UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended June
30, 1999
[ ] Transition report pursuant to
section 13 or 15(d) of the
Securities Exchange Act of 1934 For
the transition period from ______ to
------
Commission file number 0-25596
SHOP AT HOME, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1282758
(State of incorporation) (IRS EIN)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-05249
(Address of principal executive offices)
Registrant's telephone number, including area code: (615)263-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0025 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and, (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Common Stock held by non-affiliates of the
registrant on August 26, 1999 was $235,735,418
Number of shares of Common Stock outstanding as of August 25, 1999 was
30,397,202
DOCUMENTS INCORPORATED BY REFERENCE
By filing this amendment ("Amendment No. 1"), the undersigned registrant hereby
amends its Annual Report on Form 10-K for the year ended June 30, 1999 to
include therein the information required in Part III.
<PAGE>
SHOP AT HOME, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
INDEX
PART I Page
Item 1. Business 5
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of
Security Holders 19
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 22
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary
` Data 32
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 61
PART III
Item 10. Directors and Executive Officers of the
Registrant 62
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain
Beneficial Owners and Management 75
Item 13. Certain Relationships and Related
Transactions 77
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 79
SIGNATURES 86
<PAGE>
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Shop At Home, Inc. (the "Company" or "Shop At Home") based
these forward-looking statements largely on its current expectations and
projections about future events and financial trends affecting the financial
condition of its business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about Shop At Home, including,
among other things:
o general economic and business conditions, both nationally and in the
Company's markets;
o the Company's expectations and estimates concerning future financial
performance, financing plans and the impact of competition;
o anticipated trends in the Company's business;
o existing and future regulations affecting the Company's business;
o the Company's successful implementation of its business strategy;
o fluctuations in the Company's operating results; and
o technological changes in the television and Internet industry.
In addition, in this report, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Shop At Home, its business or management, are
intended to identify forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report. Because of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
<PAGE>
ITEM 1. BUSINESS
Shop At Home
The Company sells specialty consumer products, primarily collectibles,
through interactive electronic media including broadcast, cable and satellite
television and, increasingly, the Internet. The Company offers a variety of
products such as sports cards and memorabilia, coins, currency and jewelry, many
of which it sells on an exclusive basis. The Company produces programming in a
digital format in its new state-of-the-art facilities in Nashville, Tennessee.
The programming is transmitted by satellite to cable television systems,
television broadcasting stations and satellite dish receivers across the
country. Programming is delivered through the Company's website,
shopathomeonline.com. The Company intends to launch its new website,
collectibles.com, in the fall of 1999, and intends for collectibles.com to be
the premier website for the sale of collectible products.
The Company believes that the emergence of the Internet as a global
interactive communications medium provides it with an opportunity to leverage
its traditional broadcast assets and the Company's significant experience in
marketing specialty consumer products over an electronic medium. Since 1994, the
Company has increased its net revenues from $21.7 million to $152.0 million for
the year ended June 30, 1999, almost entirely through the use of traditional
television broadcasting. The Internet offers the Company the potential to
broaden its customer base, the ability to offer an expanded product line, the
capability to use computer technology to reduce the cost of processing and
fulfilling customer orders, and the opportunity to enhance the consumer shopping
experience, which the Company believes will result in additional repeat
customers and higher sales. In 1997, the Company established its first website,
shopathomeonline.com, which offers many of the same products sold on its
television programming. The Company is working with Oracle Corporation, iXL
Enterprises, Inc. and other vendors to develop collectibles.com.
To generate traffic on its website, the Company plans to enter into
other promotional arrangements with Internet portals in addition to its recent
promotional arrangements with Yahoo! and GO Network. The Company can market its
website at minimal incremental cost, through cross-promotional advertising on
its television broadcast programming, introducing the Company's traditional
television shoppers to a more interactive and cost-efficient sales method.
The Company owns and operates six UHF television stations, which are
located in the San Francisco, Boston, Houston, Cleveland, Raleigh and Bridgeport
markets. Five of these television stations are located in the top 13 television
markets in the United States, including the Bridgeport, Connecticut station
which covers a portion of the New York City metropolitan area television market.
As of June 30, 1999, the Company's television households reached, during all or
part of the day, approximately 73 million duplicated cable or 53.5 million
unduplicated households as well as direct broadcast system (DBS) programming,
many of which received the programming on more than one channel. Approximately
9.8 million cable households received the Company's programming on essentially a
full time basis (20 or more hours per day).
The Company's products are segmented into three categories: licensed
and authenticated products, consumer and specialty products, and jewelry and
lifestyle products. Licensed and authenticated products include sports
collectibles and sports related products, movie memorabilia and other signed and
autographed merchandise. Consumer and specialty products include electronic
equipment, coins and currency, and cutlery and knives. Jewelry and lifestyle
products include jewelry, gemstones, health and beauty products, personal care
items and clothing. The Company believes that its product mix and marketing
strategy are unique in the electronic commerce industry because it features
products with high average selling prices and emphasizes merchandise that is not
widely available, and is purchased primarily by men.
The Company is incorporated in Tennessee and its principal place of
business and executive offices are located at 5388 Hickory Hollow Parkway,
Antioch, Tennessee 37013. The Company's telephone number is (615) 263-8000 and
its Internet address is www.shopathomeonline.com.
Industry Background
Television Programming. Electronic commerce using full-time television
programming has grown to a $3.8 billion industry. The television commerce
industry is dominated by two competitors: The Home Shopping Network and the QVC
Network. These two competitors' combined sales represented approximately 93% of
the broadcast television commerce industry's 1998 revenues and 94% of the
industry's 1997 revenues.
Television station ownership allows a broadcaster to take advantage of
the "must carry" rules of the Federal Communications Commission (FCC).
Generally, the "must carry" rules require most cable systems (with the exception
of some small systems) to set aside up to one-third of their channels to carry
the broadcast signals of local, full-power television stations, including those
broadcasting programming that allows consumers to shop from their homes. These
signals must be carried on a continuous, uninterrupted basis and must be placed
in the same numerical channel position as when broadcast over-the-air, or on a
mutually agreeable channel.
In addition, the FCC has adopted rules for implementing digital
(including high-definition) television service, or DTV service. The FCC has
allotted to eligible existing television stations a second channel on which to
provide DTV service. Television stations will be allowed to use these channels
according to their best business judgment. These uses include multiple standard
definition program channels, data transfer, subscription video, interactive
materials, and audio signals, although stations will be required to provide a
free digital video programming service that is at least comparable to today's
analog service.
Internet Commerce. The Internet is an increasingly significant global
medium for communications, content and commerce. The increasing functionality,
accessibility and overall usage of the Internet and online services have made
them an attractive commercial medium. The Internet and other online services are
evolving into an alternative sales and marketing channel to retail stores,
mail-order catalogues and television shopping. Online retailers can interact
directly with customers, adjusting their featured selections, editorial
insights, shopping interfaces, pricing and visual presentations to effectively
market their products. The Company believes that the minimal cost to originate
programming on the Internet, the ability to reach and serve a large and global
group of customers electronically from a central location, and the potential for
personalized low-cost customer interaction all provide additional economic
benefits for online retailers.
The growing adoption of the Internet represents a significant
opportunity for businesses to conduct commerce over the Internet. The Internet
allows companies to develop one-to-one relationships with customers worldwide
without making significant investments in traditional infrastructure, such as
retail outlets, distribution networks and sales personnel.
Increases in consumer purchases on the Internet are expected to be a
significant factor in the growth of electronic commerce. The online shopping
experience offers convenience to the consumer. An online consumer's ability to
comparison shop is greatly enhanced by the ability to access multiple retailers
via the Internet. Online shopping also offers the consumer access to vendors who
sell from larger inventories than traditional retailers. Products commonly sold
on the Internet include software, books, music, airline tickets and,
increasingly, specialty consumer products and larger household consumer goods.
Specialty Consumer and Collectible Products. The sale of specialty
consumer products, and the collectibles industry in particular, is a large and
growing segment of the retail industry. Based upon a current survey and the
average annual purchases of collectors, the Company believes that the market for
primary collectibles in the United States is at least $82 billion.
The market for collectibles includes a broad range of products which
share in common a group of consumers interested in acquiring products as
collectors' items. Collectors purchase collectibles for a variety of reasons,
including nostalgia, hobby or investment. Collectibles have traditionally been
sold through specialty retailers, each of whom sells one type, or a limited
number of types, of collectible products. As a result, the market for
collectible products is large and highly fragmented with no dominant industry
retailers.
The Company believes that traditional "brick and mortar" retailers face
a number of challenges in providing a satisfying shopping experience for
collectible products, including inventory restrictions due to physical space,
difficulties in blending merchandising strategies, a tendency to stock only high
volume inventory, in addition to building and personnel costs.
Increasingly, collectors are turning to the Internet as a source of
collectible products and information regarding collectibles.
Business Strategy
The Company's business objective is to become a leading seller of
specialty consumer products, primarily collectibles, through electronic media by
implementing the following strategies:
Increase Internet Distribution. The Company plans to increase the
distribution of its programming through the Internet. The Company plans to
launch its new website, collectibles.com, in the fall of 1999. Through the
Internet, the Company will market its products to a new audience and to an
audience which may not have access to its television programming. Since the
Company's programming is produced in a digital format, it is easy for it to use
both audio and video portions of its programming to market its products on its
website. To increase the visibility of the Company's website and expose more
potential customers to its programming, the Company will promote its website
with its television programming, and it expects to place information about its
website on high traffic portals in addition to its recent promotional
arrangements with Yahoo! and GO Network. The Company will also use traditional
media advertising to promote collectibles.com. This increased visibility will
create additional brand awareness, assisting the Company in reaching its goal of
establishing collectibles.com as the premier website for collectors.
Broaden The Company's Television Programming Reach. The Company intend
to further broaden the distribution of its programming by seeking more favorable
programming times on the broadcast television stations and cable systems on
which its programming currently appears and by entering into additional carriage
agreements with cable systems and broadcast television stations owned by third
parties. The Company may also continue to acquire broadcast television stations
in major markets on a cost-effective basis, subject to the availability of
financing to do so through additional borrowings, cash flow or the use of stock
as consideration. By owning and operating stations in select markets, the
Company can broadcast full-time programming in those markets and thereby
increase the brand awareness of its website and its quality merchandise. 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. This strategy has been impacted by a recent decision of the FCC
regarding multiple ownership of television stations. See "Recent Developments -
FCC Cross-Ownership Regulation Changes" herein.
Continue to Offer High Quality, Differentiated Product Mix. The Company
plans to continue pursuing its strategy of selling products such as sports
memorabilia, coins and other collectible products, some of which are no readily
available through other television programming, Internet or retail competitors.
The Company believes its emphasis on selling higher priced, exclusive and
authenticated merchandise creates a unique market niche. This enhances its
ability to obtain carriage from cable systems and television broadcasters and
establish relationships with Internet portals.
Improve Profit Margins. As the Company's website sales increase as a
percentage of the Company's total sales, the expenses associated with such
increased sales can be contained through the use of technological efficiencies
which will offer the opportunity to improve its profit margins. The Company also
plans to improve profit margins by taking advantage of its purchasing power to
negotiate lower wholesale prices with vendors and spreading fixed charges over
an increased sales base. The Company will continue to optimize inventory levels
through a combination of methods which allows it to operate with minimal working
capital requirements, thereby further enhancing margins.
Leverage Customer Database. The Company's new integrated computer
system, which should be operational by the end of 1999, will permit it to better
manage its existing customer database in order to profile and track the
purchasing habits of its customers. This use of the database will enable it to
refine its merchandising decisions to maximize viewer interest by evaluating the
historical purchasing preferences of customers. The Company's new sales systems
will enable it to utilize this information in real time to offer customers
additional products which are complementary to the products they purchase. By
combining the Company's database with its Internet capabilities and its new
integrated computer system, the Company will be able to identify particular
products which coincide with customer purchasing profiles. The Company would
then be able to provide e-mail notices to customer about purchasing the
products. Additionally, the Company's sales systems allow call center operators
to market merchandise to its customers on an out-bound basis.
Develop Alternative Sources of Revenue. The Company believes there are
several opportunities to establish complementary sources of revenue, including:
(1) the sale of advertising on the Company's website; (2) the introduction of an
out-bound telemarketing program; and (3) the sale of additional products through
direct marketing and package insert programs.
Recent Developments
collectibles.com
Website development. The Company is making a significant investment in
the development of its new website, collectibles.com. The Company plans to
launch this website in the fall of 1999, and it intends for collectibles.com to
offer the most diverse selection of collectible products on the Internet, using
advanced multimedia content, including streaming video and audio. Given that a
significant portion of the Company's revenues are derived from the sale of
collectible merchandise, it sees this as an opportunity to generate additional
sales to the Company's existing customers and to promote its products to a
completely new audience who cannot currently view the Company's programming on
television. This investment represents a natural extension from the sale of
merchandise through means of traditional television, and it anticipates that the
Internet and its website will play an increasing role in the Company's future
growth. The Company plans to continue to cross-promote its website and its
television programming to fully take advantage of the capabilities of electronic
commerce and the Company's digital programming.
iXL. In April 1999, the Company entered into an agreement with iXL,
under which iXL has agreed to develop the collectibles.com website. Under this
agreement, the Company will pay iXL up to $3.0 million to construct and
customize the website, to create interactive interfaces, to develop software to
manage and facilitate customer transactions over the website and to provide
website marketing advice.
Internet Promotional Arrangements
Yahoo!. In April 1999, the Company entered into an agreement with
Yahoo!. According to Media Metrix, yahoo.com is the most visited website, with
approximately 32.3 million unique visitors in July 1999. Under the agreement,
the Company and Yahoo! will cross-promote each other's products and services.
The agreement, which does not require the payment of any funds from the Company
to Yahoo!, provides for:
o placement of online banner advertising featuring the Company and its
websites on Yahoo!'s websites;
o inclusion of the Company's current website and its planned website on
Yahoo!'s "Listings Page";
o links to the Company's websites from Yahoo! web pages;
o placement of the Company's logo on the Yahoo! Auction web pages;
o Yahoo!-organized auctions which feature the Company's collectible
products on Yahoo! Auction;
o products to be supplied by the Company to Yahoo! for sale on Yahoo!'s
Listing Page and the advertisement of these listings on it
television programming;
o co-sponsorship of celebrity and show host chats on Yahoo! Feature
Chats;
o broadcast of a regularly scheduled hour (the "Totally Yahoo! Hour")
during which the Company promotes and sells Yahoo!-related
products; and
o the placement of the Yahoo! logo on certain of the Company's
printed materials, the display of its logo during some of the
Company's television programming and its broadcast of commercial
spots for Yahoo!.
GO Network. In June 1999, the Company entered into an agreement with
Infoseek Corporation, the owner of the website go.com, a leading Internet
portal. GO Network has advised the Company that it has over 50 million page
views per day and over 11 million registered users. Under the agreement, the
Company will receive Gold Merchant status under the Go Shop collectibles and
jewelry departments. The Company will be one of only three Gold Merchants within
each of these departments. Benefits of Gold Merchant status include preferred
placement within the Go Shop collectibles and jewelry departments, preferred
ranking in product searches, and banner placements on the Go Shop home page.
Under the agreement, the Company will pay Infoseek a fixed fee on a monthly
basis as well as an amount equal to a percentage of the Company's revenue
attributable to sales made through the go.com website. The term of the agreement
begins on the earlier of September 30, 1999 or the launch of collectibles.com
and is for a term of one year, but either party may terminate the agreement
after 180 days upon giving 45 days notice.
Integrated Computer System
In early 1999, the Company entered into a series of agreements with
Oracle to acquire and install a new enterprise wide computer system. This
computer system includes new hardware and software and involves virtually all
aspects of the Company's business. With this integrated Oracle "enterprise
solution" computer system, the Company will be able to make more efficient use
of its call center operations, its e-mail capabilities and other methods of
contact with its customers. These agreements also provide for the installation
of the computer hardware which will be necessary to support the Company's
collectibles.com website. The estimated cost of the equipment, software and
installation is $10.0 million.
Television Station Acquisition
The Company purchased the assets of WBPT(TV), a UHF broadcast
television station located in Bridgeport, Connecticut on June 3, 1999. The
signal from this station reaches into the New York City metropolitan area, the
largest television market in the United States. The purchase price for the
station was $21.0 million of which $4.8 million was placed in an escrow account.
This account will be paid to the seller if the cable household reach of the
station increases to at least 900,000 households within six months of the date
of purchase (or 12 months in certain events). The Company has changed the call
sign of the station to WSAH. Under an agreement with the seller, the Company's
programming has been broadcast on WBPT on substantially a full-time basis since
April 3, 1999.
FCC Cross-Ownership Regulation Changes
On August 5, 1999, the 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 can own
two television stations in the same market so long as there are at least eight
individually-owned television stations in the market, and the two stations are
not both among the top four stations in the market. In addition, a company can
own single stations in adjacent markets, even if the signals of the stations
overlap one another. The FCC also voted to permit a company to own two
television stations (meeting the above requirements) and up to six radio
stations in the same market, provided there are at least 20 other radio and
television stations owned separately in the market. A company would be permitted
to own four radio stations where there are at least 10 other radio and
television stations owned separately, and would be permitted to own one radio
station notwithstanding the number of other radio and television stations.
Previously, FCC rules generally prohibited an entity from holding an
attributable interest in more than one television station with overlapping
service areas. Additionally, the FCC cross-ownership rules limited combined
local ownership of: (1) a radio station and a television station; (2) a daily
newspaper and a broadcast station; and (3) a cable television system and a
television station.
Of the six television stations owned by the Company, each is located in
markets with more than eight television stations, and none of the Company's
stations are among the top four rated stations in their markets. 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. In addition, a television
station purchaser could acquire any of the Company's stations, and not be
automatically prohibited from acquiring another station in the same 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 Yagemann Advisors
LLC, Banc of America Securities LLC and Media Venture Partners 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, it 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 televisions companies. 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 Company's 11% Senior Secured Notes due 2005 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 any additional
proceeds available for other purposes.
Distribution of Programming
The Company distributes its programming to viewers by or through:
o the Company's owned and operated television stations;
o television stations with which the Company has entered into agreements
to purchase broadcast time;
o the carriage of those television broadcasts by cable television
systems under the "must carry" or 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;
o the direct reception of the Company's satellite transmission by
individuals who own satellite dishes; and
o the Company's current website.
As of June 30, 1999, the Company's programming was viewable on
television during all or part of each day by approximately 53.5 million
individual cable households throughout North America, including DBS households.
Of these households, approximately 9.8 million households received the
programming on essentially a full-time basis (20 or more hours per day). The
Company estimates (based on a proprietary formula) that the 53.5 million cable
households that received the Company's programming for all or part of a day on
June 30, 1999, are the equivalent of approximately 18.5 million cable households
receiving such programming on a full-time basis. The Company's full-time
programming consists primarily of viewers in the San Francisco, Boston, Houston,
Cleveland, Raleigh, Bridgeport and Nashville markets. These numbers do not
include the number of persons receiving the Company's programming over satellite
downlink equipment or from over-the-air transmission of its signal.
The following table sets forth certain information with respect to the Company's
programming distribution to television cable households at June 30, 1999:
<TABLE>
<CAPTION>
Number of Hours of Programming Available to Households per Day
<S> <C> <C> <C> <C> <C> <C>
0 TO 3 3+ TO 6 6+ TO 9 9+ TO 12 OVER 12 TOTAL
------ ------- ------- -------- ------- -----
Number of Households (in millions) 5.1 26.8 4.4 4.5 12.7 53.5
</TABLE>
Programming Origination. The Company originates its programming from
its studios and technical facilities in Nashville, Tennessee. The Company
transmits its programming to transponders leased or subleased by it on
satellites. The satellites retransmit the Company's signal to (a) broadcast
television stations located throughout the United States, (b) cable television
and DBS systems and (c) satellite dish receivers.
The Company's principal satellite transponder is leased on a protected
and non-preemptible basis, which means that the provider of the service has
agreed to furnish the Company alternative service on another transponder or on
another satellite should the Company's transponder fail for any reason. Under a
Services Agreement with B & P The SpaceConnection, expiring in 2006, either
party may terminate the agreement upon the occurrence of specified defaults.
Recently, the Company has agreed with B & P to change its transponder to a more
desirable satellite and, as a result, is currently re-negotiating its service
agreement. The new agreement may contain different provisions compared to the
existing agreement with B & P.
The Company also originates programming on its website. The Company's
website, shopathomeonline.com, is fully interactive and a visitor to this
website can order a product directly from the website. The Company is now
developing a new website, collectibles.com. The Company intends for
collectibles.com to offer the most diverse selection of primary market
collectible products on the Internet, using advanced multimedia content,
including streaming video and audio. The Company has engaged the services of
Oracle, iXL and other vendors to develop a scalable platform that will allow it
to use the Company's experience with selling specialty consumer products,
especially collectibles, in real-time programming. The Company intends to
develop a community for collectors, in which they can participate in live chat
room discussions, observe product demonstrations and conduct research.
Visitors to collectibles.com will experience a personalized shopping
experience. The Company will utilize certain profiling techniques, including
collaborative filtering, to create a personalized "store" for each collector who
registers at collectibles.com. This will permit visitors to receive information
customized for their personal preferences each time they log on to the Company's
website. This technology also will be beneficial in identifying opportunities
for out-bound marketing and cross-selling within the Company's customer base.
collectibles.com will feature a locator service or search feature which
will allow visitors to search for collectible products. Each visitor will be
able to fill out a form with a description of the item needed. The information
will then be posted to an extranet to which the Company's vendors will have
access. Vendors who can fill the request will inform the Company and the
customer will be notified by the Company for the purchase.
Visitors to the Company's website will be offered a place to gather
information about collectible products through price guides and editorial
content, as well as discussions with other collectors. The Company plans to
differentiate collectibles.com from competing websites by offering unique
features, including a bonus point system that will reward visitors for
purchasing products and participating in events on the website. These points
will be redeemable for discounts on merchandise and participation in events,
such as celebrity chats or bidding on exclusive collectibles. The points system
is expected to increase repeat traffic and to develop a more loyal customer
base. The Company plans to offer gift certificates in any denomination which can
be sent to the recipient by e-mail or regular mail.
