE>
Although these amounts are excluded from the computation in loss years because
their inclusion would be anti-dilutive, they are shown here for information and
comparative purposes only.
<TABLE>
<S> <C> <C>
a) Employee stock options and warrants 3,306,629 2,158,519
b) Convertible preferred stock 113,856 137,943
</TABLE>
<PAGE>
NOTE 4 - SEGMENT DISCLOSURE
The Company operates principally in three segments: broadcast network,
Collector's Edge and collectibles.comsm. The broadcast network segment
consists of home shopping, which primarily includes the sale of merchandise
on television. The Collector's Edge segment includes the operations of
Collector's Edge of Tennessee, Inc., which sells sports trading cards to
unaffiliated customers. The collectibles.comsm segment consists of the Company's
new website, which will specialize in the sale of collectible merchandise.
The Company operates almost exclusively in the United States.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales and transfers are
accounted for as if the sales or transfers were with third parties, that is, at
current market prices.
<TABLE>
<CAPTION>
INDUSTRY SEGMENT DATA
Three Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Broadcast Network $ 43,221 $ 31,939
Collector's Edge 2,061 1,944
collectibles.comsm - -
-------------------- -------------------
$ 45,282 $ 33,883
==================== ===================
Income (loss) from operations:
Broadcast Network $ 978 $ 1,114
Collector's Edge 10 223
collectibles.comsm (327) -
-------------------- -------------------
$ 661 $ 1,347
==================== ===================
Depreciation and amortization:
Broadcast Network $ 1,210 $ 851
Collector's Edge 184 183
collectibles.comsm 17 -
-------------------- -------------------
$ 1,411 $ 1,034
==================== ===================
Income (loss) before taxes:
Broadcast Network $ (956) $ (606)
Collector's Edge (2) 223
collectibles.comsm (327) -
-------------------- -------------------
$ (1,285) $ (383)
==================== ===================
Assets:
Broadcast Network $ 183,413 $ 133,415
Collector's Edge 7,258 7,546
collectibles.comsm 3,235 -
-------------------- -------------------
$ 193,906 $ 140,961
==================== ===================
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the the Company's condensed consolidated financial statements and related
notes included elsewhere herein.
General
Shop At Home, Inc., (the "Company"), founded in 1986, sells specialty
consumer products, primarily collectibles, through interactive electronic
media, including broadcast, cable and satellite television and, increasingly,
the Internet. It offers a variety of products such as sports cards and
memorabilia, coins, currency and jewelry, much of which it sells on an exclusive
basis.
The Company receives revenues primarily from the sale of merchandise
marketed through its programming carried by:
o television stations from which the Company has purchased broadcast time;
o Company-owned television stations, with programming being carried on cable
television systems under the "must carry" or the retransmission consent
provisions of federal law;
o direct carriage on cable television systems under agreements with cable
system operators;
o direct-to-home satellite programming services; and
o direct reception of the Company's satellite transmission by individuals who
own satellite downlink equipment.
The Company receives an increasing portion of its revenues from the
sale of merchandise through its website, shopathomeonline.com, although such
revenues have not been material to date. The Company plans to launch a new
website, collectibles.comsm in October 1999.
The Company generates approximately 95% of its revenues from the sale
of products on the television network. The Company's products include sports
collectibles and sports related products, plush toys, movie memorabilia and
other signed and autographed merchandise, electronic equipment, coins and
currency, cutlery and knives and jewelry and gemstones.
Since 1997, the Company has also received revenues from sales by its
subsidiary, Collector's Edge of Tennessee, Inc., which sells sports trading
cards under licenses from National Football League Properties and National
Football League Players. Additionally, the Company receives revenues from the
sale of time on the Company's owned television stations for the broadcast of
infomercials.