Collectibles.com will use e-mail to provide exceptional customer
service. Customers will be alerted when their packages have been shipped and
will be notified via e-mail about upcoming events, featured products, and
promotional materials. The e-mail system will also allow customers to create a
wish list that they can send to their friends and families. The e-mail will
contain an embedded link that allows the friend or family member to enter the
website at the point of product interest and purchase those items without
searching. Once a purchase has been made, the purchased item will be removed
from the list to prevent repeat purchases by multiple users. A visitor who sees
an item that may be of interest to a friend or family member can send an e-mail
message automatically. This e-mail will also contain a link back to the
collectible product on the website.
Upon the introduction of collectibles.com, the Company plans to
discontinue selling products through the shopathomeonline.com website.
Owned and Operated Stations. The following table sets forth certain
information regarding each of the broadcast stations owned by the Company:
<TABLE>
<CAPTION>
Actual cable Households
DMA Households(1) Reached (2)
---------------------------- ------------------------------
License (In Thousands) (In Thousands)
Date DMA Expiration Rank of Broadcast When
Call Sign Acquired Market Date DMA Television Cable Acquired June 30, 1999
- ----------- ---------- -------------- ---------- --------- ----------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WSAH 6/99 New York(3) 4/2007 1 6,813(3) 4,907(3) 680 680
KCNS 3/98 San Francisco 12/2000 5 2,369 1,690 1,229 1,268
WMFP 2/95 Boston 4/2007 6 2,186 1,727 750 1,573
KZJL 12/94(4) Houston 8/2006 11 1,666 850 3 736
WOAC 3/98 Cleveland 10/2005 13 1,476 1,038 205 690
WRAY 3/98 Raleigh 12/2004 29 834 520 331 381
</TABLE>
(1) Total number of broadcast television households in the DMA in January 1999
according to Nielsen Media Research and total number of cable households in the
DMA in September 1998 according to Nielsen Media Research.
(2) The increase is due to the enforcement of the must carry rights of these
stations and, in some instances, is due to the installation of new broadcast
equipment.
(3) While WSAH, Bridgeport, Connecticut, is inside the New York DMA, the station
only covers a portion of the market.
(4) The Company acquired a 49% interest in KZJL in December 1994 and the
remaining 51% in September 1996. The station went on the air in June 1995 and
has always broadcast the Company's programming. The "When Acquired" cable
household number reflects the fact that the Company had only a nominal amount of
cable carriage when the station went on the air.
Affiliations. In 1993, the Company began an aggressive effort to
increase the distribution of its programming. Since that time, the Company has
been successful in significantly building a "network" for distribution of its
programming and in building relationships with television stations owned by
third parties and certain owners of multiple cable systems. The Company's
programming is now viewed in more than 135 television markets, including all of
the country's top ten DMAs.
The Company's affiliation agreements typically have a term of one year
and can be canceled upon 30 days 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, it will generally seek to
renegotiate the carriage rate or not renew the agreement.
Products and Customers
Products and Merchandise. The Company offers a variety of specialty
consumer products. Its products include sports collectibles and sports related
products, movie memorabilia and other signed and autographed merchandise,
electronic equipment, coins and currency, cutlery and knives, jewelry and
gemstones. A majority of these items are be classified as collectible products.
The Company buys products from numerous vendors and believes that it
has excellent relationships with most of its vendors. Certain products sold by
the Company are available through multiple suppliers. The Company also acquires
unique products from a select group of vendors and believes that it will be able
to continue to identify sources of specialty products. The Company believes
offering unique products helps differentiate it from its competitors. Because of
the nature of the collectibles market, the Company attempts to sign agreements
with vendors in which it is the exclusive distributor of the vendor's products.
The Company continually monitors product sales and revises its product offerings
in an effort to maintain an attractive and profitable product mix. The Company
also is continuously evaluating new products and vendors to broaden its
merchandise selection.
During the year ended June 30, 1999, the Company had three vendors from
whom it purchased more than 10% of its total cost of goods sold. These consisted
of an electronics vendor, a coin vendor and a sports vendor which accounted for
approximately 11.2%, 10.7% and 10.3% of the Company's cost of goods sold,
respectively. The Company believes that it could find replacement vendors for
the products sold by these vendors without a material adverse effect on the
Company.
The following table sets forth certain information about the types of
products sold by the Company during the years ended June 30, 1999, 1998 and
1997: <TABLE> <CAPTION>
Type of Product Percentage of Net Revenues
- --------------------------------------------- ----------------------------------------------------------------
1999 1998 1997
-------------------- ----------------- -------------------
<S> <C> <C> <C>
Sports Products 28.8 % 22.3 % 43.1 %
Plush Toys 19.5 22.2 0.6
Electronics 16.6 11.5 2.7
Coins and Currency 12.7 11.8 14.0
Jewelry and Gemstones 11.4 12.9 15.2
Cutlery and Knives 6.5 13.4 15.2
Health and Beauty Products 2.4 2.0 6.7
Other Items 2.1 3.9 2.5
Total 100.0 % 100.0 % 100.0 %
</TABLE>
Programming and Presentation of Merchandise. The Company segments most
of its programming into product or theme categories. It has the studio and
broadcasting capability to produce multiple live shows simultaneously, and it
occasionally provides multiple broadcasts to differing viewer groups during peak
viewing times. In the past, the Company has provided one full-time live
broadcast on its main satellite transponder and part-time live, taped or
simulcast broadcasts on two satellite transponders leased from ESPN. The new
Nashville facilities allow it to broadcast an analog and digital signal to the
Company's main satellite transponder in the same transmission signal. The
Company is able to provide specific products to specific television markets by
utilizing its multiple broadcast capabilities to take advantage of sales trends.
The Company plans to archive its digital programming and replay the programming
on its website so that visitors to the website can download any portion of the
video or audio programming they desire.
The Company can use its digital programming to enhance the presentation
of its merchandise on the website. The Company believes having its programming
available on its website will create one of the most advanced multimedia
environments of any retailer on the Internet. The availability of the
programming on its websites will provide visitors with a more comprehensive feel
for the products than visitors might receive from a simple picture and written
description.
The Company's programs use a show host approach with the host conveying
information about the products and demonstrating their use. The viewer may
purchase any product the Company offers, subject to availability. The Company
seeks to differentiate itself from other televised shopping programmers by using
an informal, personal style of presentation and by offering unique, high-end
products with a heavy emphasis on sports and sports related products. The sale
of coins, collectible sports-related items and other limited availability
products provides the Company's viewers with alternatives to the products
offered on other televised shopping programming.
Returns of Products and Merchandise. The Company generally offers its
customers a full refund on merchandise returned within 30 days of the date of
purchase. For the year ended June 30, 1999, returns were 18.0% of total revenue,
compared to 22.0% for the year ended June 30, 1998 and 22.2% for the year ended
June 30, 1997. The Company believes its return percentage compares favorably
with those of its broadcast-based competitors in the industry.
Shipping. The Company ships customer orders as promptly as possible
after taking the order, primarily by UPS, Federal Express, or parcel post. The
Company ships either from its warehouse facility or through selected vendors
with which it has drop-ship agreements. The Company maintains its own customer
service department to address customer inquiries about ship dates, product, and
billing information. When operational, the Company believes its new integrated
computer system will be able to track a customer's order from the time the order
is placed until the time the order is delivered to the customer's door.
Customer Relations. Customers can place orders with the Company 24
hours a day, seven days a week, over the Internet or via the Company's toll-free
number (800) 366-4010. The Company uses customer sales representatives and an
automated touch-tone ordering system to accept customer orders. A majority of
its customers pay for their purchases by credit card, and the Company also
accepts payment by money order, personal check, certified check, debit card and
wire transfer. The Company recently developed and implemented an in-house
training program designed to improve the productivity, proficiency and product
knowledge of its call center operators.
Mechanical, electronic and other items may be covered by manufacturer
warranties. The Company sells extended warranties on some products. It strives
to continuously improve its customer service and utilize outside agencies to
conduct objective comparisons with its competitors. The Company periodically
surveys and researches its customers to solicit ideas for better products,
programming, and service.
Collector's Edge. In March 1997, Collector's Edge was organized as one
of the Company's wholly-owned subsidiaries. Collector's Edge sells sports
trading cards, primarily football cards. Its principal assets are licenses from
National Football League Properties, Inc. and the National Football League
Players, Incorporated. 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 the NFL licensing agreements and
produced the sports trading cards for a period of four years. For the year ended
June 30, 1999, Collector's Edge had net revenues of approximately $9.6 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. The
licensing agreement with NFL Properties expires on March 31, 2000. The licensing
agreement with NFL Players gives Collector's Edge the right to use the
likenesses of NFL players on its trading cards. This three-year license expires
on February 28, 2000. The Company expects these licenses to be renewed in the
ordinary course of business.
Collector's Edge produces football cards generally during the
professional football season (September to February), but it sells the cards on
a year-round basis. Collector's Edge previously permitted purchasers to return
unsold trading cards for full credit upon notice from Collector's Edge that it
would accept the return. Collector's Edge recently changed its return policy and
now limits the amount of product eligible for return.
Seasonality. The Company's business is somewhat seasonal, with its
sales made in the last quarter of the calendar year normally being the highest
for the year and the sales made in the first quarter of the calendar year being
the lowest.
Competition
Competition in Television Commerce. The television commerce industry is
highly competitive and is dominated by The Home Shopping Network and the QVC
Network. The Company's programming competes directly with The Home Shopping
Network, QVC Network, ValueVision and other home shopping networks in almost all
of its markets. The Home Shopping Network and QVC Network are well-established
and have substantially greater financial, distribution and marketing resources
than the Company. They also reach a 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 its programming is often not
carried by cable systems on a full-time basis and that it may have less
desirable television channel positions on cable systems. The Company also
competes generally with traditional store and catalogue retailers, many of whom
also have substantially greater financial, distribution and marketing resources.
These competitors also may enter into business combinations, joint ventures and
strategic alliances with each other, as well as with Internet retailers or
websites which could further enhance their resources.
Competition in Internet Retailing. Internet commerce is also highly
competitive. Many major retailers and marketers now sell their products on the
Internet. Barriers to entry are very low, and new websites can be launched with
commercially available software and relatively low capital investment. Further,
many Internet retailers sell their products below cost in order to attract more
visitors to their websites which they in turn use to receive more favorable
terms on the sale of advertising space on their websites. This
business-to-consumer Internet retail industry is in its infancy and the effect
these competitors may have on the Company's business is difficult to predict.
Employees
As of June 30, 1999, the Company employed approximately 462 persons of
which approximately 348 were full-time employees. It believes its relationship
with its employees is good. Presently, no collective bargaining agreements exist
between the Company and its employees.
Technology
Integrated "Enterprise Solution" Computer System. The Company is in the
process of upgrading its computer platform with an enterprise wide system
designed by Oracle that will enhance each of its existing computer systems. This
new integrated system will interface with the Company's telephone center
operations, its websites, e-mail and any vendors with which it has electronic
data exchange capabilities. The Company believes that integrating its computer
systems will permit it to reduce certain costs that support sales. The
integrated system will permit it to improve its communications with and provide
more information to its customers, to its telephone operators and to management.
This system should be operational by the end of 1999.
The Oracle system is being built using two fully redundant Sun
Microsystems E5500 database servers running an EMC Symmetrical model 3830 disk
subsystem. The disk system is configured with 400 gigabytes of usable disk space
that is mirrored twice. Total disk space is one terabyte expandable to three
terabytes.
Production. The Company completed the construction of its new Nashville
television studios and technical facilities and moved its headquarters to
Nashville in September 1998. Compared to its previous facilities in Knoxville,
Tennessee, these studios include improved lighting, sets and camera equipment
which provide a better picture to the network of distributors of the Company's
programming. The video systems include digital processing and distribution
throughout the facilities, digital video recorders (tape and disc) and
state-of-the-art monitors. The Company has also implemented new operational
procedures to raise the production values of its programming. These include
better planning and review of the programs, storing video and graphic elements
for later recall, and providing a quality control point that is staffed 24 hours
a day.
Distribution. In order to distribute the Company's programming, its new
facilities have two new satellite uplink transmission systems. These systems
provide powerful, clear programming to its affiliates. These are configured in a
way that provides maximum redundancy for the primary network channel (any of
four transmitters feeding either of two satellite dishes) while permitting
secondary program feeds for other uses. The Company is also able to distribute
its programming over its Internet website.
Call Center. The Company has an Aspect Telecommunications Corporation
call center telephone system. The system integrates the Company's database with
universal caller ID capability and reduces the time necessary to process calls.
The system can now manage over 200 operators and is scalable so that the Company
can handle an increase in call volume. This telephone system has features that
permit frequent callers to receive priority so that they do not wait to speak
with one of the Company's operators. Once the integrated computer system is
operational, the telephone system will interact with the Company's customer
database so that an operator can view the purchasing history of the caller while
speaking with the customer and will receive a pop-up screen for order entry and
customer service. The integrated computer system will be able to search the
Company's customer database for the purchasing habits of its customers and
provide the operator with information on other products that may be of interest
to the caller.
Payment and Shipping. The Company's operations, including customer
ordering, inventory control, credit card processing and check verification are
fully automated, with real-time authorizations at the point of order. Many of
the Company's vendors are connected online through an electronic data
interchange program, which embraces the Company's strategy of having products
drop-shipped by vendors where economically feasible.
Internet Architecture. The Company's system has been designed around
industry standard architectures to provide for a reliable, scalable electronic
commerce platform. The system is fully hosted at the Company's facilities in
Nashville. The Company uses commercially available, licensed technologies and
software. The Company has two Sun Microsystems 450 Internet servers. The
facilities provide redundant T-3 communications lines delivered to the
facilities on a Sonnet ring. The servers are supported by back-up power
generators. The Company's collectibles.com website will be able to handle one
million transactions per day and 3,000 visitors simultaneously. The website will
be fully integrated into the Company's current customer relationship management
system. The Company currently provides on shopathomeonline.com a constantly
refreshing picture of the current item being offered on television programming,
along with streaming audio of the programming so that a visitor can listen to
television programming in real time through the website. The Company's new
website will be designed to include streaming video of its programming.
ITEM 2. PROPERTIES
The Company's technical facilities, studios and executive offices are
located in a 74,000 square foot building it owns in Nashville, Tennessee.
The Company has recently leased approximately 9,200 square feet in an
office building adjacent to its Nashville facilities in which it plans to locate
personnel and equipment associated with its Internet operations. The adjacent
office building is owned by an entity controlled by J.D. Clinton, who is the
Chairman of the Board and a principal shareholder of the Company. The terms of
the lease are comparable to those available in similar facilities in the area
where they are located.
Each of the Company's owned television stations has studio, office and
transmitter facilities, all of which are leased. Collector's Edge leases a
10,000 square foot facility in Denver, Colorado, which it uses for offices,
production and warehousing.
ITEM 3. LEGAL PROCEEDINGS
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 declaratory 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 Company's trademark and requesting compensatory and injunctive
relief. 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. The Company believes that the
likelihood of Signature preventing it from using the designation of "SHOP AT
HOME" for its television programming or of Signature recovering damages for such
use, is remote. The parties have held mediation proceedings in an effort to
settle this matter, and such settlement efforts are ongoing.
On May 20, 1999 McDonald's Corporation filed a lawsuit against the
Company and one of the Company's vendors in the Federal District Court in
Nashville, Tennessee. McDonald's alleges violations of the federal Lanham Act
and state law, and seeks injuctive relief, monetary damages and punitive damages
arising from the Company's sale of toys referred to as McDonald's Teenie Beanie
Babies. On May 28, 1999, the Court held a hearing on McDonald's request that the
Company be enjoined from shipping toys the Company had previously sold. The
Court denied McDonald's request, finding that McDonald's had failed to
demonstrate a substantial likelihood of succeeding on the merits. McDonald's has
continued to pursue its lawsuit and the Company has filed an answer to the
allegations and plans to vigorously pursue the defense of the matter.
The Company is subject to routine litigation arising out of the normal
and ordinary operation of its business. The Company believes that any
litigation, other than the litigation concerning its name, is covered by
insurance or will not have a material adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 28, 1999 the Company held a special meeting of its
shareholders. The meeting was called for the purpose of voting on an amendment
to its Charter increasing the number of authorized shares of common stock from
30,000,000 to 100,000,000. The amendment was approved by the following vote:
Votes for 21,491,486
Votes against 495,404
Abstentions 26,975
<PAGE>
PART II
ITEM 5. MARKET FOR SHOP AT HOME'S COMMON STOCK
The Company's common stock was quoted in the Nasdaq SmallCap Market
from June 1995 until February 9, 1999. Since February 9, 1999, the Company's
common stock has been quoted in the Nasdaq National Market under the symbol
"SATH".
The range of market prices for the Company's common stock during the
two most recent fiscal years, as reported by Nasdaq's SmallCap Market and
National Market, are shown below. Through the second quarter of fiscal 1999, the
range shown is the high and low bid prices as reported by the SmallCap Market.
For the third quarter of fiscal 1999, the high and low prices were determined by
comparing the high and low bid prices in the SmallCap Market for the period of
January 1, 1999 through February 9, 1999 with the high and low closing prices on
the National Market for the period of February 10, 1999 through March 31, 1999
and recording the highest and lowest of those prices. For the fourth quarter of
fiscal 1999, the prices shown are the high and low closing prices on the
National Market. <TABLE> <CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL 1998
First Quarter $ 4.13 $ 2.50
Second Quarter 4.69 3.63
Third Quarter 4.44 2.94
Fourth Quarter 4.00 3.00
FISCAL 1999
First Quarter 3.81 1.88
Second Quarter 10.69 1.88
Third Quarter 30.00 7.12
Fourth Quarter 14.88 7.62
</TABLE>
As of August 26, 1999, there were approximately 684 record owners of
the common stock.
The Company has not declared or paid any dividends on its common stock
in the last two fiscal years and does not anticipate declaring or paying any
dividends in the foreseeable future. Any future determination as to the
declaration and payment of dividends will be made at the discretion of the
Company's Board of Directors and will depend on then existing conditions,
including its financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and such other factors as
the Board of Directors deems relevant. The terms of the Indenture of Trust which
the Company entered into in March 1998 in connection with its issuance of the
11% Senior Secured Notes due 2005 ("Notes") restricts its ability to pay
dividends. Under the restriction, the Company cannot pay cash dividends as long
as the Notes are outstanding, unles it meets certain financial ratios as
specified in the Indenture.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Company's consolidated financial statements
and notes thereto included elsewhere herein. The statements of operations and
balance sheet data set forth below as of and for each of the five years in the
period ended June 30, 1999 are derived from the audited financial statements of
the Company.
For factors affecting the comparability of Selected Financial Data, refer to
Item 7.
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data and ratios)
Statements of Operations Data:
Net revenues $ 151,966 $ 100,757 $ 68,998 $40,675 $ 26,976
Cost of goods sold (excluding other
operating expenses and non-
recurring move related expenses) 91,816 58,862 40,626 24,516 17,121
Other operating expenses 56,430 38,069 25,882 16,930 11,010
Non-recurring move related expenses(1) 986 - - - -
Other expense (income) 65 (900) - (43) (89)
Interest income 643 564 66 14 -
Interest expense 8,964 2,850 1,080 795 216
-------------------------------------------------------------------------------
Income (loss) before income taxes (5,652) 2,440 (1,509) (1,282)
1,476
Income tax expense (benefit) (2,348) 927 (104) -
(80)
===============================================================================
Net income (loss) $ (3,304) $ 1,513 $ 1,556 (1,405) (1,282)
===============================================================================
Weighted average common
shares - basic 23,771 14,511 10,651 10,284 9,437
Weighted average common
shares - dilutive 23,771 17,496 14,268 10,284 9,437
Basic earnings (loss) per share (2) $ (0.14) $ 0.10 $ 0.14 $ (0.14) $ (0.14)
Diluted earnings (loss) per share (2) $ (0.14) $ 0.09 $ 0.12 $ (0.14) $ (0.14)
Cash dividends per share of
common stock $ - $ - $ - $ - $ -
Balance sheet data
Working capital $(17,646) $ 11,568 $ (4,642) $ (3,707) $(4,621)
Total assets 170,697 143,770 34,410 20,287 18,157
Current liabilities 48,364 19,212 18,078 8,981 7,367
Long-term debt and capital leases, less
current portion 75,893 75,254 11,135 7,805 6,865
Redeemable preferred stock 834 1,393 1,393 1,405
1,393
Stockholders' equity 45,297 44,360 2,108 2,520
3,804
</TABLE>
(1) these expenses relate mainly to employee relocation, rental of temporary
facilities, the grand opening of Shop At Home's Nashville headquarters and
employee bonuses associated with the relocation.
(2) for details of the calculation of basic and dilutive earnings per share,
see Note 12 to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" and the Company's consolidated financial
statements and related notes included elsewhere herein.
General
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, many 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 whom the Company has purchased broadcast time;
o the Company's television stations, with its 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;
o direct reception of the Company's satellite transmission by individuals who
own satellite downlink equipment; and
o the Company's website.
An increasing portion of the Company's revenues is received from the
sale of its merchandise through its website, shopathomeonline.com, although such
revenues have not been material to date.
Approximately 93.7% of the Company's revenues are derived 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, jewelry and gemstones. Beginning in 1997, the
Company has also received revenues from sales by its subsidiary, Collector's
Edge of Tennessee, Inc. Collector's Edge sells sports trading cards under
licenses from National Football League Properties, Inc. and National Football
League Players, Incorporated. Additionally, the Company receives revenues from
the sale of broadcast time on its owned television stations for the broadcast of
infomercials.
As of June 30, 1999, the Company's programming was viewable during all
or part of each day by approximately 53.5 million individual cable households,
of which approximately 9.8 million cable households received the programming on
essentially a full-time basis (20 or more hours per day) and the remaining 43.7
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 from 5.4, 8.3 and
15.3 million at June 30, 1996, 1997, and 1998 respectively, to 18.5 million at
June 30, 1999. The Company believes that the change in the number of FTE Cable
Household 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, Shop At Home normally receives less revenue from sales in the market
than it will expect to receive when the market matures. Shop At Home's
programming is received on more than one channel in many households. Shop At
Home has found that its 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 13 television markets in the United
States, including the Bridgeport, Connecticut station which serves a portion of
the New York City metropolitan area 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. Carriage costs have increased in recent periods and the Company
expects this trend will continue as it enters new markets and expands the number
of households and viewable hours for its programming. Carriage costs have also
increased because of general increases in the rates charged for carriage.