As of September 30, 1999, the Company's programming was viewable during
all or part of each day by approximately 55.4 million individual cable
households, of which approximately 10.9 million cable households received 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. To
measure performance in a manner that reflects both the growth of the Company and
the nature of its access to part-time cable households, the Company uses a cable
household full-time equivalent method to measure the reach of its programming
which accounts for both the quantity and quality of time available to it. To
derive this full-time equivalent cable household base ("FTE Cable Household"),
the Company has developed a methodology to assign a relative value of each hour
of the day to its overall sales, which is based on sales in markets where the
programming is carried on a full-time basis. Each hour of the day has a value
based on historical sales. FTE Cable Households have grown to 21.4 million at
September 30, 1999 from 15.2 million at September 30, 1998. The Company believes
that the change in the number of FTE Cable Households provides a consistent
measure of its growth and applies this methodology to all affiliates.
Accordingly, the Company uses the revenue per average FTE Cable Household as a
measure of pricing new affiliate contracts and estimating their anticipated
revenue performance.
When the Company enters a new market, it generally takes about three
months to establish program awareness by the viewers. During this three month
period, the Company normally receives less revenue from sales in the market than
it expects to receive when the market matures. The Company's programming is
received on more than one channel in many households. The Company has found that
sales in a market increase when its programming is available on more than one
channel, thereby justifying the additional carriage costs.
The Company owns and operates six UHF television stations located in
the San Francisco, Boston, Houston, Cleveland, Raleigh and Bridgeport markets.
Five of these stations are in the top 15 television markets in the United
States, including the Bridgeport, Connecticut station which serves a portion of
the New York City market.
Principal elements in the Company's cost structure are (a) cost of
goods sold, (b) transponder and cable costs and (c) salaries and wages. The
Company's cost of goods sold is a direct result of both the product mix and its
ability to negotiate favorable prices from its vendors. Transponder and cable
costs include expenses related to carriage under affiliation and transponder
agreements. Because it takes a period of time for a market's revenue potential
to mature, the Company expects to pay initial carriage cost in excess of its
goal of approximately 15% of revenues from the market. If carriage cost does not
decrease toward this goal as the market matures, management of the Company will
usually attempt to renegotiate the carriage contract, seek an opportunity to
terminate the carriage contract or not renew it. Salaries and wages have
increased with the Company's increased revenues and the addition of staff to
support its growth.
<PAGE>
Overview of Results of Operations
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain items included in the Company's Condensed
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------------ -------------------
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of goods sold (excluding items listed
below) 62.8 58.8
Salaries & wages 6.0 7.8
Transponder & cable 17.4 17.4
Other general operating and
administrative expense 9.3 8.3
Depreciation & amortization 3.1 3.0
Non-recurring move-related expenses - 0.7
Total operating expenses 98.6 96.0
Interest income 0.7 0.8
Interest expense (5.0) (5.9)
Other income 0.1 -
Net loss before income taxes (2.9) (1.1)
Income tax benefit (1.1) (0.4)
Net loss (1.8) (0.7)
</TABLE>
Three months ended September 30, 1999 vs. three months ended September 30, 1998
Net Revenues. The Company's revenues for the quarter ended September
30, 1999, were $45.3 million, an increase of 33.6% from revenues of $33.9
million for the same quarter in 1998. The core business of the shopping network
accounted for 95.4% of revenues on an average of 20.1 million FTE Cable
Households in the quarter ended September 30, 1999 compared to an average of
15.7 million FTE Cable Households in the 1998 quarter, representing a 28.2%
increase in FTE Cable Households. The remaining 4.6% of 1999 revenues resulted
from approximately $2.1 million in revenues from Collector's Edge, which was
consistent with the same quarter in 1998.
In addition, the 1999 period includes infomercial revenue of $381
thousand compared to $304 thousand in 1998, representing a 25.3% increase. This
increase reflects a growth in revenue from the San Francisco and Boston stations
in the 1999 period.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and inbound freight. For the quarter ended September 30, 1999, the
cost of goods sold increased to 62.8% from 58.8% in the comparable 1998 period.