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.
Overview of Results of Operations
The following table sets forth for the periods indicated the percentage
relationship to net revenues of certain items included in the Company's
Statements of Operations: <TABLE> <CAPTION>
Year Ended June 30,
<S> <C> <C> <C>
1999 1998 1997
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold (excluding items listed below) 60.4 58.4 58.8
Salaries and wages 7.0 7.4 8.1
Transponder and cable charges 17.3 17.7 17.6
Other general operating and administrative expenses 9.7 10.6 10.3
Depreciation and amortization 3.2 2.2 1.5
Non-recurring move-related expenses 0.6 - -
Interest income 0.4 0.6 0.1
Interest expense 5.9 2.8 1.6
Other income - 0.9 -
Income (loss) before income taxes (3.7) 2.4 2.2
Income tax expense (benefit) (1.5) 0.9 (0.1)
Net income (loss) (2.2) 1.5 2.3
</TABLE>
Results of Operations
Fiscal Year 1999 vs. Fiscal Year 1998
Net Revenues. Shop At Home's net revenues for the year ended June 30,
1999 were $152.0 million, an increase of 50.8% over net revenues of $100.8
million for the year ended June 30, 1998. The core business of sales through
electronic media accounted for 93.7% of net revenues derived from an average of
16.6 million FTE Cable Households in the year ended June 30, 1999 compared to an
average of 11.1 million FTE Cable Households for the year ended June 30, 1998.
During the year ended June 30, 1999, Shop At Home generated revenues per FTE
Cable Household of approximately $9.16 compared with approximately $9.09 per FTE
Cable Household for the year ended June 30, 1998. The increase is mainly
attributable to a greater contribution from the non-broadcast business. The
remaining 6.3% of net revenues resulted from approximately $9.6 million in net
revenues from Collector's Edge.
Also included in net revenues was infomercial income generated by Shop
At Home's broadcast operations in the Boston, Houston, Cleveland, San Francisco,
Raleigh and Bridgeport markets, of $1.9 million compared to approximately $1.4
million in the year ended June 30, 1998. This represents a 35.7% increase and is
primarily due to Shop At Home's ownership of five stations during most of 1999,
and six by June 1999, compared to the prior year in which it owned two stations
for the first nine months and five stations for the last three months of fiscal
1998. Shop At Home also sold approximately $0.3 million of broadcast time to
certain vendors during the year ended June 30, 1998, but did not continue this
practice in the year ended June 30, 1999.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and inbound freight. For the year ended June 30, 1999, the cost of
goods sold as a percentage of net revenues increased to 60.4% from 58.4% for the
year ended June 30, 1998. This increase is mainly due to a greater percentage of
sales of lower-margin product categories, electronics and coins, which
collectively represented approximately 29.4% of revenues for the year ended June
30, 1999 compared to 23.3% of revenues for the year ended June 30, 1998.
Salaries and Wages. Salaries and wages for the year ended June 30, 1999
were $10.6 million, an increase of 42.8% compared to the year ended June 30,
1998. Salaries and wages as a percent of revenues decreased to 7.0% from 7.4%
reflecting the increase in revenues without a corresponding increase in
salaries. In addition, during fiscal 1999, $0.9 million of salaries were
capitalized as a result of the company-wide installation of the Oracle system
and the development of the collectibles.com website.
Transponder and Cable. Transponder and cable costs for the year ended
June 30, 1999 were $26.3 million, an increase of $8.5 million or 48.0% compared
to the year ended June 30, 1998. The cable component of this expense category
was 16.1% in 1999 and 16.2% for 1998. The 1999 period reflects the reduction of
cable costs of KCNS, San Francisco, and WRAY, Raleigh, which were acquired in
March 1998 and therefore not included in the 1999 period. Overall, the increase
in cable costs outpaced the increase in revenues as a result of approximately
1.9 million FTEs added in the quarter ended June 30, 1999, many of which had not
matured.
Other General Operating and Administrative Expenses. Other general
operating and administrative expenses for the year ended June 30, 1999 were
$14.6 million, an increase of $3.9 million or 36.4% compared to the year ended
June 30, 1998. As a percentage of revenues, this constituted a decrease to 9.7%
in 1999 from 10.6% in 1998 and was attributable to a number of factors,
including lower legal and consulting expenses and operating supplies.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 1999 was $4.9 million, an increase of $2.7 million or 125.6%
compared to the year ended June 30, 1998. The largest part of this increase was
the full year of amortization expense on the three television stations acquired
in March 1998 and sepreciation of the new building and related contents that
were acquired September 1998.
Move-Related Expenses. Move-related expenses were approximately $1.0
million in the year ended June 30, 1999 and there was no comparable expense in
the previous year. These expenses primarily relate to employee relocation,
rental of temporary facilities, the grand opening of Shop At Home's Nashville
headquarters and employee bonuses associated with the relocation.
Interest Expense. Interest expense for the year ended June 30, 1999,
was $9.0 million, an increase of $6.1 million over the year ended June 30, 1998.
The increase was primarily due to the full year effect of the issuance in March
1998 of $75.0 million of 11% Senior Secured Notes due 2005.
Interest Income. Interest income for the year ended June 30, 1999, was
$0.6 million. This income was primarily due to the investment of cash.
Other Income. There was minimal other income for the year ended June
30, 1999 while the year ended June 30, 1998 included a one-time $900 thousand
gain on the sale of Shop At Home's contractual right to acquire a Knoxville
television station.
Income Tax (Benefit) Expense. Income tax (benefit) for the year ended
June 30, 1999 was provided at an effective tax rate of 41.5%.
Fiscal 1998 vs. Fiscal 1997
Net Revenues. Shop At Home's net revenues for the year ended June 30,
1998, were $100.7 million, an increase of $31.8 million or 46.0% over the year
ended June 30, 1997. The increase was primarily attributable to the addition of
approximately 6.7 million FTE Cable Households over the year resulting in a
total of 15.3 million FTE Cable Households at the end of June 1998. For the year
ended June 30, 1998, Shop At Home generated revenues per household of
approximately $9.09 on an average of 11.1 million FTE Cable Households compared
with sales of approximately $10.25 per household on an average of 6.6 million
FTE Cable Households in fiscal 1997. The rapid addition of new households
outpaced the accompanying revenue growth, resulting in lower 1998 sales per
household than 1997. The increase in households is attributable mainly to the
addition of approximately 4.0 million FTE Cable Households and approximately 1.0
million additional FTE Cable Households for the last quarter of fiscal 1998
related to the acquisition of KCNS in San Francisco, California, WRAY in
Raleigh, North Carolina and WOAC in Cleveland, Ohio. In addition, Collector's
Edge contributed approximately $5.3 million in sales during fiscal 1998. Shop At
Home also generated $1.4 million in infomercial revenue from WMFP in Boston and
KZJL in Houston for the year ended June 30, 1998, representing a 40% increase
over the year ended June 30, 1997. This was the result of more active sales of
infomercial time at KZJL and WMFP. No infomercial income was generated from the
newly acquired KCNS, WRAY or WOAC stations during the year.
Cost of Goods Sold. For the fiscal year ended June 30, 1998, the cost
of goods sold decreased slightly to 58.4% from 58.8% as a percentage of sales in
the year ended June 30, 1997. This improvement was attributable to Shop At
Home's ability to leverage its purchasing power due to increased sales,
resulting in lower costs in most categories, especially the sports product line.
Salaries and Wages. Salaries and wages for the year ended June 30, 1998
were $7.4 million, an increase of $1.9 million or 33.8% over the year ended June
30, 1997, which was primarily attributable to the broadening of executive and
technical staffs necessary for the future growth of Shop At Home and variable
labor costs associated with the higher volume of customer calls. Salaries and
wages decreased as a percentage of sales to 7.4% from 8.1%.
Transponder and Cable. Transponder and cable costs for the year ended
June 30, 1998 were $17.8 million, an increase of $5.6 million or 46.6% over the
year ended June 30, 1997. Carriage costs, expressed as a percentage of revenues,
did not change significantly. This was a result Shop At Home's efforts to
control this expense in line with a target of 15% of sales.
Other General Operating and Administrative Expenses. Other general
operating and administrative expenses for the year ended June 30, 1998 were
$10.7 million, an increase of $3.5 million or 49.3% over the year ended June 30,
1997. The major components of this increase were $0.7 million of additional
credit card fees, and general increases related to the increase in sales volume.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 1998 were $2.2 million, an increase of $1.1 million or
107.0% over the year ended June 30, 1997. This increase was a combination of
additional amortization related to the added license cost for KCNS, WRAY and
WOAC of approximately $0.5 million and an increase of approximately $0.4 million
in amortization of licenses held by Collector's Edge, which did not exist in the
prior year.
Interest Expense. Interest expense for the year ended June 30, 1998 was
$2.9 million, an increase of $1.8 million or 163.9% over the year ended June 30,
1997. The increase was due to the interest expense associated with $75.0 million
of 11% Senior Secured Notes due 2005 which Shop At Home issued in March 1998.
Interest Income. Interest income for the year ended June 30, 1998 was
$0.6 million. This income was primarily due to the investment of cash.
Income Tax (Benefit) Expense. Income tax expense for the year ended
June 30, 1998 was approximately $0.9 million, which represented an effective tax
rate of 38%.
Liquidity and Capital Resources
As of June 30, 1999, Shop At Home had total current assets of $30.7
million and total current liabilities of $48.4 million, resulting in a negative
working capital position of $17.7 million. This represents a $29.2 million
reduction from the working capital position at the end of the prior year. The
major components of the decrease were: (1) the borrowing of $20.0 million on a
short-term basis to acquire the assets of the Bridgeport station with the
acquired assets classified as non-current and (2) expenditures of approximately
$14.1 million to purchase property, plant and equipment offset by approximately
$2.8 million from the exercise of options and warrants.
In July 1999, Shop At Home's working capital position increased by
$44.3 million from the net proceeds of the public offering of 5,828,000 shares
of common stock. The Company used $20.0 million, including $0.6 million of
restricted cash to pay off the short term loan relating to the acquisition of
the assets of the Bridgeport station with the balance available to develop,
launch and promote the collectibles.com website and the installation of a new
computer system.
During the year ended June 30, 1999, Shop At Home used approximately
$0.9 million for operations. The major components of this net use were the loss
of $3.3 million, which included non-cash items of a $2.3 million decrease in net
deferred tax liabilities, offset by $4.9 million in depreciation and
amortization. In addition, Shop At Home used approximately $5.7 million to
support a higher level of receivables, primarily as a result of Shop At Home
offering a greater number of products on installment payments and an increase in
revenues from Collector's; and $3.4 million to carry higher inventory levels,
primarily sports and jewelry products. Approximately $7.3 million was provided
from operations in the form of increased accounts payable and accrued expenses.
Shop At Home used approximately $35.1 million for investing activities.
Approximately $14.1 million was expended on the completion of the Nashville
facilities, including furniture and fixtures and operating equipment at that
location, and on the transmitter upgrades to KCNS in San Francisco and WRAY in
Raleigh. Shop At Home also purchased the assets of the Bridgeport station on
June 3, 1999 for $21.0 million of which $14.8 million was allocated to license
cost, $1.4 million to fixed assets and $4.8 million to restricted cash pending
completion of contractual terms.
Approximately $21.8 million was provided to Shop At Home from financing
activities during the year ended June 30, 1999. The principal source was a
bridge loan of $20.0 million, for the purchase of the assets of the Bridgeport
station, and $2.8 million from the sale of options and warrants which were
offset in part by approximately $0.5 million of debt repayments and
approximately $0.2 million to repurchase 90,300 shares of common stock.
Approximately 85% of Shop At Home's receipts are customer credit card
charges, most of which are collected within three days of shipment. This
facilitates cash flow since Shop At Home usually pays its vendors within 30 days
and, as a result, Shop At Home 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.
Shop At Home intends to launch its new website, collectibles.com, in
the fall of 1999. Upon launch of collectibles.com, the Company intends to
discontinue selling products through shopathomeonline.com. To develop this
website, 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 provide all of
the interface between the site and the consumer. It is anticipated that the
total cost of these agreements will approximate $13.0 million, approximately
$6.4 million of which has already been incurred. After collectibles.com is
operational, working capital will be required to promote and develop the website
in order to generate sales.
Additional financing may be necessary to operate the Company's business
in the near future. The Indenture associated with the Notes 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.
Shop At Home expects to negotiate a 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 can own two television stations in the same
market so long as there are more than eight television stations 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 are among the top four rated stations in their markets. 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 Yagemann Advisors
LLC, Banc of America Securities LLC and Media Venture Partners 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."
Shop At Home intends to become year 2000 compliant through systems
replacement and believes existing capital budgets are adequate for any remaining
hardware and software replacements.
Shop At Home is supported by redundant IBM RS6000 computers, each of
which communicates directly with its year 2000 compliant backup disk system. The
AIX operating system currently in use is 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 systems, and
the Company is currently testing the Y2K compliance patch to Windows NT.
Additionally, Shop At Home'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, the Internet web server and a
software program utilized by the human resources department are being remediated
through the replacement of the telephone voice response system and the
installation of the new Oracle computer system.
A year 2000 committee has been established and part of its task is to
review businesses outside of Shop At Home whose systems are electronically
linked to the Company. Shop At Home 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. Shop At Home is investigating material vendors and suppliers to
identify any non-compliance issues.
The Company has incurred approximately $5.8 million on new computer
hardware and systems to date. Most of the primary computer systems are being
replaced either as part of the Y2K compliance program or in order 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.
To implement the computer conversion, Shop At Home entered into
agreements with its vendors. The computer system provided by the vendors will be
Y2K compliant and will provide an integrated computer system for Shop At Home's
business processes. The enterprise wide system is expected to be installed and
operational by the end of 1999.
To date the Company has substantially completed the review of its
critical internal hardware and software systems, has identified those vendors
which warrant further examination for potential problems and has mailed
inquiries to those vendors as to their compliance. The Company has also
identified and corrected internal problems and begun evaluation of the responses
to questionnaires sent to suppliers, and has begun testing its internal systems
and contingency planning. The following is the timetable for Shop At Home's year
2000 compliance effort during the remainder of 1999:
August........complete contingency planning. begin contingency testing;
continue the internal Oracle implementation of new hardware and
software.
September.....continue contingency testing; complete software upgrades and
testing on all network PC's.
October.......complete all evaluation and testing; review all portions of Y2K
documentation.
The worst case scenario for Shop At Home 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.
Recent Accounting Pronouncements
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 Company adopted the
Statement for the fiscal year ending June 30, 1999. The adoption had no effect
as Shop At Home 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
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement was
adopted with the June 30, 1999 fiscal year financial statements and will impact
interim reporting beginning with the quarter ending September 30, 1999. Shop At
Home determined that its reportable segments are the same as previously
disclosed, although expanded disclosures were required under provisions of the
standard.
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for financial statements for years beginning after
December 15, 1998. SOP 98-1 provides guidance on accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company adopted
the provisions of SOP 98-1 in its fiscal year ending June 30, 1999. The adoption
of this statement resulted in $5.0 million of capitalized software costs and $80
thousand of expensed training costs.
ITEM 7A. 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 $7.1 million as of June 30, 1999. These funds are generally
invested in highly liquid debt instruments with short-term maturities. As such
instruments mature and the funds are re-invested, the Company is exposed to
changes in market interest rates. This risk is not considered material and the
Company manages such risk by continuing to evaluate the best investment rates
available for short-term high quality investments.
The Company is not exposed to market risk through 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Accountants 33
Consolidated Balance Sheets at June 30, 1999 and June 30, 1998 34-55
Consolidated Statements of Operations for the years ended June 30, 1999,
June 30, 1998, and June 30, 1997 36
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1999, June 30, 1998, and June 30, 1997 37
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, June 30, 1998, and June 30, 1997 38-39
Notes to Consolidated Financial Statements 40-60
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Shop At Home, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing on page 32 present fairly, in all material respects, the financial
position of Shop At Home, Inc. and its subsidiaries at June 30, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1999 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14 (a)(2) on page 63 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these financial statements and financial statement
schedule in accordance with generally accepted auditing standards, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Nashville, Tennessee
August 27, 1999
<PAGE>
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
June 30,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,066 $ 21,224
Restricted cash 5,433 -
Accounts receivable - trade, net 8,969 3,830
Inventories, net 7,234 4,332
Prepaid expenses 919 404
Deferred tax assets 1,097 990
------------------ -----------------
Total current assets 30,718 30,780
NOTE RECEIVABLE-RELATED PARTY, net
of unamortized discount of $96 and $134
for 1999 and 1998, respectively 690 660
PROPERTY and EQUIPMENT, net 35,403 20,557
LICENSES, net of accumulated amortization of $4,646 and
$2,479 for 1999 and 1998, respectively 97,020 84,831
GOODWILL, net of accumulated amortization of $353 and $188
for 1999 and 1998, respectively 2,367 2,532
OTHER ASSETS 4,499 4,410
------------------ -----------------
TOTAL ASSETS $ 170,697 $ 143,770
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
----------------------------------------------------------
1999 1998
------------------------ -----------------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion - capital leases $ 298 $ 161
Loan payable 20,000 -
Accounts payable - trade 15,511 9,016
Accounts payable - related party - 12
Credits due to customers 3,069 3,987
Other payables and accrued expenses 9,375 5,769
Deferred revenue 111 267
------------------------ -----------------------
Total current liabilities 48,364 19,212
LONG-TERM LIABILITIES
Capital leases 893 254
Long-term debt 75,000 75,000
Deferred income taxes 309 3,551
REDEEMABLE PREFERRED STOCK
$10 par value, 1,000,000 shares authorized,
82,038 and 137,943 issued and outstanding in
1999 and 1998, respectively - redeemable at 834 1,393
$10 per share plus unpaid dividends accrued
COMMITMENTS (NOTES 4, 5, 6, 9, 10,13, and 17)
STOCKHOLDERS' EQUITY
Common stock - $.0025 par value,
100,000,000 and 30,000,000 shares authorized
in 1999 and 1998, respectively; 24,557,822 and
23,313,191 shares issued and outstanding in
1999 and 1998, respectively 61 58
Additional paid in capital 53,317 49,079
Accumulated deficit (8,081) (4,777)
------------------------ -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 170,697 $ 143,770
======================== =======================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
NET REVENUES $ 151,966 $ 100,757 $ 68,998
COST OF GOODS SOLD (excluding items 91,816 58,862 40,626
listed below)
Salaries and wages 10,636 7,446 5,564
Transponder and cable charges 26,303 17,768 12,118
Other general operating and
administrative expenses 14,555 10,667 7,143
Depreciation and amortization 4,936 2,188 1,057
Non-recurring move-related expenses 986 - -
------------------ ------------------ -----------------
Total operating expenses 149,232 96,931 66,508
------------------ ------------------ -----------------
INCOME FROM OPERATIONS 2,734 3,826 2,490
------------------ ------------------ -----------------
OTHER INCOME (EXPENSE)
Interest income 643 564 66
Interest expense (8,964) (2,850) (1,080)
Other income (expense) (65) 900 -
------------------ ------------------ -----------------
Total other income (expense)
(8,386) (1,386) (1,014)
------------------ ------------------ -----------------
INCOME (LOSS) BEFORE INCOME TAXES (5,652) 2,440 1,476
INCOME TAX EXPENSE (BENEFIT) (2,348) 927 (80)
------------------ ------------------ -----------------
NET INCOME (LOSS) $ (3,304) $ 1,513 $ 1,556
================== ================== =================
BASIC EARNINGS (LOSS) PER SHARE $ (.14) $ .10 $ .14
================== ================== =================
DILUTED EARNINGS (LOSS) PER SHARE $ (.14) $ .09 $ .12
================== ================== =================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1999, 1998 and 1997 (In
thousands, except share data)
Additional
Common Paid-In Accumulated
Stock Capital Deficit
------------------ ------------------ -----------------
<S> <C> <C> <C>
Balance, June 30, 1996 (10,575,255 shares) $ 26 $ 9,928 $ (7,846)
Exercise of stock options (100,000 shares) 1 100 -
Exercise of employee stock options
(20,000 shares) - 20 -
Issuance of common stock in payment of
payable obligations (19,159 shares) - 33 -
Preferred stock dividend accrued - (14) -
Net income - - 1,556
------------------ ------------------ -----------------
Balance, June 30, 1997 (10,714,414 shares) 27 10,067 (6,290)
Exercise of stock warrants (200,000 shares) 1 226 -
Exercise of employee stock options
(454,600 shares) 1 506 -
Issuance of common stock in payment of a
note (444,177 shares) - net 1 1,190 -
Preferred stock dividend accrued - (14) -
Tax benefit of non-qualified stock options - 245 -
Issuance of 11,500,000 shares in connection
with public offering, net of offering costs 28 36,859 -
Net income - - 1,513
------------------ ------------------ -----------------
Balance, June 30, 1998 (23,313,191 shares) 58 49,079 (4,777)
Issuance of 11,226 shares in consideration of personal -
guaranty - 40
Purchase and retirement of 90,300 shares - (203) -
Preferred stock dividend accrued - (14) -
Exercise of 350,000 warrants 1 419 -
Exercise of 600,000 options 1 1,499 -
Exercise of 317,800 employee stock options 1 921 -
Conversion of 55,905 shares of preferred stock - 559 -
Tax benefit of non-qualified stock options - 1,017 -
Net loss - - (3,304)
------------------ ------------------ -----------------
Balance, June 30, 1999 (24,557,822 shares) $ 61 $ 53,317 $ (8,081)
================== ================== =================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Years Ended June 30,
-------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- ------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,304) $ 1,513 $ 1,556
Gain on sale of contractual right - (900) -
Non-cash items included in net income (loss):
Depreciation and amortization 4,936 2,188 1,057
(Gain)/loss on sale of equipment 65 - 3
Deferred income taxes (2,332) 290
(80)
Deferred interest expense (30) (32) -
Provision for inventory obsolescence 602
78 710
Provision for bad debt 561 188
59
Amortization of debt issuance costs 543 143 -
Changes in current and non-current items:
Accounts receivable (5,700) (1,003) (2,968)
Inventories (3,504) (1,318) (1,361)
Prepaid expenses and other assets 95 755 (241)
Accounts payable and accrued expenses 7,297 3,512 8,915
Deferred revenue (156) 159 (1,405)
-------------------- ------------------- ------------------
Net cash (used) provided by operations (927) 5,573 6,245
-------------------- ------------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Note receivable-related party - (800) -
Proceeds from note receivable-related party - 12 -
Cash payments for acquisitions (543)
- (1,838)
Restricted cash (5,433) -
-
Purchase of property and equipment (14,101)
(16,800) (1,056)
Proceeds from sale of equipment 69
Cash payment for other assets (262) (330)
(1,857)
Proceeds from sale of contractual right - 900 -
Purchase of licenses (14,807) (72,635) -
-------------------- ------------------- ------------------
Net cash used by investing activities (35,077) (89,653) (4,751)
-------------------- ------------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Purchase and retirement common stock (203) - -
Payment of dividends (14) (14) (14)
Exercise of stock options/warrants 2,842 734 120
Common stock issued - 40,250 -
Repayments of debt and capital leases (495) (11,551) (1,356)
Proceeds of long term debt and loan payable 20,000 78,000 2,919
Payment of stock issuance costs (284) (3,363) -
Payment of debt issuance costs - (3,830) -
-------------------- ------------------- ------------------
Net cash provided by financing activities 21,846 100,226 1,669
-------------------- ------------------- ------------------
NET INCREASE/(DECREASE) IN CASH (14,158) 16,146 3,163
Cash beginning of period 21,224 5,078 1,915
-------------------- ------------------- ------------------
Cash end of period $ 7,066 $ 21,224 $ 5,078
==================== =================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, except share data)
Years Ended June 30,
-------------------------------------------------------
1999 1998 1997
------------------ ---------------- ----------------
<S> <C> <C> <C>
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Accrued liability for purchase of equipment $ 1,874 $ - $ -
------------------ ---------------- ----------------
Tax effect qualified stock options $ 1,017 $ 245 $ -
------------------ ---------------- ----------------
Stock issued for loan guaranty $ 40 $ - $ -
------------------ ---------------- ----------------
Conversion of 55,905 shares of preferred stock into common $ 559 $ - $ -
------------------ ---------------- ----------------
Stock issued for inventory and reduction
of accounts payable $ - $ - $ 33
------------------ ---------------- ----------------
Cost of equipment purchased through
capital lease obligation $ 1,271 $ 326 $ 437
------------------ ---------------- ----------------
Notes payable issued for acquisitions
of BCST and MFP, Inc. $ - $ - $ 1,400
------------------ ---------------- ----------------
Stock issued in connection with retirement
of debt (144,177 shares) $ - $ 1,190 $ -
------------------ ---------------- ----------------
Accrued preferred stock dividend $ 14 $ 14 $ 14
------------------ ---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 8,711 $ 857 $ 998
------------------ ---------------- ----------------
Taxes $ $ 432 $ 140
-
------------------ ---------------- ----------------
.
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SHOP AT HOME, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. All dollar values in tables and the financial
statements and footnotes have been expressed in (000s) except for share and per
share data.
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"), SAH Acquisition Corporation II ("SAH
Acquisition II"), SAH Acquisition Corporation ("SAH AQ") and Partners - SATH
L.L.C. ("Partners"), (collectively the "Company"). 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.
MFP operates a commercial television station, WMFP, Channel 62, serving
the Boston television market area. MFP also operates a commercial TV station,
WSAH, channel 43, serving a portion of the New York City market area. The assets
of WSAH were acquired in June 1999.
Collector's, formed in February 1997, is a trading card wholesaler whose
main assets are licenses from National Football League Properties, Inc. and
National Football League Players, Incorporated.
SAH Acquisition II operates three commercial television stations: KCNS,
Channel 38, serving the San Francisco television market area; WOAC, Channel 67,
serving the Cleveland television market area and; WRAY, Channel 30, serving the
Raleigh-Durham television market area, all of which were acquired on March 27,
1998. SAH Acquisition II's principal asset consists of its ownership in the
respective television licenses.
Partners owns real property located at 5388 Hickory Hollow Parkway,
Antioch, Tennessee, the Company's headquarters and broadcasting facility. The
real property is Partners' only asset. SAH AQ's principal asset is a 1%
membership in Partners.
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 one year or less to be cash equivalents.
Restricted Cash. Restricted cash represents cash held in escrow of
$4,800 for final settlement of the purchase of assets of WSAH Bridgeport (Note
16) and $600 of cash held for future interest due on the $20,000 short-term
bridge loan (Note 5).
Accounts Receivable--Trade. The Company has reduced accounts receivable
to the net realizable value through recording allowances for doubtful accounts.
At June 30, 1999 and 1998, the Company had recorded allowances of $543, and
$535, respectively.
Inventories. Inventories, which consist primarily of products held for
sale such as jewelry, electronics and sports collectibles, are stated at the
lower of cos 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.
Collector's Inventories. The Collector's inventories of sports cards
represent all of the contract manufacturing costs associated with each release.
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.
On major construction projects requiring a number of months to complete, such as
the construction of the Nashville headquarters, the Company's policy is to
capitalize the interest associated with these projects until completion.
Depreciation is computed under straight-line methods over the estimated
useful lives of the assets as reflected in the following table:
Furniture and fixtures 7 Years
Software costs 3 Years
Operating equipment 5-15 Years
Leasehold improvements 3-15 Years
Building 40 Years
FCC Licenses for Television Stations. During June 1999, the Company
through its subsidiary MFP, Inc., acquired one FCC television license. During
fiscal 1998, the Company through its subsidiary, SAH Acquisition II, acquired
three FCC licenses for television stations and in fiscal 1995 the Company
acquired two subsidiaries that owned FCC television licenses. Although FCC
television licenses are granted for eight-year periods, they are required to be
renewed by the FCC unless (1) the holder has seriously violated the
Telecommuntication's Act or FCC rules and regulations; (2) failed to serve the
public interest, convenience, and necessity, or (3) followed a pattern of abuse
in violation of FCC rules and regulations. Accordingly, FCC licenses are
historically renewed for indefinite periods of time giving them indefinite
lives. Given the indeterminate lives afforded by the licensing process and the
historical appreciation in value of the license, the Company determined that a
life of 40 years would be appropriate. Amortization of these licenses was
$2,133, $773 and $307 for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
The Company has allocated the purchase price of its 1998 and prior
acquisitions based upon independent appraisals. In each of the appraisals of
broadcast properties, with the exception of WMFP-Boston, the fair value of the
property including the intangible license was in excess of the purchase price,
and accordingly, resulted in no goodwill. The appraisal of WMFP-Boston resulted
in the recording of some goodwill. The Company has allocated the purchase price
of WSAH, based on an estimate in relation to the appraisals of the 1998
acquisitions.
NFL Licenses. In fiscal year 1997, the Company formed Collector's, a
wholly owned subsidiary engaged in the business of selling sports trading cards
under licenses with National Football League Players, Incorporated and National
Football League Properties, Inc. The value ascribed to these licenses in
connection with their acquisition by Collector's is being amortized over the
contract life of three years. Amortization of these licenses was $485, $479 and
$162 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
Goodwill. Goodwill is amortized over 40 years, using the straight-line
method. The amortization period for goodwill was determined based on the
rationale developed to assign lives to the FCC licenses. Goodwill recorded in
connection with the acquisitions of WMFP and the assets of Collector's represent
the excess purchase price over the fair value of the net identifiable assets
acquired. The amount of goodwill for WMFP was determined by independent
appraisal. Goodwill for Collector's was determined by reference to the fair
values of net assets acquired and further supported by established business
relationships which represent future revenue streams. Goodwill amortization
amounted to $165, $112 and $61 for fiscal years ended June 30, 1999, 1998 and
1997, respectively. Management periodically evaluates the net realizability of
the carrying amount of goodwill.
Debt Issue Costs. The Company has $3,121 and $3,643 as of June 30, 1999
and 1998 of debt issuance costs recorded as other assets. These deferred costs
relate to the issuance of the $75,000 of Senior Secured Notes and are being
amortized over the life of the Notes, 7 years. The amortization of $543 and $143
for the fiscal year ended June 30, 1999 and 1998, respectively, has been
recorded as additional interest expense.
Sales Returns. The Company generally allows customers to return
merchandise for full credit or refund within 30 days from the date of receipt.
Collector's sells to wholesalers and retailers; terms of sale and return
privileges are negotiated on an individual basis. At June 30, 1999 and 1998, the
Company had recorded credits due to customers of $3,069 and $3,987,
respectively, for actual and 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), wholesale sales of collectible sports
cards 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.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and inbound freight costs.
Income Taxes. The Company files a consolidated federal income tax return
with its subsidiaries. The Company files separate or consolidated state returns
as required by each jurisdiction. The Company determines deferred tax assets and
liabilities based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Earnings (Loss) Per Share. Statement of Financial Accounting Standards
No. 128, Earnings Per Share requires the presentation of basic and diluted EPS.
Basic earnings (loss) per share is computed by dividing net income (loss)
available for common shareholders by the weighted average number of shares of
common stock outstanding. Diluted earnings (loss) per share is computed by
dividing adjusted net income (loss) by the weighted average number of shares of
common stock and assumed conversions of dilutive securities outstanding during
the respective periods. Dilutive securities represented by options, warrants,
redeemable preferred stock and convertible debt outstanding have been included
in the computation except in periods where such inclusion would be
anti-dilutive. The Company uses the treasury stock method for calculating the
dilutive effect of options and warrants and the if converted method with respect
to the effect of convertible securities.
Use of Estimates. The preparation of the financial statements in
conformity with 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.
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 requires
recognition of impairment losses for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses recognized is based on the
difference between the fair values and the carrying amounts of the assets. SFAS
121 also requires that long-lived assets held for sale be reported at the lower
of carrying amount or fair value less cost to sell. The Company has not
experienced such 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 equals 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 Note 11.
Recent Accounting Pronouncements. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. The Statement establishes standard for
reporting comprehensive income and its components in a full set of financial
statements. The Company adopted the Statement for the fiscal year ending June
30, 1999. The adoption had no effect as Shop At Home 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
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement was
adopted for the June 30, 1999 fiscal year financial statements and will impact
interim reporting beginning with the quarter ending September 30, 1999. Shop At
Home determined that its reportable segments are the same as previously
disclosed, although expanded disclosures were required under provisions of the
standard.
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for financial statements for the years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company adopted
the provisions of SOP 98-1 in its fiscal year ending June 30, 1999. The adoption
of this statement resulted in $5,026 of capitalized software costs, which is
included in construction in progress at June 30, 1999, and $80 of expensed
training costs.
Reclassifications. Certain amounts in the prior years' consolidated
financial statements have been reclassified for comparative purposes to conform
with the current year presentation.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following major classifications:
<TABLE>
<CAPTION>
June 30,
1999 1998
---- ----
<S> <C> <C>
Leasehold improvements $ 144 $ 346
Building 11,651 -
Operating equipment 17,352 10,666
Software 861 628
Furniture and fixtures 2,310 201
Construction in progress 5,026 10,185
Land 1,250 1,250
------------------ ----------------
38,594 23,276
Accumulated depreciation (3,191) (2,719)
------------------ ----------------
Property and equipment, net $ 35,403 $ 20,557
================== ================
</TABLE>
Depreciation expense totaled $2,145 and $824 for the fiscal years ended
June 30, 1999 and 1998, respectively. Interest capitalized amounted to $399 and
$273 for the year ended June 30, 1999 and 1998, respectively.
NOTE 3 -- INVENTORY
The components of inventory at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
June 30,
1999 1998
---- ----
<S> <C> <C>
Work in progress(Collector's) $ 795 $ 166
Products purchased for resale 5,570 4,095
Finished goods (Collector's) 1,173 92
--------------- ---------------
7,538 4,353
Valuation allowance (304) (21)
--------------- ---------------
Total $ 7,234 $ 4,332
=============== ===============
</TABLE>
NOTE 4 -- CAPITAL LEASES
The Company has acquired various equipment under the provisions of
long-term capital leases.
Future minimum lease payments under capitalized leases are as follows at
June 30, 1999:
2000 $404
2001 404
2002 496
2003 71
2004 47
Thereafter -
----------------
Total minimum lease payments 1,422
Less amount representing interest (231)
----------------
Present value of minimum lease payments 1,191
Less current portion (298)
----------------
Long-term portion $ 893
================
The cost of the assets under these leases is approximately $1,271 and no
depreciation had been taken on these assets as of June 30, 1999 since they have
not yet been placed in service. NOTE 5 -- INDEBTEDNESS
Issuance of $75,000 of 11% Senior Secured Notes
In March 1998, the Company issued $75,000 of 11% Senior Secured Notes
Due 2005 ("Notes"). Interest on the Notes is payable semi-annually on April 1
and October 1 of each year. The Notes are not redeemable at any time prior to
April 1, 2002. On or after April 1, 2002, the Notes will be redeemable at the
option of the Company, in whole or in part, at the redemption prices, plus
accrued and unpaid interest, if any, to the date of redemption. Upon the
occurrence of a change of control, holders 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 are 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 are also secured by a lien on all of
the issued and outstanding capital stock of MFP, Inc., the owner and operator of
WMFP(TV) in Boston and WSAH(TV) in Bridgeport, BCST (parent of UBS) and UBS, the
owner and operator of KZJL(TV) in Houston (the "Other Broadcast Subsidiaries").
In addition, the obligations of the Company under the Notes are jointly and
severally guaranteed on a senior basis by each of the Company's subsidiaries.
The Indenture restricts the Company from incurring additional
indebtedness in excess of $20,000, which indebtedness 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. The indenture also
restricts the Company's ability to issue preferred stock, incur liens, pay
dividends, make certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other person, issue or sell stock of
subsidiaries, or sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company or encumber the assets of the
Company or its subsidiaries.
Short Term $20,000 Bridge Loan
The Company secured a $20,000 bridge loan at a 10% interest rate in
June 1999. The proceeds were used on June 3, 1999 in the acquisition of the
assets of WBPT (TV)(now WSAH) in Bridgeport. The loan was subsequently repaid in
July 1999 from proceeds of a public stock offering (Note 20).
NOTE 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.
The Company originally issued 140,000 shares of preferred stock, $10.00
par value. 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. 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 has the option to require the
Company to redeem their shares, after five 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, 1999 and 1998 the Company was $14 in arrears on its
dividend payments due. These dividend payments are payable only when declared by
the Board of Directors.
NOTE 7 -- COMMON STOCK
In April 1999, the Company's shareholders approved an amendment to its
charter which increased the number of authorized shares of common stock to 100
million from 30 million.
The Company's Board of Directors approved the authorization of 30
million shares of nonvoting common stock which was approved by shareholders at
the Annual Meeting held in March 1998. There are no shares issued for this class
of stock.
In March 1998, the Company issued a total of 11.5 million shares
(including the underwriters over-allotment of 1.5 million shares) of $.0025 par
value common stock at $3.50 per share. A significant portion of the proceeds of
this common stock issuance, in conjunction with the debt issuance discussed in
Note 5, were used in the acquisition of three television stations (Note 15) and
acquisition, construction and equipping of the new Nashville headquarters and
broadcast facility.
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
net of $143 of deferred interest. The conversion price of $3.00 per share was in
excess of the $2.50 market value of the stock at the time the note was issued.
This note was being amortized in monthly installments of $43 and was due
September 2000. The conversion of this note reduced interest expense by
approximately $75 in the fiscal year ending June 30, 1998.
The terms of the Indenture of Trust which the Company entered into in
March 1998 in connection with its issuance of the 11% Senior Secured Notes due
2005 ("Notes") restricts its ability to pay dividends. Under the restriction,
the Company cannot pay cash dividends as long as the Notes are outstanding,
unles it meets certain financial ratios as specified in the Indenture.
With respect to restrictions on the Company's ability to obtain funds from
its subsidiaries, under Tennessee law a corporation may not pay a cash dividend
if, after giving it effect, (1) the corporation would not be able to pay its
debts as they become due in the usual course of business, or (2) the
corporation's total assets would be less that the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
NOTE 8 -- INCOME TAXES
The components of temporary differences and the approximate tax effects
at June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
June 30,
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
and AMT credits $ 5,918 $ 919
Accruals 1,097 990
------------------- ------------------
Total deferred tax assets $ 7,015 $ 1,909
------------------- ------------------
Deferred tax liabilities:
Licenses and intangibles 5,253 3,945
Depreciation 974 525
------------------- ------------------
Total deferred tax liabilities 6,227 4,470
------------------- ------------------
Net deferred tax assets (liabilities) $ 788 $ (2,561)
=================== ==================
Current deferred tax assets $ 1,097 $ 990
Long-term deferred tax liabilities (309) (3,551)
------------------- ------------------
Net deferred tax assets (liabilities) $ 788 $ (2,561)
=================== ==================
</TABLE>
At June 30, 1999 the Company had $95 of AMT credits available for use in
future periods in addition to $15,324 of net operating loss carryforward, which
begin to expire in 2010.
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>
Years Ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) $ (1,921) $ 830 $ 502
Increase (decrease) in income taxes
Resulting from:
State income tax expense (benefit), net
of federal effect (224) 98 74
Change in valuation allowance - - (1,043)
Nondeductible portion of meals
and entertainment 45 38 17
Other (248) (39) 370
---------------- ---------------- ----------------
Actual income tax expense (benefit) $ (2,348) $ 927 $ (80)
================ ================ ================
</TABLE>
The components of income tax expense (benefit) for the years ended June
30, 1999, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
State $ (16) $ 101 $ -
Federal - 536 -
-------------- -------------- ---------------
$ (16) 637 -
-------------- -------------- ---------------
Deferred:
State (577) 46 74
Federal (1,755) 244 (154)
-------------- -------------- ---------------
(2,332) 290 (80)
-------------- -------------- ---------------
Total expense (benefit) $ (2,348) $ 927 $ ( 80)
============== ============== ===============
</TABLE>
The Company has allocated deferred tax benefits directly to additional
paid in capital for the years ended June 30, 1999 and 1998 of $1,017 and $245,
respectively. These amounts reflect the tax benefit received from the exercise
and disqualifing dispositions by employees of qualified stock options.
In connection with the acquisition of BCST, in 1997, the Company
reduced the valuation allowance for deferred tax assets by $189, 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.
Specific factors considered by management included a return to
profitable operations that had been created by a change in strategic direction
implemented by the relatively new ownership and management team. Strategic
actions included acquisition of broadcast properties to take advantage of "must
carry" statutes to increase coverage in major metropolitan markets such as
Boston and Houston, and the use of cable affiliations to expand coverage in
other major markets. Further, emphasis was placed on selling product that
yielded a higher margins. The combination of these factors produced a
significant increase in sales and it is anticipated that this momentum would
continue into future years.
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.
NOTE 9 - COMMITMENTS
Oracle. In early 1999, the Company entered into a series of agreements
with Oracle and other vendors to acquire and install a new enterprise wide
computer system. This computer system includes new hardware and software and
involves virtually all aspects of the Company's business. These agreements also
provide for the installation of the computer hardware which will be necessary to
support the Company's collectibles.com website. The estimated cost of the
equipment, software and installation is $10 million of which approximately $6.2
million has been incurred at June 30, 1999.
iXL. In April 1999, the Company entered into an agreement with iXL, and
other vendors under which they have agreed to develop the collectibles.com
website. Under this agreement, the Company will pay up to $3 million to
construct and customize the website, to create interactive interfaces, to
develop software to manage and facilitate customer transactions over the website
and to provide website marketing advice.
Transponder Use Agreement and Purchased Air-Time. In December 1995, the
Company's transponder lease with Space Connection 402R became effective. Shop At
Home has contracted for a "Fully Protected" service which provides that the
services shall be "non-preemptible" on the same transponder; or, if that is not
possible, then on a transponder on the same satellite; and, if that is not
possible, then on a satellite of similar quality and location. The expenses for
the transponder and purchased air time (primarily for cable access fees) were
$26,303, $17,768, and $12,118, for fiscal years ended June 30, 1999, 1998 and
1997, respectively. The Company has recently agreed to change its transponder to
a more desirable satellite, and is currently re-negotiating its transponder
lease.
Royalty Commitments. Collector's has minimum contractual commitments to
National Football League Players, Inc. and National Football League Properties,
Incorporated, in addition to other minor licensors which are in the normal
course of its business. The commitments at June 30, 1999, approximate $1,500,
which will expire during fiscal 2000.
Lease Commitments. Rental expense for the office and studio and
miscellaneous equipment was $1,096, $840 and $529 for the fiscal years ended
June 30, 1999, 1998 and 1997, respectively, which includes the Company's
Knoxville office and studio space leased from an entity owned by a director of
the Company. Payments under this lease totaled $82, $149 and $140, in the fiscal
years ended June 30, 1999, 1998 and 1997, respectively.
Future minimum lease payments of noncancelable operating losses are as
follows at June 30, 1999:
2000 $ 2,555
2001 2,527
2002 2,493
2003 2,384
2004 2,221
Thereafter 1,086
The Company has agreements with various affiliated television and cable
system operators to purchase air time. The terms of the agreements vary from
week-to-week to one year periods and are generally cancelable on 30 days notice.
NOTE 10 -- RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30 1999 and 1998, the Company engaged
in some related party transactions in the normal course of business, none of
which exceeded $25 thousand in total except, as described below.
The Company leased its Knoxville office and studio space from William
and Warren, Inc., and entity owned by W. Paul Cowell, a director of the Company
until December 2, 1998, and paid total lease payments of approximately $82, $149
and $140 during the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Management of the Company determined that these terms and
conditions were competitive with comparable commercial space being leased in the
Knoxville market. With the relocation of its offices and studios to Nashville,
Tennessee, the Company terminated this lease in January, 1999.
On August 16, 1995, the Company issued its $2,000 Variable Rate
Convertible Secured Note Due 2000 to Global Network Television, Inc. J.D.