This increase is mainly due to a higher percentage of sales attributable to
lower-margin product categories, primarily electronics and coins which
collectively represented approximately 28.5% of revenues for the three months
ended September 30, 1999 compared to 20.3% of revenues for the 1998 period.
Salaries and Wages. Salaries and wages for the quarter ended September
30, 1999 were $2.7 million, an increase of 2.4% over the comparable 1998
quarter. Salaries and wages as a percent of revenues, decreased to 6.0% in the
1999 period compared to 7.8% in the 1998 period after giving effect to $608
thousand or 18.4% of salaries capitalized as part of the installation of new
computer software systems.
Transponder and Cable. Transponder and cable costs for the quarter
ended September 30, 1999 were $7.9 million, an increase of $2.0 million or 34.2%
over the comparable 1998 quarter. During the same period full-time equivalent
households grew 28.0%. The cable carriage cost component of this expense
category increased as a percentage of revenues to 16.3% from 16.1%. The
additional expense in cable cost is the result of the Company's FTE Cable
Households average increasing to 20.1 million from 15.7 million for the quarters
ending September 30, 1999 and 1998, respectively. Carriage costs as a percentage
of revenues initially tend to be higher in periods during which the Company
enters a new market. Due to the fixed nature of this expense, however, the ratio
of expense to revenues usually decreases as the viewing audience grows and
related revenues increase. As a market matures, if carriage costs do not migrate
down to a cost-effective level, the Company attempts to renegotiate the carriage
contract and may exit a market if acceptable margins cannot be obtained.
Other General Operating and Administrative Expenses. Other general,
operating and administrative expenses for the quarter ended September 30, 1999
were $4.2 million, an increase of $1.4 million or 49.0% over the comparable 1998
quarter. This increase is comprised of approximately $171 thousand of expenses
relating to collectibles.comsm which will not become operational until October
1999, and increases in various broadcast expenses, such as: $217 thousand in
telephone expenses due to increased talk time during the implementation of new
software, $152 thousand in property taxes at the Nashville headquarters, $99
thousand in employee benefits and $60 thousand in operating supplies.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended September 30, 1999 were $1.4 million, an increase of $378 thousand
or 36.5% over the comparable 1998 quarter. The major component of this increase
was the additional depreciation on the Company's headquarters.
Non-recurring Move-Related Expenses. There were no non-recurring
move-related expenses in the quarter ended September 30, 1999 compared to $254
thousand in the 1998 period related to employee relocation.
Interest. Interest expense for the quarter ended September 30, 1999 was
$2.3 million, an increase of $275 thousand or 13.7% over the comparable 1998
quarter. This increase is due to the capitalization of interest in 1998 in
connection with the construction and build-out of the Nashville headquarters.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had total current assets of $49.0
million and total current liabilities of $29.2 million, resulting in a positive
working capital position of $19.8 million. This represents a $37.5 million
increase from the working capital position at the end of the prior year. The
major components of the increase resulted from the $44.3 million of proceeds
(net of underwriting commissions) from the public offering of 5,828,000 shares
of common stock in July 1999, offset by approximately $6.5 million spent to
acquire equipment and software and an increase of approximately $2.9 million in
the combined level of inventory and accounts receivable. The Company used $20.0
million, including $600 thousand of restricted cash, to pay off the short term
loan relating to the acquisition of the assets of the Bridgeport television
station, with the balance available to develop, launch and promote the
collectibles.comsm website and the installation of an enterprise-wide computer
system.
During the three months ended September 30, 1999, the Company used
approximately $2.1 million for operations. The major component of this net use
was the loss of $790 thousand, which included non-cash items of a $495 thousand
decrease in net deferred tax liabilities, offset by $1.4 million in depreciation
and amortization. In addition, the Company used approximately $1.1 million to
support a higher level of receivables from customers paying in installments, and
$1.9 million to carry higher inventory levels, primarily jewelry products.