Clinton, a director and principal shareholder of the Company, is the sole
shareholder and Chairman of Global Network Television (now Gatehouse Equity
Management Corporation). The loan carried interest at the prime rate plus 2%,
and was payable in 60 monthly installments. 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. On October 1, 1997, the note was transferred to
FBR Private Equity Fund, L.P., which immediately converted the note to 444,177
shares of common stock of the Company.
In September 1998, the Company relocated its studios and headquarters to
newly constructed facilities in Nashville, Tennessee. The real property for the
new facility was initially acquired by a limited liability company organized by
individuals related to J.D. Clinton, and that company obtained a construction
loan (the "Facility Loan") in January 1998 from a commercial lender to build the
facility. The loan was guaranteed by Shop At Home and also was personally
guaranteed by Mr. Clinton. The Company agreed to pay to Mr. Clinton an annual
fee equal to 1% of the amount of the Facility Loan in consideration for Mr.
Clinton's guaranty, which was to be payable in either cash or in stock of the
Company. In March 1998, the Company acquired the facility by acquiring all of
the ownership interest in the limited liability company for a price equal to the
balance due on the Facility Loan, thereby generating no profits for the owners
of the limited liability company. The Company paid the Facility Loan in full
upon the acquisition of the limited liability company, thereby terminating Mr.
Clinton's guaranty. As a result of the agreement to pay a fee to Mr. Clinton for
his guaranty, the Company issued to Mr. Clinton a total of 11,226 shares of
Common Stock.
In connection with the relocation of the primary residence of Kent E.
Lillie, President of the Company, from Atlanta, Georgia, to Nashville,
Tennessee, the Company made an interest-free loan to Mr. Lillie in the principal
amount of $800. This loan is repayable from a portion of any bonuses paid to Mr.
Lillie by the Company. As of June 30, 1999, a total of $14 of the principal
balance of the note had been repaid. The note is payable in full on June 30,
2002.
In February 1995, the Company entered into a financing lease transaction
with Brownsville Auto Leasing Corporation whereby the Company leased the
transmitter for WMFP(TV). The monthly principal payments on the lease were $10
and the outstanding balance on the lease at December 31, 1997, was $350. James
P. Clinton, the brother of J.D. Clinton, was a principal of Brownsville Auto
Leasing Corporation. This financing transaction was terminated in April 1998,
when the Company acquired the transmitter from the lessor at the price agreed
upon in the lease agreement.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
In 1999 the Company's Board of Directors adopted the 1999 Employee
Stock Option Plan which provides for the issuance of up to three million shares
of common stock. Shareholder ratification is still pending.
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 SARs 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 SARs 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.
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- --------------------------- -------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
---------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(3,304) $ (3,603) $ 1,513 $ 1,385 $ 1,556 $ 1,466
Basic earnings (loss) per share $ (.14) $ (.15) $ .10 $ .09 $ .14 $ .14
Diluted earnings (loss) per share $ (.14) $ (.15) $ .09 $ .08 $ .12 $ .11
</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 years ended June 30, 1999, 1998
and 1997, respectively: dividend yield of 0%; expected volatility of 76%, 65%
and 65%; risk-free interest rate of 4.5%, 5.5% and 6.0%; and expected life of
7.5 years.
A summary of the status of the Company's options as of June 30, 1999,
1998 and 1997 and changes during the periods ending on those dates is presented
below: <TABLE> <CAPTION>
June 30,
1999 1998 1997
---------------------------- ----------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise ExercisePrice
Options Price Options Price Options
-------------- ----------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period: 2,379,000 $ 2.51 2,192,500 $ 2.20 1,785,000 $ 2.01
Granted 1,143,000 10.02 698,000 3.40 639,500(1) 2.88
Exercised (917,800) 2.47 (454,600) 1.10 (120,000) 1.00
Forfeited (155,000) 3.90 (56,900) 2.88 (112,000) 2.81
-------------- -------------- -----------
Outstanding at end of period 2,449,200 $ 6.14 2,379,000 $ 2.51 2,192,500 $ 2.20
Options exercisable at period
end 901,800 1,175,000 1,493,500
Weighted average fair value of
options granted during the
year $ 7.78 $ 2.61 $ 2.04
</TABLE>
1) Effective June 19, 1997, the option committee repriced all fiscal year
1997 options to $2.88 with the same terms and conditions. The options
as modified have been used in all applicable computations.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
WeightedAverage
Remaining WeightedAverage WeightedAverage
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
Range of Exercise Prices at 6/30/99 at 6/30/99
- -------------------------------- -------------- --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.99 200,000 4 years $ 1.00 200,000 $ 1.00
$2.00 - $2.99 930,200 8 years 2.84 445,600 2.86
$3.00 - $4.99 387,000 7 years 3.55 56,200 3.71
$5.00 - $5.99 8,000 10 years 5.25 - -
$6.00 - $6.99 70,000 5 years 6.97 70,000 6.97
$7.00 - $9.99 46,000 10 years 8.93 - -
$10.00 - $11.99 569,000 10 years 11.70 100,000 11.81
$12.00 - $13.99 239,000 10 years 13.20 30,000 13.00
-------------- ---------------
2,449,200 901,800
============== ===============
</TABLE>
At June 30, 1999, warrants to purchase 2,650,000 shares of common stock
at $1.29 per share are outstanding. These warrants expire June 30, 2001.
NOTE 12 -- EARNINGS (LOSS) 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>
Years Ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (3,304) $ 1,513 $ 1,556
Preferred stock dividends ( 14) (14) (14)
------------- ------------- --------------
Numerator for basic earnings per
share-income (loss) available to
common stockholders (3,318) 1,499 1,542
Effect of dilutive securities:
Preferred stock dividends 14 14 14
Interest on convertible debt - 50 175
============= ============= ==============
Numerator for diluted earnings per
share-income available to
common stockholders after
assumed conversions $(3,304) $ 1,563 $ 1,731
============= ============= ==============
Denominator:
Denominator for basic earnings per
share-weighted-average shares 23,771 14,511 10,651
Effect of dilutive securities:
a) Employee stock options - 436 528
b) Non employee options - 204 150
c) Warrants - 2,088 2,268
d) Convertible preferred stock - 138 138
e) Convertible debt - 119 533
------------- ------------- --------------
Denominator for diluted earnings per
Share-adjusted weighted-average
Shares and assumed conversions 23,771 17,496 14,268
============= ============= ==============
Basic earnings (loss) per share $ (.14) $ .10 $ .14
============= ============= ==============
Diluted earnings (loss) per share $ (.14) $ .09 $ .12
============= ============= ==============
</TABLE>
Although the amounts are excluded from the computations in loss years because
their inclusion would be anti-dilutive they are shown here for informational and
comparative purposes only:
<TABLE>
<S> <C> <C> <C>
a) Employee stock options 1,184 - -
b) Non Employee options 239 - -
c) Warrants 2,389 - -
d) Convertible preferrred stock 121 - -
</TABLE>
NOTE 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 1999, 1998 and 1997, the Company did not make contributions to the plan.
As of July 1, 1999, the Company has elected to match in the form of company
stock a portion of the employee's contribution up to a maximum of 2.5% of the
employee's annual contribution.
NOTE 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.
NOTE 15 -- ACQUISITION BY SAH ACQUISITION CORPORATION II
On March 27, 1998, SAH Acquisition Corporation II, a wholly-owned
subsidiary of the Company, acquired the assets and broadcast licenses of
television stations KCNS, San Francisco, California; WRAY, Wilson, North
Carolina (Raleigh market); and WOAC, Canton, Ohio (Cleveland market). The
stations were purchased pursuant to an Asset Purchase Agreement dated September
23, 1997 between Global Broadcasting Systems, Inc., and its affiliate ("Global
Broadcasting") and SAH Acquisition II. Under the agreement, Global Broadcasting
agreed to sell KCNS and WRAY to SAH Acquisition II and to assign to SAH
Acquisition II the right to purchase WOAC under a contract which Global
Broadcasting had with a third party. The total purchase price paid by SAH
Acquisition II to Global in connection with the acquisition of KCNS and WRAY was
$52,350, and SAH Acquisition II purchased WOAC for a total purchase price of
$23,500.
The acquisition of the stations was accounted for by the Company as an
acquisition of assets and not the acquisition of a "business," as defined in SEC
Rule 210.11-01(d). The Company reached this conclusion because, with the
exception of a de minimis period of time, none of the acquired stations had been
historically operated as a broadcast outlet for home shopping programming by
Global or the predecessor in title, and the Company concluded that there was no
continuity of revenues from those stations from which relevant historical
information could be derived.
Global Broadcasting also had a contractual right to acquire WPMC(TV) in
Jellico, Tennessee (Knoxville market) from the licensee of that station. Shop At
Home agreed to a transaction whereby the contractual right to acquire WPMC was
assigned to another party. As part of that assignment, Shop At Home received a
payment $900 from the party which ultimately purchased the station, and also
received a $500 reduction in the purchase price of KCNS and WRAY due to the
return to Global Broadcasting of a $500 escrow deposit it had previously paid in
connection with its agreement to purchase WPMC.
Since the purchase price for the assets of Global Broadcasting to SAH
Acquisition II did not change as a result of the assignment of the contract to
purchase WPMC, except to the extent of the $500 escrow payment returned to
Global Broadcasting, Shop At Home did not deem it to be appropriate to allocate
any portion of its purchase price of the assets of Global Broadcasting to its
rights in the WPMC contract.
NOTE 16 - ACQUISITION OF WSAH
On June 3, 1999, MFP, Inc., a wholly-owned subsidiary of Shop At Home,
acquired the assets of WBPT(TV), Bridgeport, Connecticut, and changed its call
sign on that date to WSAH. MFP acquired WSAH at a cost of $21,000, of which
approximately $4,800 was placed in an escrow account. This escrow account will
be paid to the seller of the station if the station increases its cable
household reach above that existing on the closing date. The escrow account will
be paid to the seller at the rate of $22 per additional cable household added,
with the final determination made six months after the closing, or in certain
events 12 months after the closing. In order for the full amount of the escrow
account to be paid to the seller, the cable household reach must increase from
680,000 existing households as of the closing date to 900,000 cable households.
The purchase price (after applying a $1,000 escrow deposit) was funded through a
bridge loan which was repaid in July 1999 from the proceeds of Shop At Home's
public offering of common stock.
The acquisition of WSAH was accounted for by the Company as an
acquisition of assets and not the acquisition of a "business," as defined in SEC
Rule 210.11-01(d). The Company reached this conclusion because, with the
exception of a de minimis period of time, the acquired station had not been
historically operated as a broadcast outlet for home shopping and the Company
concluded that there was no continuity of revenues from this station from which
relevant historical information could be derived.
The purchase price of $21.0 million has been preliminarily allocated to
the net assets acquired based on the appraised fair values at the date of
acquisition of other stations' assets previously acquired as follows:
Restricted cash $ 4,800
Property and equipment 1,400
FCC License 14,800
-------------------
Total $ 21,000
===================
NOTE 17 -- CONTINGENCIES
The Company is subject to claims in the ordinary course of business.
Management does not believe the resolution of such claims will result in a
material adverse effect on the future financial condition, results of
operations, or cash flows of the Company.
NOTE 18 -- INDUSTRY SEGMENTS
Effective June 30, 1999, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which supercedes
previously issued segment reporting disclosure rules and requires reporting
segment information that is consistent with the way in which management operates
the Company. The segment disclosures for prior years have been restated to
conform with the current year presentation. The Company operates principally in
two segments; retail and wholesale. The retail segment consists of home
shopping, which primarily includes the sale of merchandise through electronic
retail. The wholesale segment includes the operations of Collector's which sells
sports trading cards to unaffiliated customers. 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
Years Ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Retail $ 142,360 $ 95,474 $ 68,038
Wholesale 9,569 5,900 960
Intersegment eliminations 37 (617) -
----------------- ------------------ ----------------
$ 151,966 $ 100,757 $ 68,998
================= ================== ================
Operating profit:
Retail $ 2,303 $ 4,394 $ 2,471
Wholesale 312 (449) 19
Intersegment eliminations 119 (119) -
----------------- ------------------ ----------------
$ 2,734 $ 3,826 $ 2,490
================= ================== ================
Depreciation and amortization:
Retail $ 4,202 $ 1,515 $ 820
Wholesale 734 673 237
----------------- ------------------ ----------------
$ 4,936 $ 2,188 $ 1,057
================= ================== ================
Interest income:
Retail $ 663 $ 606 $ 66
Wholesale - - -
Intersegment eliminations (20) (42) -
----------------- ------------------ ----------------
$ 643 $ 564 $ 66
================= ================== ================
Interest expense:
Retail $ 8,951 $ 2,735 $ 994
Wholesale 33 157 86
Intersegment eliminations (20) (42) -
----------------- ------------------ ----------------
$ 8,964 $ 2,850 $ 1,080
================= ================== ================
Income (loss) before taxes:
Retail $ (6,051) $ 3,167 $ 1,543
Wholesale 280 (608) (67)
Intersegment eliminations 119 (119) -
----------------- ------------------ ----------------
$ (5,652) $ 2,440 $ 1,476
================= ================== ================
Income taxes:
Retail $ (2,460) $ 1,158 $ (80)
Wholesale 112 (231) -
----------------- ------------------ ----------------
$ (2,348) $ 927 $ (80)
================= ================== ================
Identifiable assets:
Retail $ 278,925 $ 237,392 $ 45,417
Wholesale 7,855 6,905 4,638
Intersegment eliminations (116,083) (100,527) (15,645)
----------------- ------------------ ----------------
$ 170,697 $ 143,770 $ 34,410
================= ================== ================
Capital expenditures:
Retail $ 14,089 $ 16,771 $ 1,046
Wholesale 12 29 10
----------------- ------------------ ----------------
$ 14,101 $ 16,800 $ 1,056
================= ================== ================
</TABLE>
Vendor concentration. During the year ended June 30, 1999, the Company
had three vendors from whom it purchased more than 10% of its total cost of
goods sold. These consisted of an electronics vendor, a coin vendor and a sports
vendor which accounted for approximately 11.2%, 10.7% and 10.3% of the Company's
cost of goods sold. The Company believes that it could find replacement vendors
for the products sold by these vendors without a material adverse effect on the
Company.
NOTE 19 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial
information for the Company, segregating the Parent from the guarantor
subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the
Company and guarantees are full, unconditional, joint and several. The separate
company financial statements of each guarantor subsidary have not been included
herein because management does not believe that their inclusion would be more
meaningful to investors than the presentation of the condensed consolidating
financial information presented below.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEET DATA
June 30, 1999 June 30, 1998
Guarantor Guarantor
Parent Subsidiaries Consolidated(1) Parent Subsidiaries Consolidated(1)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 6,760 $ 306 $ 7,066 $ 20,848 $ 376 $ 21,224
Restricted cash 5,433 - 5,433 - - -
Accounts receivable 92,768 3,413 8,969 88,307 3,505 3,830
Inventories 5,531 1,702 7,234 4,061 271 4,332
Prepaid expenses 850 69 919 301 103 404
Deferred tax assets 1,097 - 1,097 990 - 990
-------------- ----------------- -------------- ---------------- --------------- ----------------
Total current assets 112,439 5,490 30,718 114,507 4,255 30,780
Notes receivable 1,090 - 690 1,060 - 660
Property and equipment,
net 26,484 8,919 35,403 13,756 6,801 20,557
FCC and NFL licenses, net 293 96,727 97,020 157 84,674 84,831
Goodwill, net - 2,367 2,367 - 2,532 2,532
Other assets 3,953 546 4,499 4,406 4 4,410
Investment in subsidiaries 27,630 1,400 - 10,935 1,400 -
-------------- ----------------- -------------- ---------------- --------------- ----------------
Total assets $ 171,889 $ 115,449 $ 170,697 $ 142,847 $ 99,666 $ 143,770
============== ================= ============== ================ =============== ================
Liabilities and
Stockholders' Equity:
Accounts payable and
accrued expenses $ 26,387 $ 88,778 $ 27,955 $ 17,616 $ 89,031 $ 18,784
Current portion--capital
leases and long-term
debt 20,298 - 20,298 161 - 161
Deferred revenue 105 6 111 235 31 267
-------------- ----------------- -------------- ---------------- --------------- ----------------
Total current liabilities 46,790 88,784 48,364 18,012 89,062 19,212
Long-term debt including,
capital leases 75,893 400 75,893 75,254 400 75,254
Deferred income taxes 898 (588) 309 3,659 (63) 3,551
Redeemable preferred
stock 834 750 834 1,393 750 1,393
Common stock 61 2 61 58 1 58
Additional paid-in capital 53,317 28,278 53,317 47,105 11,659 49,079
Accumulated deficit (5,904) (2,177) (8,081) (2,634) (2,143) (4,777)
============== ================= ============== ================ =============== ================
Total liabilities and
Stockholders' equity $ 171,889 $ 115,449 $ 170,697 $ 142,847 $ 99,666 $ 143,770
============== ================= ============== ================ =============== ================
</TABLE>
(1) Intercompany balances have been eliminated in the consolidated totals.
<TABLE>
<CAPTION>
Consolidating Statement of Operations and Cash Flow Data
June 30, 1999 June 30, 1998 June 30, 1997
Parent Guarantor Consolidated Parent Guarantor Consolidated Parent Guarantor Consolidated
Subsidiaries (1) Subsidiaries (1) Subsidiaries (1)
------------ ------------ ------------ ---------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 135,139 $ 16,791 $ 151,966 $ 92,689 $ 8,685 $ 100,757 $ 68,075 $ 2,977 $ 68,998
Cost of goods sold 85,369 6,528 91,816 54,980 4,379 58,862 40,328 298 40,626
Operating expenses 49,556 7,814 57,416 33,958 4,111 38,069 24,944 2,992 25,882
------------ ------------ ----------- ---------- ------------ ---------- ---------- ----------- ---------
Income (loss) from
operations 214 2,449 2,734 3,751 195 3,826 2,803 (313) 2,490
Interest expense 8,909 76 8,964 2,708 184 2,850 930 150 1,080
Interest income 655 8 643 606 - 564 66 - 66
Other income (expense) 2,902 (2,967) (65) 1,967 (1,068) 900 - - -
------------ ------------ ----------- ---------- ------------ ---------- ---------- ----------- ---------
Income (loss) before
taxes (5,138) (586) (5,652) 3,616 (1,157) 2,440 1,939 (463) 1,476
Income tax expense
(benefit) (2,114) (234) (2,348) 1,400 (473) 927 105 (185) (80)
------------- ------------ ----------- ---------- ------------ ---------- --------- ----------- --------
Net income (loss) $ (3,024) $ (352) $ (3,304) $ 2,216 $ (584) $ 1,513 $ 1,834 $ (278) $ 1,556
============= ============ =========== =========== ============ ========== ========= =========== =========
CASH FLOWS
Cash provided by
(used in) operations $ (18,883) $ 17,956 $ (927) $ (75,394) $ 80,810 $ 5,573 $ 2,926 $ 3,319 $ 6,245
Cash provided by
(used in) investing
activities (17,051) (18,026) (35,077) (12,763) (76,747) (89,653) 2,515 (8,017) (4,751)
Cash provided by
(used in) financing
activities (21,846) - 21,846 104,248 (4,008) 100,226 (2,547) 4,967 1,669
------------- ------------ ----------- ----------- ------------ ---------- ----------- ----------- -------
Increase (decrease) in
cash (14,088) (70) (14,158) 16,091 55 16,146 2,894 269 3,163
Cash at beginning of
period 20,848 376 21,224 4,757 321 5,078 1,863 52 1,915
------------- ------------ ----------- ----------- ------------ ---------- --------- ----------- ---------
Cash at end of period $ 6,760 $ 306 $ 7,066 $ 20,848 $ 376 $ 21,224 $ 4,757 $ 321 $ 5,078
============= ============ =========== =========== ============ ========== ========= =========== =========
</TABLE>
(1) Intercompany balances have been eliminated in the consolidated totals.
<PAGE>
NOTE 20 - SUBSEQUENT EVENTS
Public Offering of Common Stock. In July 1999, the Company completed an
offering of a total of 5,828,000 shares including underwriters' over-allotment,
thereby raising a total of $44.3 million at an offering price, net of
commission, of $7.60 a share. A portion of the proceeds were applied to repay
the short term $20,000 bridge loan.
Reorganization of Shop At Home and Subsidiaries. In July 1999, Shop At
Home reorganized its subsidiaries. The corporate name of MFP, Inc., the owner of
WMFP in Boston and WSAH in Bridgeport, was changed to SAH-Northeast Corporation.
In addition, the license of WMFP was transferred to SAH-Boston License Corp. and
the license of WSAH was transferred to SAH-New York License Corp., each a new
subsidiary of SAH-Northeast Corporation. Broadcast, Cable and Satellite
Technologies, Inc., and Urban Broadcasting Systems, Inc., were merged into
SAH-Houston Corporation. The license of KZJL was transferred to SAH-Houston
License Corporation, a new subsidiary of SAH-Houston Corporation.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors current consists of seven (7) persons. At the
December 2, 1998 annual meeting a total of eight (8) directors were elected. One
director, Patricia E. Mitchell, resigned from the Board of Directors effective
January 27, 1999. The Company's Bylaws specify that the Company's President
shall be a member of its Board of Directors.
The following sets forth the name, position, age, business experience
and other information with regard to the current directors of the Company:
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 of Independent Southern BancShares, Inc.,
Brownsville, Tennessee, a diversified financial institutions holding company.
Mr. Clinton is Chairman and Director, INSOUTH Bank, Brownsville, Tennessee.
Mr.Clinton is a Director, Southern Financial, Inc., Nashville,Tennessee. Age 55.
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 that 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. Age 53.
Frank A. Woods, Director. Mr. Woods has been a Director since 1993.
Since 1991, Mr. Woods has been Chairman of the Board and Director of MediaUSA
L.L.C. (and its predecessor company, MediaOne), Nashville, Tennessee, a
communications consulting and strategic planning firm. Mr. Woods is a principal
of The Woods Group, Nashville, Tennessee, a diversified merchant banking firm.
Age 58.
A.E. Jolley, Director. Mr. Jolley has been a Director since 1986. Mr.
Jolley has been President, Lakeway Containers, Inc., Morristown, Tennessee,
a corrugated container manufacturer, since 1975. 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. Age 60.
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. Age 52.
J. Daniel Sullivan, Director. Mr. Sullivan has been a Director since
the annual meeting of shareholders held on March 6, 1998. Mr. Sullivan currently
is President & Chief Executive Officer of Quorum Broadcasting, Inc., a
television broadcasting business. Mr. Sullivan served as the President and CEO
of Sullivan Broadcasting Company, a television broadcasting company from 1995 to
1998. Between 1987 and 1995, Mr. Sullivan was the President of Clear Channel TV,
a subsidiary of Clear Channel Communications, Inc., a broadcasting company. Age
48.
Donna Hilley, Director. Ms. Hilley has been a Director since the
annual meeting of shareholders held on December 2, 1998. Ms. Hilley is the
President and Chief Executive Officer of Sony/ATV Music Publishing, a music
publishing company based in Nashville, Tennessee, and an affiliate of Sony
Corporation. Ms. Hilley has held her current position with Sony/ATV since 1994,
but was employed by the same company and its predecessor, Tree International,
since 1973 in a number of positions. She also serves on the Board of Trustees
of Belmont University. Age 55.
The principal business activity of each of the above Directors has been
as shown above during the past five years, except that in some cases the
individual has been employed by a predecessor organization or has undertaken
greater responsibilities with the same employer, a parent company, or a
successor organization.
The following information relates to the executive officers of the
Company, as of October 21, 1999, other than Mr. Lillie who also serves as a
director of the Company, as noted above. With the exception of the President and
Chief Executive Officer and the Executive Vice President and Chief Financial
Officer, who have employment agreements, the remaining executive officers serve
at the discretion of the Board:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Arthur D. Tek......................... 50 Executive Vice President and Chief Financial Officer
Theodore M. Engle III................. 37 President, collectibles.com
Everit A. Herter...................... 58 Executive Vice President of Affiliate Relations
George J. Phillips.................... 37 Executive Vice President, General Counsel and Secretary
H. Wayne Lambert...................... 48 Executive Vice President and Chief Information Officer
</TABLE>
Arthur D. Tek, Executive Vice President and Chief Financial Officer.
Mr. Tek has served as the Executive Vice President and Chief Financial Officer
since March 1999. Prior to joining the Company, Mr. Tek served as Chief
Financial Officer of Paxson Communications Corporation from 1992 to March 1999.
Mr.Tek currently serves on the board of the Broadcast Cable Financial Management
Association. He is a member of the American Institute of CPA's. Mr. Tek holds
a bachelor's degree in economics from Tulane University, an MBA degree in
accounting from Columbia University and an MS degree in information systems
from Rensselaer Polytechnic Institute.
Theodore M. Engle III, President, collectibles.com. Mr. Engle has
served as President of collectibles.com since July 1999. Mr. Engle joined
the Company in February 1998 as Executive Vice President and Chief Operating
Officer. Prior to joining the Company, Mr. Engle was Chief Operating Officer
of HLC, Inc., a developer and provider of banking products to corporate clients.
Prior to joining HLC, Inc. in 1995, Mr. Engle served as Chief Financial Officer
for IBM's Tennessee marketing and sales operation. He was with IBM for 11
years. Mr.Engle holds a BS degree in accounting from the University of
Tennessee.
Everit A. Herter, Executive Vice President of Affiliate Relations. Mr.
Herter became Executive Vice President of Affiliate Relations in September
1998, and has served the Company since 1994 as a consultant, as Director of
Affiliate Relations and as Vice President for Affiliate Relations. Prior to
joining the Company, Mr. Herter was a Senior Vice President with the J. Walter
Thompson Company advertising agency ("JWT"). Mr. Herter was with JWT for 16
years. Before joining JWT, Mr. Herter was Vice President, Management Supervisor
on the Ford Motor Company Corporate advertising account and Assistant to the
President of Kenyon & Eckhardt Advertising in New York City.
George J. Phillips, Executive Vice President, General Counsel and
Secretary. Mr. Phillips joined the Company in November 1997. Prior to joining
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 where he concentrated on litigation. Mr. Phillips graduated from
Duke and obtained his law degree from the University of Tennessee. Mr. Phillips
is a member of the American Corporate Counsel Association and the Tennessee Bar
Association.
H. Wayne Lambert, Executive Vice President and Chief Information
Officer. Mr. Lambert became Executive Vice President and Chief Information
Officer in August 1999. He joined the Company in March 1992 as Vice President
of Information Technology. Prior to joining the Company, he served as Operations
Officer for National Book Warehouses, Inc. in Knoxville, Tennessee. Prior to
joining National Book Warehouses, he served as Assistant Controller for the
Knoxville News-Sentinel, a newspaper in 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.
Officers, directors and certain shareholders of companies which have
equity securities registered with the SEC under Section 12 of the Securities
Exchange Act of 1934, as amended from time to time (the "Securities Exchange
Act"), must file certain periodic reports (identified as Forms 3, 4 and 5) with
respect to their stock ownership of the company, and certain changes therein.
Based solely upon a review of the Forms 3 and 4 and amendments thereto furnished
to the Company during the most recent fiscal year and Forms 5 and amendments
thereto furnished to the Company with respect to the most recent fiscal year,
the following information concerns any director, officer, or shareholder
beneficially owning more than 10% of any class of equity securities, who failed
on a timely basis to file reports required by Section 16(a) of the Exchange Act:
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the compensation paid or accrued by the
Company during the three fiscal years ended June 30, 1999, to those persons who
served as the Company's CEO during the 1999 fiscal year and were the Company's
most highly compensated executive officers (other than the CEO) serving as of
the end of the 1999 fiscal year whose compensation exceeded $100,000
(collectively, the "Named Executive Officers"). Not more than five persons (six
including Mr. Bauchiero) are required to be shown.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
Securities All Other
Name and Other Annual Underlying Options Compensation
Principal Salary Bonus Compensation /SARs $
Position Year $ $ $ (#)(2)
-------- ---- ----- ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kent E. Lillie
President/CEO 1999 207,500 - 12,000(1) 510,000 -
1998 190,000 124,523 12,000(1) 55,000 88,453(3)
1997 188,654 155,605 12,000(1) 510,000 -
Theodore M. Engle 1999 142,030 - - 50,000 -
III, President,
collectibles.com
1998 41,539 - - 100,000 -
1997 N/A N/A N/A N/A N/A
Joseph Nawy, 1999 115,000 5,480 500(1) - -
Vice President
Finance
1998 115,000 12,449 6,000(1) 10,000 1,554(3)
1997 114,393 15,560 6,000(1) 20,000 -
Henry I. Shapiro, 1999 130,000 2,800 - 14,792(3)
Vice President
Jewelry & Lifestyle
Products
1998 129,308 - - 15,000 -
1997 97,510 - - 10,000
Everit A. Herter 1999 120,769 12,000 - - -
Executive
Vice President
Affiliate Relations
1998 94,961 12,000 - - -
1997 76,707 12,000 - - -
James Bauchiero(4) 1999 150,000 - 8,200 (1) - -
Executive
Vice President
CFO
1998 70,385 - 3,600 (1) - -
1997 N/A N/A N/A N/A N/A
</TABLE>
(1) Other Annual Compensation consists of automobile allowances.
(2) All numbers represent options to purchase Common Stock of the Company.
(3) Other Compensation consists of relocation allowances.
(4) Mr. Bauchiero resigned his position in February 1999.
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 1999 fiscal year of the
Company.
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 1999 fiscal year of the
Company.
<TABLE>
<CAPTION>
Options/SAR Grants in Last Fiscal Year
Individual Potential Realizable Value
Grants at Assumed Annual Rates of
Stock Price Appreciation for
Option Term
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/sh) Date 5%(S) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Kent E. Lillie 100,000 9.83% $11.813 1/27/04(1) 332,671 727,496
100,000 9.83% $11.813 1/27/05 408,055 917,745
100,000 9.83% $11.813 1/27/06 487,208 1,127,020
100,000 9.83% $11.813 1/27/07 570,318 1,357,221
100,000 9.83% $11.813 1/27/08 657,584 1,610,444
10,000 .98% $6.969 12/2/03(2) 19,254 42,546
Everit A. Herter 9,000 .88% $3.031 8/19/04(3) 9,277 21,047
9,000 .88% $3.031 8/19/05 11,105 25,880
9,000 .88% $3.031 8/19/06 13,025 31,196
9,000 .88% $3.031 8/19/07 15,040 37,043
9,000 .88% $3.031 8/19/08 17,156 43,476
Theodore M. Engle III 10,000 .98% $3.563 7/1/04(4) 12,118 27,491
10,000 .98% $3.031 7/1/05 14,505 33,803
10,000 .98% $3.031 7/1/06 17,012 40,746
10,000 .98% $3.031 7/1/07 19,644 48,384
10,000 .98% $3.031 7/1/08 22,408 56,785
</TABLE>
(1) Options to acquire 500,000 shares of Common Stock of the Company were
issued January 27, 1999, of which options to purchase 100,000 shares
became exercisable on January 27, 1999, with options to acquire 100,000
shares to become exercisable on January 27, 2000, 2001, 2002 and 2003.
The options expire on the earlier of thirty (30) days after the
termination of employment or five (5) years from the date the options
become exercisable.
(2) Options awarded for serving as a director.
<PAGE>
(3) Options to acquire 45,000 shares of Common Stock of the Company were
issued August 19, 1998, of which options to purchase 9,000 shares
became exercisable on August 19, 1999, with options to acquire 9,000
shares to become exercisable on August 19, 2000, 2001, 2002 and 2003.
(4) Options to acquire 50,000 shares of Common Stock of the Company were
issued July 1, 1998, of which options to purchase 10,000 shares became
exercisable on July 1, 1999, with options to acquire 10,000 shares to
become exercisable on July 1, 2000, 2001, 2002, and 2003.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth certain information with respect to
options exercised by any Named Executive Officer during the 1999 fiscal year of
the Company, and with respect to unexercised options to purchase shares of the
Common Stock held by such officers as of the end of the 1999 fiscal year.
Aggregate Option/SAR Exercises In Last Fiscal Year
And Fiscal Year End Option/SAR Value
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at June Options/SARs at
30, 1999 June 30, 1999
Shares Acquired on
Name Exercise (#) Value Realized ($) Exercisable/ Exercisable/
Unexercisable Unexercisable(5)
<S> <C> <C> <C> <C>
Kent E. Lillie None N/A 625,000/650,000 $4,675,650/$2,226,500
Theodore M. Engle III 2,000 $19,250(1) 18,000/130,000 $160,308/$1,157,780
Everit Herter 10,000 $120,650(2) 0/65,000 0/$578,890
Joseph Nawy 56,000 $658,630(3) 2,000/32,000 $17,812/$284,992
Henry I. Shapiro 20,000 $242,500(4) 37,000/18,000 $329,522/$160,308
</TABLE>
(1) Options to purchase 2,000 shares were exercised on February 19, 1999 at
an exercise price of $3.63 per share. The value realized is based upon
the closing price on the Nasdaq National Stock Market ("NMS") on that
date of $13.25.
(2) Exercised on February 11, 1999 at an exercise price of $2.810 per
share. The value realized is calculated using the closing price on the
NMS market on that date of $14.875.
(3) Options to purchase 10,000 shares were exercised on February 11, 1999
and February 17, 1999 and options to purchase 28,000 shares were
exercised on February 23, 1999, each at an exercise price of $2.125 per
share. Options to purchase 8,000 shares were exercised on February 23,
1999 at an exercise price of $2.875 per share. The value realized is
based upon the closing price on the NMS market as of the close of those
dates of $14.875, $9.938 and $14.875, respectively.
(4) Options to purchase 10,000 shares were exercised on February 11, 1999
and February 23, 1999, each at an exercise price of $2.75 per share.
The value realized is based upon the closing price on the NMS market as
of the close of those dates of $14.875.
(5) The market value of underlying securities at June 30, 1999, was $8.906
per share based upon the NMS closing price. "In-the-Money" options are
options in which the fair market value of the underlying securities
exceeds the exercise price of the options.
<PAGE>
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 for five years. The options expire on the earlier to occur of (a)
five years after the date of vesting or (b) 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 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 June 21, 1996, the Board of Directors granted 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 of these shares vested on
January 1, 1997, 1998 and 1999, and options to purchase an additional 100,000
shares will vest on January 1 of each year thereafter for another two 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. The agreement provided that Mr. Lillie would 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 twelve months following the occurrence of
the event, and any options to purchase stock not yet vested shall automatically
vest on the date of such termination. The Company also 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 the loan 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 ten percent (10%) of bonus payments made to Mr.
Lillie are required to be used to repay the loan. During the fiscal year ending
June 30, 1999, Mr. Lillie received no cash bonus payments to apply as payments
on the loan. The loan does not bear interest.
<PAGE>
Effective January 27, 1999, 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 a term of five (5) years, beginning February 1, 1999, with a base salary of
$225,000 per year. The agreement is automatically renewable for successive two
(2) 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) ten percent (10%) of
the increase of the Corporation's net income over the same quarter of the
previous fiscal year, or (ii) five percent (5%) of the Total Cash Flow with
Total Cash Flow being defined as the net income, plus depreciation and
amortization. Under the agreement, Mr. Lillie receives an automobile allowance
and other fringe benefits and allowances. The agreement also provides that Mr.
Lillie will be granted options to purchase up to 500,000 shares of the Company's
Common Stock at an exercise price of $11.813 per share. Effective on the date of
the Agreement, the option to purchase 100,000 of these shares vested, and
options to purchase 100,000 shares will vest on each of the next four (4)
anniversary dates of the Agreement. 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 twenty-four (24) months
following the occurrence of the event, and to receive an amount of cash equal to
his base salary and monthly allowances for the twenty-four (24) months preceding
such resignation. In addition, any options to purchase stock not yet vested
shall automatically vest on the date of such termination. In the event the
Company terminates Mr. Lillie for cause, the Company has agreed to continue Mr.
Lillie's base salary and car allowance for a period of one year. The agreement
also provides that Mr. Lillie will not compete with the Company for two (2)
years following the termination of his employment.
Arthur D. Tek. On February 25, 1999, the Company executed an employment
agreement with Arthur D. Tek whereby Mr. Tek commenced employment as the
Company's Executive Vice President and Chief Financial Officer. Under the terms
of the agreement, Mr. Tek will be employed for a term of five (5) years,
beginning on March 12, 1999, with a base salary of $175,000 per year. The term
of the agreement may only be extended by mutual agreement. If the Company elects
not to renew the agreement, then Mr. Tek will be paid his base salary for one
year or until he accepts a position with another company. In addition to the
base salary, the agreement provides Mr. Tek an annual bonus up to $75,000 per
year, based on a bonus plan similar to the one in existence for the President
and Chief Executive Officer. The agreement also provides that Mr. Tek will be
paid or reimbursed for the relocation of his primary residence from Florida to
Nashville, Tennessee, including certain lodging expenses in Nashville,
Tennessee. The agreement grants Mr. Tek options to purchase up to 150,000 shares
of Common Stock at an exercise price of $13.00 per share during the term of the
agreement. Of those options, options to purchase 30,000 shares vested on March
12, 1999, and additional options to purchase 24,000 shares vest on each
anniversary date thereafter for five years. The options expire on the earlier to
occur of (a) five years after the date of vesting or (b) 90 days after
termination of Mr. Tek's employment with the Company. If within two years of a
"change of control", as defined in the agreement, the Company terminates Mr. Tek
without cause or Mr. Tek resigns, then the Company has agreed to continue Mr.
Tek's base salary for a period of two years or the remainder of the term of the
agreement, whichever is shorter. In the event the Company terminates Mr. Tek
without cause or Mr. Tek resigns due to the Company's breach of the agreement,
then the Company has agreed to continue Mr. Tek's base salary for one year,
unless he accepts a position with another company. The agreement also provides
that Mr. Tek will not compete with the Company for one year following the
termination of his employment, unless the agreement is terminated by the Company
without cause or by Mr. Tek due to the Company's breach of the agreement.
Compensation of 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 has paid each director $500 for each meeting attended ($100 if
attendance is by telephone), along with the director's expenses associated with
attending the meeting. Effective December 2, 1998, the amount paid to Directors
was increased to $1,000 for each meeting attended ($500 if attendance is by
telephone). Effective January 1, 1998, the Company also granted to each director
an option to purchase 5,000 shares of the Company's Common Stock at an exercise
price of $3.75, the market price on the date issued. Effective December 2, 1998
the Company also granted to each director an option to purchase 10,000 shares of
the Company's Common Stock at an exercise price of $6.969, the market price on
the date granted.
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.
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.
A maximum of 1,500,000 shares of Common Stock may be issued upon the
exercise of options and SARs.
<PAGE>
No option or SAR may be granted after October 15, 2001. No option that
is an incentive stock option nor any corresponding SAR related to such option
shall be exercisable after the expiration of ten (10) years from the date such
option or SAR was granted or after the expiration of five (5) years in the case
of any such option or SAR that was granted to a 10% shareholder.
As of October 21, 1999, stock options for 984,800 shares of Common
Stock have been granted under the Plan and were outstanding and unexercised. A
total of 506,600 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.
REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the Company's executives are made by the
Company's Board of Directors. Each member of the Board, except for Kent E.
Lillie, is a non-employee director. It is the responsibility of the Board to
assure that the executive compensation programs are reasonable and appropriate,
meet their stated purpose and effectively service the interests of the Company
and its stockholders. Pursuant to rules of the Securities and Exchange
Commission ("SEC") designed to enhance disclosure of corporate policies toward
executive compensation, set forth below is the report of the Board of Directors
with respect to executive compensation.
Compensation Philosophy and Policies for Executive Officers
The Company believes that the most effective executive compensation
program aligns the interest of the Company's executives with the interests of
its stockholders. The Company's primary corporate mission is to achieve
profitability on a consistent basis and thereby enhance long-term stockholder
value. In pursuit of that mission, the Board seeks to maintain a strong positive
nexus between this mission and its compensation and benefit goals.
The Company's executive compensation program exemplifies the Board's
commitment to that nexus. The Company provides only minimal perquisites to its
executive officers, relying instead upon compensation methods that emphasize
overall Company performance. In addition, the Company maintains no contractual
arrangements with any executive officer, other than its agreements with its
President and CFO, thereby enhancing the opportunities for performance-based
rewards to individuals.
The Company's executive compensation program supports the Company's
mission by:
o Directly aligning the interests of executive officers with the
long-term interests of the Company's stockholders by making Company
stock appreciation over the long term the cornerstone of executive
compensation through awards that can result in the ownership of
substantial amounts of the Company's Common Stock.
o Providing compensation opportunities that create an environment that
attracts and retains talented executives on a long-term basis.
o Emphasizing pay for performance by having a meaningful portion of
executive compensation "at risk."
<PAGE>
At present, the Company's executive compensation program is comprised
of three primary components: base salary, annual cash incentive (bonus) and
long-term incentive opportunity in the form of stock options. Two of the three
components of the Company's executive compensation plan -- bonus and stock
options -- directly relate to overall performance by the Company. With respect
to the third component -- salary -- the Company seeks to be at or below market,
placing primary emphasis on the opportunities for greater reward through the
availability of performance-based reward mechanisms.
Base Salary
The base salary of the Company's President, as listed in the Summary
Compensation Table, is governed by an employment agreement with the Company. As
a part of its search for a President in 1993, the Board determined that in order
to attract an individual with knowledge and experience necessary to implement
the Company's mission, the Company needed to provide that individual with a
certain level of compensation. The Board also determined to place a greater
portion of the compensation package in performance-based compensation (i.e.,
performance bonus and stock options), thereby providing an incentive for
outstanding performance and minimizing the amount of guaranteed compensation.
The Board believes that the employment agreement with Mr. Lillie contains an
appropriate mix of guaranteed and performance-based compensation.
The Company has no other employment agreements with any other
employees, other than its CFO. All other executive officer salaries are
evaluated on an annual basis. In determining appropriate salary levels and
salary increases, the Board considers achievement of the Company's mission,
level of responsibility, individual performance, internal equity and external
pay practices. In this regard, the Board attempts to set base salaries of all
executive officers at rates at or below the rates of other individuals in
equivalent positions in the market area. The Board determines those rates from
information gathered by its members.
Annual Bonus
The Board believes that annual bonuses to executive officers encourage
management to focus attention on key operational goals of the Company, and
corporate and business earnings are the main performance measure for awards of
bonuses. In that regard, the agreement with the Company's President provides a
quarterly bonus of the greater of (i) ten percent (10%) of the increase of the
Corporation's net income over the same quarter of the previous fiscal year, or
(ii) five percent (5%) of the Total Cash Flow with Total Cash Flow being defined
as the net income, plus depreciation and amortization. With respect to the other
executive officers of the Company, the Board does not have a formal annual
incentive plan. Instead, the Board has elected to review the corporate and
business performance of the Company on a periodic basis, and make awards to
executive officers if appropriate. In determining appropriate annual bonuses,
the Board considers achievement of the Company's mission, level of
responsibility, individual performance, internal equity, and external pay
practices. In the fiscal year ended June 30, 1999, the Board elected to award
cash bonuses to one executive officer (Mr. Herter) and nine other officers.
Long-Term Incentives
The Company's only current long-term incentive compensation is stock
options that are directly related to improvement in long-term stockholder value.
The Board believes that stock option grants provide an incentive to executive
officers that focuses each officer's attention on managing the Company from the
perspective of an owner with an equity stake in the business. In addition, the
Board believes that stock option grants provide the Company with a mechanism for
recruiting individuals by providing an opportunity for those officers to profit
from the results of their contributions to the Company. These grants also help
ensure that operating decisions are based on long-term results that benefit the
Company and ultimately the Company's stockholders.
The options granted to executive officers provide the right to purchase
shares of Common Stock usually at the fair market value on the date of grant.
Usually, each stock option becomes vested and exercisable over a period of time,
generally five years. The number of shares covered by each grant reflects the
Board's assessment of the executive's level of responsibility, and his or her
past and anticipated contributions to the Company. The size of option grants to
individual executives is designed to reflect the impact the individual has on
decisions that affect the overall success of the Company.