Approximately $600 thousand was provided from operations in the form of
increased accounts payable and accrued expenses.
The Company used approximately $6.1 million for investing activities
primarily in connection with the installation of its computer system and the
launch of collectibles.comsm.
Approximately $23.7 million was provided to the Company from financing
activities during the three months ended September 30, 1999. The principal
source was the public offering of 5,828,000 shares of common stock which
provided $44.3 million in proceeds (net of underwriting commissions) offset by
the repayment of the $20.0 million bridge loan incurred for the purchase of the
assets of the Bridgeport television station.
Approximately 90% of the Company's receipts are customer credit card
charges, most of which are collected within three days of shipment. This
facilitates cash flow since the Company usually pays its vendors within 30 days
and, as a result, the Company does not need a large amount of working capital to
support a rapid growth in revenues.
The acquisition of television stations impacts the results of
operations as follows:
o costs of carriage decrease to the extent that the Company purchased
time on these stations prior to acquisition;
o costs related to station operations increase;
o depreciation and amortization significantly increase as a result of
the acquisition of these stations;
o interest expense increases as a result of the issuance of debt (if
incurred);
o infomercial income may increase; and
o net revenues increase as a result of additional households.
The Company intends to launch its new website, collectibles.comsm, in
October 1999. Upon the launch of collectibles.comsm, the Company intends to
discontinue selling products through shopathomeonline.com. To develop
collectibles.comsm, the Company has entered into agreements with Oracle, iXL and
other vendors. Oracle will provide the internal systems to manage order entry,
accounting, human resources, purchasing and receivables. iXL will help create
the interface between the website and the consumer. It is anticipated that the
total cost of all of these agreements, with hardware, will approximate $16.0
million, approximately $11.7 million of which has already been incurred. After
collectibles.comsm is operational, working capital will be required to promote
and develop the website in order to generate sales.
Additional financing may be necessary to continue the Company's growth.
The Indenture of Trust executed in connection with the Company's $75,000,000 11%
Senior Secured Notes Due 2005 permits the Company to incur debt which may be
used for such future capital needs. In order to incur this debt the Company must
satisfy certain conditions imposed by the Indenture. The Company is currently
negotiating a proposed line of credit of up to $20.0 million to be available
for general corporate purposes. Additionally, it is anticipated that the line
of credit may be used for additional broadcast property acquisitions. There
can be no assurance that the line of credit will be established or that the
Company will have funds available for its future needs.
On August 5, 1999, the Federal Communications Commission ("FCC") voted
to make certain significant changes in the restrictions involving the multiple
ownership of broadcast stations. At that time, the FCC voted 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.
Under these new rules, a company may own two television stations in the same
market so long as there are at least eight independent voices in the market, and
the two stations are not both among the top four stations in the market.
Of the six television stations owned by the Company, each is located in
a market with more than eight television stations, and none of the Company's
stations is among the top four rated stations in its market. As a result, any
owner of an existing television station in any of the Company's markets could
acquire the Company's station in that market.
The Company believes that this rule change by the FCC makes the
Company's stations more valuable than when the stations were purchased. On
August 12, 1999, the Company announced that it had retained investment bankers
to identify strategic alternatives to maximize shareholder value, including the
possible sale of some or all of the Company's major market stations as well as
the sale of a significant equity ownership interest to a strategic partner. The
Company stated that no decision had been made as to whether or not to pursue any
particular alternative, and there is a possibility that no transaction will
result.
If the Company were to sell one or more of its stations as a result of
this opportunity, the Company would seek to use a portion of the resulting
proceeds to replace any lost carriage of the Company's programming through the
acquisition of other stations or by agreements with cable television operators.
A potential equity investment by a strategic partner could enhance or benefit
the Company's broadcast, Internet and electronic retailing capabilities. The
Indenture under which the Notes are issued imposes restrictions on the ability
of the Company to sell its assets or to use the proceeds of such sales for
general corporate purposes. The Company could use proceeds of such a sale to
defease the Notes in order to make the additional proceeds available for other
purposes.
Year 2000
Computer systems, computer software, and equipment dependent on
microprocessors may cease to function or work incorrectly when the year 2000
arrives. The problem affects those systems and computer products which are
programmed to use a two digit code for the year, and may read the code "00" as
1900 rather than 2000. To prevent critical failures of important computers or
products, this problem, sometimes referred to as the "Y2K" problem, must be
identified and corrected. Systems and equipment that will not experience this
problem are generally referred to as "year 2000 compliant," or "Y2K compliant."
The Company intends to become Y2K compliant through systems replacement
and believes existing capital budgets are adequate for any remaining hardware
and software replacements.
The Company is supported by redundant systems from Sun, IBM and EMC.
All host systems are Y2K compliant. The relocation to Nashville facilitated
compliance efforts by requiring the replacement of key network equipment. Since
the move, approximately 90% of local area network application servers and
computers have been upgraded to Windows NT. All Windows NT systems have been
upgraded to insure Y2K compliance. Additionally, the Company's telephone system,
Aspect software and computer server used in the Company's call center have been
upgraded and are compliant. The Company's telephone voice response system is
being remediated through replacement. The Company's financial system, human
resources system and other management systems are being replaced by Oracle
applications that are Y2K compliant.
One task of the year 2000 committee is to review businesses outside of
the Company which have systems electronically linked to the Company. The Company
has identified those vendors which warrant further examination for potential
problems and has begun contingency planning. The Company has provided many of
its vendors with Y2K compliant software, and management is not presently aware
of any material problems in the year 2000 compliance plans of its major vendors
and service providers.
The Company has incurred approximately $8.8 million for new computer
hardware and systems to date. All of the primary computer systems have been
replaced either as part of the Y2K compliance program or to build a system to
support future growth. The total cost of system replacements, including both
hardware and software, is expected to be approximately $4.2 million, in addition
to prior expenditures.
The worst case scenario for the Company would be for critical vendors
or service providers to have Y2K problems. These critical vendors and suppliers
include bank card processors, long distance telephone service providers and the
full-time satellite transponder provider. Although these vendors have advised
the Company that they are in compliance, contingency plans will include
identifying alternative vendors and providers.
Despite the concern among the general public with year 2000 problems,
management does not anticipate major interruptions. The development and testing
of contingency plans should assure that no major interruptions occur. Management
believes its Y2K program is adequate to detect compliance problems in advance,
and that the necessary resources to remedy them are available. The Y2K problem,
however, has many aspects and potential consequences, some of which are not
reasonably foreseeable. Therefore, there can be no assurance that unforeseen
consequences will not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
The Company is exposed to some market risk through interest rates,
related to its investment of its current cash and cash equivalents of
approximately $22.5 million as of September 30, 1999. These funds are generally
invested in highly liquid debt instruments with short-term maturities. As such
instruments mature and the funds are reinvested, the Company is exposed to
changes in market interest rates. This risk is not considered material, and the
Company manages such risk by continuing to evaluate the best investment rates
available for short-term high quality investments.
The Company is not exposed to market risk through changes in interest
rate on its long-term indebtedness, because the debt is at a fixed rate.
The Company obtains, on consignment, the vast majority of products
which it sells through its programming, and the prices of such products are
subject to changes in market conditions. These products are purchased
domestically, and, consequently, there is no foreign currency exchange risk.
The Company has no activities related to derivative financial
instruments or derivative commodity instruments.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes In Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission Of Matters To A Vote Of Security Holders.
None
Item 6. Reports On Form 8-K.
Exhibits
Exhibit 27 Financial Data Schedule (For SEC use only)
<PAGE>
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: 10/29/99
/S/ Arthur Tek
Arthur Tek, Executive VP & Chief Financial Officer
Date: 10/29/99
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