<PAGE>
The Company granted no stock options for shares of Common Stock to its
officers in the fiscal year ended June 30, 1993, and the Company granted stock
options for 210,000 shares of Common Stock to its officers, other than the
President, in the fiscal year ended June 30, 1994. In the fiscal year ended June
30, 1995, the Company awarded officers options to purchase up to 140,000 shares
of Common Stock. In the fiscal year ended June 30, 1996, the Company awarded
officers options to purchase up to 225,000 shares of Common Stock. In the fiscal
year ended June 30, 1997, the Company awarded officers options to purchase up to
145,000 shares of Common Stock. In the fiscal year ended June 30, 1998, the
Company awarded officers options to purchase up to 485,000 shares of Common
Stock. In the fiscal year ended June 30, 1999, the Company awarded officers
options to purchase up to 430,000 shares of Common Stock. Since June 30, 1999,
the Company has awarded its officers options to purchase up to 100,000 shares of
Common Stock. These totals are exclusive of stock options granted to Kent E.
Lillie and are net of any options which expired without being exercised.
Chief Executive Compensation
The regulations of the SEC require the Board to disclose the basis for
the compensation of the Company's chief executive officer relative to the
Company's performance. The Company's chief executive officer is its President,
Kent E. Lillie. Mr. Lillie's compensation is governed by the terms of an
employment agreement dated September 25, 1993, and a second employment agreement
dated July 1, 1997, and a third employment agreement dated January 27, 1999.
The Board's general approach in establishing Mr. Lillie's compensation
was to provide a base salary below market, augmented by an annual bonus based
upon specific corporate-wide performance criteria, and stock options reflective
of the value of that performance. The Board approved a current base salary of
$225,000 as provided by the third Employment Agreement, and a quarterly bonus
based upon the financial performance of the Company. The Board determined, based
upon the information available, that the base salary and annual bonus was below
the market rate and within the Company's overall internal compensation goal. Mr.
Lillie did not receive a bonus for the fiscal year ended June 30, 1999.
Consistent with the goals stated above, that fact reflects the Company's overall
performance during that fiscal year and not Mr. Lillie's performance.
As a part of the first employment agreement, dated September 25, 1993,
Mr. Lillie was granted options to purchase up to 600,000 shares of the Company's
Common Stock at an exercise price of $1.00 per share. Those options vest over a
period of five (5) years, with 100,000 shares vesting immediately upon
employment. The Board granted Mr. Lillie an option to purchase 500,000 shares of
its Common Stock as additional long-term incentive during the fiscal year ended
June 30, 1997. Effective July 1, 1997, the Company and Mr. Lillie entered into a
new employment agreement, under which Mr. Lillie received options to purchase
50,000 shares of the Company's Common Stock and certain changes were made in the
computation of Mr. Lillie's bonus. Effective January 27, 1999, the Company and
Mr. Lillie entered into a new employment agreement, under which Mr. Lillie
received options to purchase 500,000 shares of the Company's Common Stock. See
"Employment Agreements" herein.
THE FOREGOING REPORT IS SUBMITTED BY ALL MEMBERS OF THE COMPANY'S BOARD OF
DIRECTORS WHOSE MEMBERS ARE AS FOLLOWS:
J.D. Clinton A.E. Jolley J. Daniel Sullivan
Kent E. Lillie Frank A. Woods Donna Hilley
Joseph I. Overholt
STOCKHOLDER RETURN COMPARISONS
The following line-graph compares the cumulative stockholder returns
for the Company over the past five (5) years with a broad market equity index
and a published industry or line-of-business index. For these purposes, the
Company has chosen the Nasdaq Market Index and a Peer Group Index composed of a
combination of those industries classified as "Media - Broadcasting - TV" and
"Retail - Catalog & Mail Order Houses" by Media General Financial Services, Inc.
The chart below uses as a beginning price the average of the high and low bid of
the Company's Stock on June 30, 1994 (the last trading day prior to fiscal year
1995), and assumes $100 invested on that date.
<TABLE>
<CAPTION>
Fiscal Year Ending
Company/Index/Market
6/30/94 6/30/95 6/30/96 6/30/97 6/30/98 6/30/99
<S> <C> <C> <C> <C> <C> <C>
Shop At Home, Inc. 100.00 141.75 200.00 144.85 183.51 459.28
Peer Group Index 100.00 56.82 76.57 73.64 93.45 86.22
NASDAQ Market Index 100.00 117.28 147.64 177.85 235.75 330.37
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following information relates to the Common Stock of the Company
beneficially owned, directly or indirectly, by all persons known by the Company
to be the beneficial owners of more than five percent (5%) of the Common Stock,
as of October 21, 1999. Unless otherwise noted, the named persons have sole
voting and investment power with respect to the shares indicated.
Amount and Nature of Percent of
Name and Address of Beneficial Owner(1) Beneficial Ownership Class
J.D. Clinton and SAH Holdings, L.P.(2)...... 5,103,076 15.65%
(1) In addition to shares over which the person has voting power or
investment power, 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 Proxy Statement 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 Proxy Statement 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 (formerly
Global Network Television, Inc.), a Tennessee corporation ("GEM"), as
its sole general partner. Mr. Clinton is chairman, a director and the
sole shareholder of GEM. SAH currently owns 2,451,850 shares of Common
Stock, and holds warrants to purchase an additional 1,650,000 shares of
Common Stock. Clinton Investments, L.P., a limited partnership for
which GEM is the sole general partner, owns 387,381 shares of Common
Stock, and holds warrants to purchase an additional 542,500 shares of
Common Stock. GEM owns 9,000 shares of Common Stock. Mr. Clinton holds
options to purchase 25,000 shares of stock from the Company. Mr.
Clinton's wife owns, individually, 7,400 shares of Common Stock. Two
trusts, the beneficiaries of whom are members of Mr. Clinton's
immediate family, own 29,945 shares of Common Stock in the aggregate.
All of the listed shares are assumed to be beneficially owned by Mr.
Clinton.
The following information presents the beneficial ownership of the
Common Stock of the Company, as of October 21, 1999, by the Company's directors,
director nominees, the executive officers named in the Remuneration of Directors
and Officers, and by all directors, director nominees and executive officers as
a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name of Beneficial Owner(1) Beneficial Ownership Class
<S> <C> <C>
J.D. Clinton (2)............................................. 5,103,076 15.65%
Kent E. Lillie (3)........................................... 948,000 3.06
Theodore M. Engle III (4).................................... 31,250 *
Joseph Nawy (5).............................................. 61,100 *
Everit A. Herter (6)......................................... 19,000 *
Henry I. Shapiro (7)......................................... 45,100 *
Donna Hilley (8)............................................. 10,000 *
A.E. Jolly (9)............................................... 536,092 1.76
Joseph I. Overholt (10)...................................... 440,000 1.45
J. Daniel Sullivan (11)...................................... 161,000 *
Frank A. Woods (12).......................................... 25,000 *
James Bauchiero ............................................ 0 --
All directors and executive officers as a group
(14 persons).............................................. 7,417,518 22.15%
</TABLE>
* Less than 1.0%.
(1) In addition to shares over which the person has voting power or
investment power, 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 Proxy Statement 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 Proxy Statement have been exercised.
(2) See Notes in preceding section entitled "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS."
(3) Includes options to purchase 625,000 shares of Common Stock from the
Company and 9,000 shares of Common Stock held in a retirement account
controlled by Mr. Lillie.
(4) Includes options to purchase 28,000 shares of Common Stock from the
Company.
(5) Includes options to purchase 20,000 shares of Common Stock from the
Company. Mr. Nawy holds 5,000 shares in a retirement account which he
controls and 100 shares in a family limited partnership.
(6) Options to purchase shares of Common Stock of the Company.
(7) Includes options to purchase 42,000 shares of Common Stock from the
Company.
(8) Includes options to purchase 10,000 shares of Common Stock from the
Company.
(9) Includes options to purchase 25,000 shares of Common Stock from the
Company.
(10) Includes options to purchase 25,000 shares of Common Stock from the
Company.
(11) Includes options to purchase 15,000 shares of Common Stock from the
Company.
(12) Includes options to purchase 25,000 shares of Common Stock from the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 16, 1995, the Company issued its $2,000,000 Variable Rate
Convertible Secured Note Due 2000 to Global Network Television, Inc. (now
Gatehouse Equity Management Corporation). J.D. Clinton, a director of the
Company, is the sole shareholder and Chairman of Global Network Television, and
that corporation is a principal shareholder 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, 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. On October 1, 1997, the note was transferred to FBR Private Equity
Fund, L.P., which immediately converted the note to 444,177 shares of
Common Stock of the Company. Based upon management's knowledge of the
commercial lending market, the terms and rates of the note were considered
competitive.
In September 1998, the Company relocated its studios and headquarters
to newly constructed facilities in Nashville, Tennessee. The real property for
the new facility was initially acquired by a limited liability company organized
by individuals related to J.D. Clinton, and that company obtained a construction
loan (the "Facility Loan") in January 1998 from a commercial lender to build the
facility. The loan was guaranteed by the Company and also was personally
guaranteed by Mr. Clinton. The Company agreed to pay to Mr. Clinton an annual
fee equal to 1% of the amount of the Facility Loan in consideration for Mr.
Clinton's guaranty, which was to be payable in either cash or in stock of the
Company. In March 1998, the Company acquired the facility by acquiring all of
the ownership interest in the limited liability company for a price equal to the
balance due on the Facility Loan, thereby generating no profits for the owners
of the limited liability company. The Company paid the Facility Loan in full
upon the acquisition of the limited liability company, thereby terminating Mr.
Clinton's guaranty. As a result of the agreement to pay a fee to Mr. Clinton for
his guaranty, the Company issued to Mr. Clinton a total of 11,226 shares of
Common Stock. The Company also retained the services of a development company
with respect to the construction and development of the facility, and paid a
development fee of approximately $165,000 for its services. The development
company is owned by Stephen Sanders, an individual who is related to J.D.
Clinton. The Board of Directors of the Company approved the development
agreement and determined that the agreed upon fee was in an amount considered
normal and typical in the industry for the type of services to be rendered.
In February 1995, the Company entered into a financing lease
transaction with Brownsville Auto Leasing Corporation whereby the Company leased
the transmitter for WMFP(TV). The monthly principal payments on the lease were
$9,700 and the outstanding balance on the lease at December 31, 1997, was
$349,700. James P. Clinton, the brother of J.D. Clinton, is a principal of
Brownsville Auto Leasing Corporation. This financing transaction was terminated
in April 1998, when the Company acquired the transmitter from the lessor at the
price agreed upon in the lease agreement.
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 "Employment
Agreements -- Kent E. Lillie" in Item 12 above..
On September 1, 1999, the Company entered into a lease agreement with
INSOUTH Bank under which the Company will lease approximately 9,244 square feet
of office space in a commercial building which is adjacent to the main offices
of the Company in Nashville. The lease is for a term of five (5) years, with
renewal options, at a lease rate that was determined by the Company to be
comparable to the lease rates for comparable space in the area. J.D. Clinton is
the controlling shareholder of INSOUTH Bank.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Item 8 of Form
10-K:
1.Financial Statements
Report of Independent Accountants Consolidated
Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Operations for the years
ended June 30,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997.
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
The other schedules are omitted because the
required information is either inapplicable or
has been disclosed in the consolidated
financial statements and notes thereto.
3. Exhibits
The Index to Exhibits is at page 82.
(b) Reports on Form 8-K
A Form 8-K was filed on June 16, 1999 which reported the
acquisition of the assets of WBPT(TV), Bridgeport, Connecticut.
<TABLE>
<CAPTION>
SHOP AT HOME, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(Thousands of Dollars)
Balance at Charged to Balance
beginning Returns and at end
of year Allowances Deductions (1) of year
--------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999
estimated credits
due to customers $ 3,987 $ 32,610 $ 33,528 $ 3,069
=============== ================ =============== ============
Year ended June 30, 1998
estimated credits
due to customers $ 3,121 $ 28,363 $ 27,497 $ 3,987
=============== ================ =============== ============
Year ended June 30, 1997
estimated credits
due to customers $ 1,100 $ 19,503 $ 17,482 $ 3,121
=============== ================ =============== ============
(1) Merchandise returned
Balance at Balance
beginning Additional at end
of year provisions Reduction of year
--------------- ---------------- --------------- ------------
Year ended June 30, 1999
Accounts receivable
reserves $ 535 $ 561 $ 553 $ 543
=============== ================ =============== ============
Year ended June 30, 1998
Accounts receivable
reserves $ 59 $ 476 (2) $ - $ 535
=============== ================ =============== ============
Year ended June 30, 1997
Accounts receivable
reserves $ - $ 59 $ - $ 59
=============== ================ =============== ============
</TABLE>
(2) net of $288 charged to goodwill as a result of adjustment to originally
recorded purchase transaction.
<PAGE>
<TABLE>
<CAPTION>
Balance at Balance
beginning Additional at end
of year provisions Deductions of year
--------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999
Inventory reserves $ 21 $ 602 $ 319 $ 304
============== =============== ============== ============
Year ended June 30, 1998
Inventory reserves $ 698 $ 78 $ 755 $ 21
============== =============== ============== ============
Year ended June 30, 1997
Inventory reserves $ 88 $ 710 $ 100 $ 698
============== =============== ============== ============
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
3(i).4 Restated Charter, recorded August 13, 1999, filed as Exhibit
3(i).4 to the Annual Report on Form 10-K filed August 31, 1999,
and incorporated herein by this reference.
3(ii).1 Restated Bylaws, adopted July 21, 1999, filed as Exhibit 3(ii).1
to the Annual Report on Form 10-K filed August 31, 1999, 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.
4.6 Form of Trust Indenture with PNC Bank, N.A., as Trustee with
regard to the 11% Secured Notes due 2005, containing specimen of
the Note, filed as Exhibit 4.6 to the Company's Amendment No. 2
to the Registration Statement on Form S-1 filed with the
Commission on March 21, 1998, and incorporated herein by this
reference.
4.7 Form of Security and Pledge Agreement, filed as Exhibit 4.7 to
the Company's Amendment No. 2 to the Registration Statement on
Form S-1 filed with the Commission on March 21, 1998, and
incorporated herein by this reference.
10.1 Company's Omnibus Stock Option Plan, filed as Exhibit 10.3 to
the Company's Annual Report on Form 10-K filed with the
Commission for the fiscal year ended June 30, 1992, and
incorporated herein by this reference.
10.4 Form of Transponder Use Agreement dated April 1, 1993 between
Shop At Home, Inc. and B & P The SpaceConnection, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993, and incorporated herein by
this reference.
10.5 Transponder Use Agreement dated June 6, 1994, between Shop At
Home, Inc. and Broadcast International, Inc., filed as Exhibit
10.5 to the Company's Registration Statement on Form S-4 filed
with the Commission on December 28, 1994, and incorporated
herein by this reference.
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.
10.10 Form of Employment Agreement between Kent E. Lillie and Shop At
Home, Inc., filed as Exhibit B to the Company's Current Report
on Form 8-K filed with the Commission on September 17, 1993, and
incorporated herein by this reference.
10.11 Form of Warrant to Purchase Shares dated September 7, 1993,
between Shop At Home, Inc. and SAH Holdings, L.P., filed as
Exhibit A to the Company's Current Report on Form 8-K filed
with the Commission on September 17, 1993, and incorporated
herein by this reference.
10.12 Form of Option Agreement for options issued to employees,
executive officers and others, filed as Exhibit 10.13 to the
Company's Registrant Statement on Form S-4 filed with the
Commission on December 28, 1994, and incorporated herein by this
reference.
10.32 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.
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.
10.36 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.
10.43 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, filed as Exhibit 10.45
to the Company's Registration Statement on Form S-1 filed with
the Commission on January 14, 1998, and incorporated herein by
this reference.
10.46 Credit and Security Agreement dated as of February 24, 1997,
between Norwest Credit, Inc., and Collector's Edge of Tennessee,
Inc., filed as Exhibit 10.46 to the Company's Registration
Statement on Form S-1 filed with the Commission on January 14,
1998, and incorporated herein by this reference.
10.47 Loan Agreement dated November 28, 1997, between the Company and
NationsBank of Tennessee, N.A., filed as Exhibit 10.47 to the
Company's Registration Statement on Form S-1 filed with the
Commission on January 14, 1998, and incorporated herein by this
reference.
10.48 Loan Note dated November 28, 1997 made by the Company payable
to NationsBank of Tennessee, N.A., filed as Exhibit 10.48 to
the Company's Registration Statement on Form S-1 filed with
the Commission on January 14, 1998, and incorporated herein
by this reference.
10.49 Amendment No.1 to Company's Omnibus Stock Option Plan filed as
Appendix A to the Company's Proxy Statement on Schedule 14A for
the 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,
filed as Exhibit 10.50 to the Company's Registration Statement
on Form S-1 filed with the Commission on January 14, 1998, and
incorporated herein by this reference.
10.51 Form of Transponder Use Agreement dated June 25, 1995, between
the Company and B&P The SpaceConnection, filed as Exhibit 10.51
to the Company's Registration Statement on Form S-1 filed with
the Commission on January 14, 1998, and incorporated herein by
this reference.
10.52 Asset Purchase Agreement between Shop At Home, Inc., and Paxson
Communications regarding WBPT(TV), Bridgeport, Connecticut,
dated February 26, 1999, filed as Exhibit 10.46 to the Current
Report on Form 10-Q/A filed May 14, 1999, and incorporated
herein by this reference.
10.53 1999 Employee Stock Option Plan, filed as Exhibit 10.53 to the
Annual Report on Form 10-K filed August 31, 1999, and
incorporated herein by this reference.
10.54* Employment Agreement with Kent E. Lillie and Shop At Home, Inc.
dated January 27, 1999.
10.55* Employment Agreement with Arthur D. Tek and Shop At Home, Inc.
dated February 25, 1999.
10.56* Lease Agreement with InSouth Bank dated September 1, 1999.
11 Schedule of Computation of Net Income Per Share (in Note 12 to
Consolidated Financial Statements of the Company for the period
ended June 30, 1999, included herein.
21* Subsidiaries of the Company.
27* Financial Data Schedule. (For SEC Use Only)
* Filed herewith
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Amendment No.1 to the
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
SHOP AT HOME, INC.
By: /s/ Arthur D. Tek Date: 10/28/99
Arthur D. Tek
Executive Vice President and
Chief Financial Officer
<PAGE>
Exhibit 10.54
KENT E. LILLIE
EMPLOYMENT AGREEMENT
This Employment Agreement, dated as of January 27, 1999, is by and
between Shop at Home, Inc., a Tennessee corporation (the "Corporation"), and
Kent E. Lillie, an individual residing in the State of Tennessee.
W I T N E S S E T H:
WHEREAS, the Corporation engages in the business of the retail sale of
merchandise by sales presentations broadcast and distributed directly to
potential customers by cable, broadcast and satellite television transmissions
and by Internet, commonly known as the "shop at home business," and in the
business of the ownership and operation of television stations;
WHEREAS, Employee is currently the President and Chief Executive
Officer of the Corporation, pursuant to the Employment Agreement dated July 1,
1997;
WHEREAS, the Corporation recognizes that the Employee is a valuable
employee of the Corporation who is directly responsible for the Corporation's
growth and financial success; and
WHEREAS, the parties hereto desire to enter into a newly negotiated
agreement for the Corporation's employment of Employee on the terms and
conditions hereinafter stated, with the intention to replace all previous
employment agreements in their entirety.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Employment and Term. The Corporation hereby employs Employee as its
President and Chief Executive Officer to perform such services and duties as the
Board of Directors of the Corporation may from time to time designate during the
term hereof, and Employee accepts such employment, all subject to the terms and
conditions of this Agreement. Employee's employment under the terms of this
Agreement shall commence on February 1, 1999 and shall be for a term of five (5)
years (the "Term"). Employee's employment under this Agreement shall be extended
automatically for successive additional two (2) year terms after the initial
term unless either party gives written notice to the contrary to the other at
least ninety (90) days prior to commencement of any such renewal term.
2. Termination. The Corporation may terminate Employee's employment
under this Agreement at any time during the Term (a) for Cause (as hereinafter
defined) or (b) if Employee becomes Completely Disabled (as hereinafter
defined). This Agreement shall terminate automatically upon the death of the
Employee. Upon proper termination of the Employee, except as provided in
subsections 4(c)-(d), Employee shall not be entitled to receive any further
compensation or benefits from the Corporation, and except in the case of the
death of the Employee, in which event the Corporation shall continue to pay to
the Employee's estate or personal representative his Base Salary for a period of
one (1) year.
3. Duties. Employee, during the term of this Agreement, will devote his
full-time attention and energies to the diligent performance of his duties as an
employee of the Corporation. During the term of this Agreement, Employee will
not accept employment with any other Person, or engage in any venture for profit
which the Corporation may consider to be in conflict with its best interest or
to be in competition with its business or which may interfere with Employee's
performance of his duties hereunder.
4. Compensation.
(a) The Corporation will pay to Employee as compensation for
the services to be performed by him hereunder an annual salary of $225,000.00
(the "Base Salary"), payable in equal installments, subject to increase from
time to time by the mutual agreement of the parties hereto.
(b) As additional compensation, the Corporation will pay to
Employee an annual bonus paid on a quarter basis within sixty (60) days of the
end of each fiscal quarter, and provided that his employment has not been
terminated by Employee or by Employer in accordance with Section 2 hereof prior
to the last day of the fiscal quarter. Each quarterly bonus shall be equal to
the greater of (i) ten percent (10%) of the increase of the Corporation's net
income over the same quarter of the previous fiscal year, or (ii) five percent
(5%) of the Total Cash Flow (as defined below) for such quarter. For these
purposes, Total Cash Flow shall be the net income, plus depreciation and
amortization. The parties agree that the Corporation's quarterly financial
statements as filed on Form 10-Q with the Securities and Exchange Commission
shall be used as the basis upon which to determine the amount of any additional
compensation under this subsection. In the event that the Corporation later
elects or is required to revise its quarterly financial statements, the parties
agree to cooperate to make any necessary adjustments in the additional
compensation, with the intention being to finally balance such additional
compensation against the annual financial statements prepared by the
Corporation's accountants in accordance with generally accepted accounting
practices. Such annual financial statements shall be conclusive as to the total
amount, if any, of such quarterly bonuses due.
(c) If, within 24 months after the occurrence of a Change of
Control, the Corporation elects to terminate Employee's employment hereunder for
any reason, or if the Employee elects to terminate this Agreement by
resignation, the Corporation shall continue to pay Employee an amount equal to
the total amount of cash compensation paid to Employee during the 24 month
period immediately prior to the date of termination. This payment shall be paid
in a lump sum payment within thirty (30) days after the date of the Employee's
termination.
(d) In the event the Corporation terminates for Cause as
defined in Section 7(b), the Corporation shall continue to pay Employee's Base
Salary and car allowance in the amount and manner herein provided for a period
of 12 months from the date of termination.
5. Other Benefits.
(a) The duties to be performed by Employee under this
Agreement will require the regular use of an automobile, and the parties agree
that Employer shall, in lieu of furnishing Employee with a company car or
reimbursing Employee for expenses incurred for use of his personal automobile,
pay Employee a monthly automobile allowance of $1,000.00. Neither the payments
to Employee nor any other terms of this Agreement are intended or shall make
Employee the owner, bailee, or lessee of any automobile utilized by Employee.
(b) The Corporation will reimburse Employee for all expenses
incurred (other than for automobile use) in the course and scope of the
Corporation's business, upon the presentation by Employee, from time to time, of
an account of such expenditures, setting forth the purposes for which incurred,
and the amounts thereof, together with such receipts showing payments as
Employee has reasonably been able to retain.
(c) The Corporation shall provide Employee with health, life
and disability insurance pursuant to its group insurance plan as now or
hereafter in effect. In addition, Employee shall receive vacation and holiday
benefits in accordance with the Corporation's policies as now or hereafter in
effect.
(d) The Corporation will pay the reasonable cost of a country
club membership and the recurring periodic fees for the Employee.
6. Stock Options. The Corporation will grant to Employee a
non-qualified (as defined by the Internal Revenue Code) option to purchase up to
500,000 shares of the Corporation's Common Stock, $.0025 par value, at an
exercise price of $11.81 per share, subject to the vesting schedule set out in
the following sentence. Effective on the date of this Agreement, the option to
purchase up to 100,000 shares of Common Stock, of the above total of 500,000
shares, shall vest on the date of this Agreement, and an option to purchase an
additional 100,000 shares shall vest on the anniversary date for each of the
following four years. An option to purchase shares shall terminate five (5)
years after the date of the vesting of the option if not exercised on or prior
to that date. The form of such options shall be in accordance with the typical
form of such options previously granted by the Corporation to Employee. In the
event Employee resigns, or the Corporation terminates Employee for Cause,
Complete Disability, or death, all of Employee's rights with respect to such
options not yet vested shall terminate. In the event the Employee resigns within
twenty-four (24) months of the occurrence of a Change of Control, or the
Corporation terminates Employee at any time for any reason other than for Cause,
Complete Disability, or death, all of Employee's rights with respect to options
not yet vested, shall vest as of the date of termination.
7. Definitions. For purposes of this Agreement the following terms
shall have the meanings specified below:
(a) "Accounts" - All commercial accounts to which the
Corporation (including Employee) has heretofore purchased or hereafter purchases
products or services relating to the Corporation Business at any time during the
two-year period preceding termination or expiration of Employee's employment.
For purposes of this Agreement, an Account shall be deemed to be located at the
address of the Account with which the Corporation regularly deals.
(b) "Cause" shall mean any one of the following:
[1] The Employee commits an act of dishonesty,
embezzlement or fraud against the
Corporation.
[2] The Employee competes, in a manner
prohibited by this Agreement, with the
Corporation.
[3] The Employee fails to use his best efforts
on behalf of the Corporation, or conducts
himself in a manner substantially
detrimental to the Corporation, including
without limitation, if the Employee breaches
any of his obligations under this Agreement
and fails or refuses to comply with the
provisions of this Agreement within five (5)
days after receipt of written notice from
the Corporation by Employee detailing such
failure or refusal and the steps necessary
to remedy that failure.
[4] Employee is convicted of a misdemeanor
involving dishonesty, breach of trust or
moral turpitude, or is convicted of any
felony.
[5] Employee engages in the illegal use of any
drug.
[6] Any state or federal regulatory agency or
court of competent jurisdiction issues an
order requiring the Employee's removal from
any duties or responsibilities for the
Corporation.
(c) A "Change of Control" shall be an event (i) that results
in any person, including its affiliates, owning or otherwise having voting
control with respect to directors of the Corporation, of more of the issued and
outstanding stock of the Corporation or any successor entity than SAH Holdings,
L.P. and its affiliates (Global Network Television, Inc., Clinton Investments,
L.P. or J.D. Clinton) or (ii) J.D. Clinton is not elected to, or is removed
from, the Board of Directors of the Corporation (other than by the mutual
decision of J.D. Clinton and Employee) or (iii) as defined in Article 1.2 of
that certain Stock Option Agreement between the Corporation and Employee dated
as of January 27, 1999.
(d) "Corporation Business" - shall mean the business of retail
sales of merchandise by sales presentations broadcast directly to potential
customers over broadcast stations, by cable and by satellite television
transmissions, or distributed over the internet, commonly known as the "shop at
home business," and shall also include the ownership or operation of one or more
television broadcast stations.
(e) The "Corporation's Territory" shall be deemed to be North
America.
(f) "Complete Disability" - Employee's inability, due to
illness, accident or any other physical or mental incapacity, to perform the
duties provided for herein for an aggregate of 90 days within any period of 240
consecutive days.
(g) "Confidential Information" - Names, addresses, telephone
numbers, contact persons and other identifying information relating to Accounts
and information with respect to the needs and requirements of Accounts for the
Corporation's products and services; rate and price information on products and
services provided by the Corporation to its Accounts; all business records and
personnel data relating to the Corporation's employees, including compensation
arrangements of such employees; any trade secrets or other confidential
information licensed to, obtained, developed or purchased or otherwise possessed
by the Corporation or licensed by the Corporation to others; any other trade
secrets or confidential information used or obtained by Employee in the course
of his employment hereunder from any officer, employee, agent or representative
of the Corporation or any division, subsidiary or affiliate of the Corporation
or otherwise, information contained in any confidential documents prepared by or
for the Corporation and its employees or agents at the Corporation's expense, on
Corporation time or otherwise in furtherance of the Corporation Business, and
other confidential information used or obtained by Employee in the course of his
employment with the Corporation; financial information with respect to the
Corporation Business; and information with respect to the Corporation's
suppliers, and the source and availability of the supplies, equipment and
materials used in the Corporation Business; provided, however, that Confidential
Information shall not include: (i) any information that shall become generally
known to the industry through no fault of Employee; (ii) any information that
shall be disclosed to Employee by a third party (other than an officer,
employee, agent or representative of the Corporation or any division, subsidiary
or affiliate of the Corporation) having legitimate and unrestricted possession
thereof and the unrestricted right to make such disclosure; or (iii) any
information that Employee can demonstrate was within his legitimate and
unrestricted possession prior to the time of his employment by the Corporation.
All Confidential Information shall be contractually subject to protection under
this Agreement whether such information would otherwise be regarded or legally
considered "confidential" and without regard to whether such information
constitutes a trade secret under applicable law or is separately protectable at
law or in equity as a trade secret.
(h) "Person" - Any individual, corporation, bank, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization, governmental authority or other entity.
8. Covenants Against Unfair Post-Termination Competition.
(a) Covenant Against Disclosure or Use of Confidential
Information. In consideration of his employment hereunder, Employee agrees that,
for a period of two (2) years immediately after the termination or expiration of
his employment hereunder, he will not:
[1] disclose to any Person,
[2] use in soliciting the patronage of any
Person for the purpose of providing products
or services of the kind provided in the
Corporation Business, or
[3] otherwise use for his own purposes, any
Confidential Information obtained by
Employee while employed by the Corporation;
provided, however, that Employee may make
disclosures required by a valid order or
subpoena issued by a court or administrative
agency of competent jurisdiction. In such
event, Employee will promptly notify the
Corporation of such order or subpoena to
provide the Corporation an opportunity to
protect its interest. Employee shall not be
bound by this Section if the payments and
benefits described in Section 4(c) or (d) to
which Employee shall be entitled are not
current; the Employee has notified the
Corporation of that default, and the
Corporation has not cured that default
within thirty (30) days from the date of
notice.
(b) Covenant Against Post-Termination Competition. In
consideration of Employee's employment by the Corporation, Employee agrees that,
for a period of two (2) years immediately after the termination or expiration of
his employment hereunder, he will not, directly or indirectly, individually or
on behalf of any Person:
[1] solicit any Account for the purpose of
selling or providing to the Account products or
services of the same kind as provided by the
Corporation during Employee's employment by the
Corporation; or
[2] provide services of the type provided by
Employee to the Corporation to any Person which is
then engaged in the Corporation Business; or
[3] enter into the employ of or render any service to
or act in concert with any person, partnership,
corporation or other entity engaged in the
Corporation Business within the Corporation's
Territory; or
[4] become interested in the Corporation Business, as
a proprietor, partner, shareholder, director,
officer, principal, agent, employee, consultant or in
any other relationship or capacity; provided, that
Employee may own up to 5% of the outstanding shares
of any company which is a reporting company with the
U.S. Securities and Exchange Commission.
This Section shall survive the expiration or termination of this
Agreement for any reason.
Notwithstanding any of the preceding provisions, the agreement of the
Employee not to compete with the Corporation after his termination shall be void
and unenforceable after the occurrence of a Change of Control.
9. Inventions, Discoveries and Improvements.
(a) Disclosure to Corporation. Employee will promptly disclose
in writing to the Corporation any and all inventions, discoveries and
improvements, directly or indirectly related to the Corporation Business,
whether conceived or made solely by Employee or jointly with others during the
period of Employee's employment hereunder. All of Employee's right, title and
interest n and to all such inventions, discoveries and improvements developed or
conceived by Employee during the period of his employment shall be the sole
property of the Corporation.
(b) Documents of Assignment. At the Corporation's request and
expense, both during and subsequent to Employee's employment hereunder, Employee
will promptly execute a specific assignment of title to the Corporation of each
invention, discovery or improvement belonging to the Corporation and will
perform all other acts reasonably necessary to enable the Corporation to secure
a patent therefor in the United States and in foreign countries, and to
maintain, defend and assert such patents. This Section shall survive the
expiration or termination of this Agreement.
(c) Prior Inventions. Any inventions, discoveries or
improvements, patented or unpatented, that Employee can demonstrate were
conceived or made by him prior to the date hereof shall be excluded from the
provisions of this Section.
10. Return of Client Lists, Other Documents and Equipment. Upon the
termination or expiration of his employment hereunder, Employee shall deliver
promptly to the Corporation all Corporation files, customer lists, memoranda,
research, drawings, blueprints, Corporation forms and other documents supplied
to or created by him in connection with his employment hereunder (including all
copies of the foregoing) in his possession or control and all of the Corporation
equipment and other materials in his possession or control. Employee
acknowledges that all items described in this Section are and will remain at all
times the sole and exclusive property of the Corporation.
11. Survival of Restrictions. Notwithstanding the breach of any of the
provisions of this Agreement by either party hereto, all of the provisions of
Sections 8, 9 and 10 of this Agreement shall survive the termination or
expiration of Employee's employment with the Corporation and shall continue in
full force and effect in the same manner and to the same extent as if they were
set forth in a separate agreement between the Corporation and Employee, and all
of such provisions shall be binding on the heirs, legatees and legal
representative(s) of Employee.
12. Hold Harmless. Employee and the Corporation covenant and agree that
they will indemnify and hold harmless the other from (i) any and all losses,
damages, liabilities, expenses of claims resulting from or arising out of any
nonfulfillment by the defaulting party of any material provision of this
Agreement, and (ii) any and all losses or damages resulting from the defaulting
party's malfeasance or gross negligence.
13. Contract Nonassignable. The parties acknowledge that this Agreement
has been entered into due to, among other things, the special skills of
Employee, and agree that this Agreement may not be assigned or transferred by
Employee, in whole or in part, without the prior written consent of the
Corporation. This Agreement shall be binding and shall inure to the benefit of
the Corporation and its successors and assigns.
14. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or mailed, first class, certified mail, postage
prepaid:
To Corporation: Shop At Home, Inc.
5388 Hickory Hollow Parkway
Antioch, Tennessee 37013
Attention: General Counsel
To Employee: Kent E. Lillie
4362 Chickering Lane
Nashville, Tennessee 37215
15. Cumulative and Severable Nature of Rights and Agreements. Employee
acknowledges and agrees that the Corporation's various rights and remedies in
this Agreement are cumulative and nonexclusive of one another and that
Employee's several undertakings and agreements contained herein, including,
without limitation, those contained in Sections 8(a), 8(b), 9 and 10 of this
Agreement, are severable covenants independent of one another and of any other
provision or covenant of this Agreement. Employee agrees that the existence of
any claim by him against the Corporation, whether predicated on this Agreement
or otherwise, shall not constitute a defense to enforcement by the Corporation
of any or all of such provisions or covenants. If any provision or covenant, or
any part thereof, of this Agreement should be held by any court to be invalid,
illegal or unenforceable, either in whole or in part, such invalidity,
illegality or unenforceability of the remaining provisions or covenants, or any
part thereof, of this Agreement, all of which shall remain in full force and
effect.
16. Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the future performance of any such
condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
17. Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto.
18. Execution to Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same instrument.
19. Headings. The headings set out in this Agreement are for
convenience of reference and shall not be deemed a part of this Agreement and
shall not affect the meaning or construction of any of the provisions her
20. Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the parties and
supersedes any prior understandings, agreements, or representations by or among
the parties, written or oral, to the extent they related in any way to the
subject matter hereof.
21. Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Tennessee without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Tennessee or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Tennessee.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
EMPLOYER: EMPLOYEE:
SHOP AT HOME, INC.
By: J.D. CLINTON, Chairman KENT E. LILLIE
<PAGE>
EXHIBIT 10.55
EMPLOYMENT AGREEMENT
Arthur D. Tek
Executive Vice President and Chief Financial Officer
This EMPLOYMENT AGREEMENT made as of this day of February 25, 1999,
(this "Agreement") by and between Shop At Home, Inc., a Tennessee corporation
with its principal place of business 5388 Hickory Hollow Parkway, Nashville,
Tennessee 37013-3128, its successors and assigns (herein the "Network") and
Arthur D. Tek, an individual, currently residing at the address set forth in
Section 24 (the "Executive") (collectively, the "Parties").
WHEREAS, Network desires to employ Executive as Executive Vice
President and Chief Financial Officer, and the Parties desire to enter into this
agreement to secure Executive's employment as Executive Vice President and Chief
Financial Officer during the term hereof, all on the terms and conditions set
forth herein;
WHEREAS, Network understands that Executive has a present contract with
Paxson Communications Corporation (herein "Paxson") that contains a noncompete
clause that may be applicable to the Executive accepting this position with the
Network, therefore this Agreement, and any offer of employment, is contingent
upon the Executive obtaining a valid release in such form as may be acceptable
to the Network from Paxson releasing him from the provisions of his noncompete
clause of his Employment contract with Paxson. It is a condition precedent to
this Agreement that the Executive obtain a valid waiver from Paxson's noncompete
clause. Executive shall deliver such release to the Network simultaneously with
his execution of this Agreement.
WHEREAS, Network agrees to employ the Executive and the Executive
agrees to serve the Network as Executive Vice President and Chief Financial
Officer based primarily at the Network's offices referenced above on the terms
and conditions hereinafter set forth.
<PAGE>
NOW, THEREFORE, the Parties agree as follows:
1. TERM. Employment of the Executive by the Network pursuant to this
Agreement will be for a five (5) year period commencing the Start Date, unless
terminated sooner pursuant to Section 11 below (the "Term of Employment"). The
Start Date shall be March 15, 1999, or earlier.
2. DUTIES. Subject to the direction and control of the President and
Chief Executive Officer, and such other senior executive officer as the Chairman
of the Board may direct to whom Executive will report, the Executive shall have
all of the power and authority inherent in the position of Executive Vice
President and Chief Financial Officer and shall supervise and be responsible for
the operations and management of the Network and its subsidiaries. The Executive
shall also have such other executive powers and duties, consistent with his
responsibilities as Executive Vice President and Chief Financial Officer, as
may, from time to time, be prescribed by the Chairman of the Board and the
President and Chief Executive Officer. The Executive agrees to render his
services under this Agreement loyally and faithfully, to the best of his
abilities and in substantial conformance with all laws, rules and Network
policies, and in connection therewith, will not improperly or without good
cause, in the best interest of the Network, disclose any trade secrets or other
confidential information of the Network. Without limiting the foregoing, except
as expressly modified herein, Executive shall be subject to all of the Network's
policies as well as the following:
(a) Executive will comply with all the Network and
professional standards governing Executive's objectivity in the
performance of Executive's duties, including restrictions on outside
activities, investments, business interests, or other involvements
which could compromise Executive's objectivity or create an impression
of conflict of interest. Executive will not, without the prior approval
of the President and Chief Executive Officer, accept any gift,
compensation, or gratuity (which excludes business meals and
entertainment received by Executive in the ordinary course of business)
from any person or entity with which the Network or any of its
broadcast properties is or may be in competition or in any instance
where there is a stated or implied expectation of favorable treatment
of that person or entity. Executive will not, without the prior written
approval of the President and Chief Executive Officer, take advantage
of any business opportunity or situation or engage in any enterprise or
venture of which the Network may have an interest on his or her own
behalf, if said business opportunity or situation, enterprise or
venture is related in any way to or is similar to the business of the
Network.
<PAGE>
(b) In performing Executive's duties under this agreement,
Executive shall conduct himself with due regard to social conventions,
public morals and standards of decency, and will not cause or permit
any situation or occurrence which would tend to degrade, scandalize,
bring into public disrepute, or otherwise lower the community standing
of Executive or the Network's public image.
3. BASE SALARY. Network will pay the Executive a base salary (the "Base
Salary"), to be paid on the same payroll cycle as other salaried employees of
the Network, at an annual rate for 1999 of $175,000.
4. RAISES TO BASE SALARY. The Base Salary may be subject to annual increases
pursuant to an annual performance evaluation by and upon the discretion of the
President & Chief Executive Officer on the anniversary date of this Agreement.
5. STOCK OPTIONS. The Executive will be granted 150,000 stock options priced at
the Executive's Start Date with the first twenty percent (20%) vesting
immediately and the balance vesting at sixteen percent (16%) over the next five
(5) years pursuant to the form of the Stock Option Agreement attached hereto as
Exhibit 1.
6. BONUS. In addition to the Base Salary and stock options, the Network will
develop a bonus plan for the Executive similar to the one in existence for the
President and Chief Executive Officer tied to the performance of the Network
which may provide the Executive up to an additional $75,000 a year (the "Bonus
Plan"). This Bonus Plan shall be reduced to writing within two (2) weeks from
the Start Date and shall be attached to this Agreement.
7. STANDARD BENEFITS. During the Term of Employment, the Executive shall be
eligible to participate in all employee benefit plans and arrangements now in
effect or which may hereafter be established, which are generally available to
other senior executives of the Network, including, without limitation, all life,
group insurance and medical plans and all disability, retirement and other
employee benefit plans of the Network, as long as any such plan or arrangement
remains generally applicable to other senior executives of the Network.
8. EXPENSES. The Executive shall be reimbursed for all reasonable expenses
incurred by him in the discharge of his duties, including, but not limited to,
expenses for entertainment and travel. The Executive shall account to the
Network for all such expenses on the standard reimbursement forms and pursuant
to the Network's generally applicable reimbursement policies.
<PAGE>
9. MOVING EXPENSES. The Network will pay the Executive's reasonable and
necessary moving expenses in moving from Florida to Nashville. These moving
expenses shall include any broker's fee incurred in selling the Executive's
residence in Florida.
10. LODGING EXPENSES. Network will pay the Executive's lodging expenses until
Executive is able to move his family from Florida, such period in no event to
exceed six (6) months following the Start Date. Such lodging shall consist of
the rental of a furnished apartment that shall be mutually agreeable to the
parties.
11. TERMINATION. Notwithstanding the provisions of Paragraph 1 of this
Agreement, the Executive's Term of Employment pursuant to this Agreement shall
terminate on the earliest of the following dates:
(a) FOR CAUSE. The date the President and Chief Executive
Officer or the Chairman of the Board chooses to give the Executive
notice of termination of his employment "for cause" ("Termination For
Cause"). The term "For Cause" as used in this Agreement shall mean the
occurrence of any of the following events:
(i) Executive's arrest or civil prosecution for the
commission of (A) a felony, (B) any criminal act with respect
to Executive's employment (including but not limited to any
criminal act involving a violation of the Communications Act
of 1934, as amended, or regulations promulgated by the Federal
Communications Commission), (C) any act that materially
threatens to result in suspension, revocation, or adverse
modification of any FCC license of any broadcast station owned
by any affiliate of the Network or would subject any such
broadcast station to fine or forfeiture; or (D) any material
violation of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended.
(ii) Executive's taking of any action or inaction
which would cause the Network to be in default under any
material contract, lease or other agreement;
(iii) Executive's dependence on alcohol or illegal
drugs;
(iv) Failure or refusal to perform according to or
follow the lawful policies and directives of the Chairman of
the Board or the President and Chief Executive Officer;
(v) Executive's misappropriation, conversion or
embezzlement of the assets of the Network or any affiliate of
the Network;
(vi) A material breach of this Agreement by
Executive, including engaging in action in violation of
Paragraph 2 of this Agreement; or
(vii) Any representation of Executive in Section 15
of this Agreement being false when made; or
(viii)The Executive voluntarily, including
retirement, ceases his employment with the Network at a time
when the Network is not in material breach of this Agreement.
In the event of a termination under this subparagraph (a),
other than pursuant to clause (a)(viii), the Network shall notify the
Executive of its intentions to terminate his employment and the
specific reason(s) therefore, and the Executive, on at least ten (10)
business days notice, shall have an opportunity to respond thereto;
and, provided further, if the basis for such termination is susceptible
of being cured by the Executive, the Network shall afford the Executive
a reasonable period, not to exceed 60 days, to effect such cure, and
the Executive's employment may not be terminated during said period.
In the event of termination for Cause, the Network will be
released from all further obligation to the Executive under this
Agreement, except for such salary as may have been earned or any Bonus
Awards made but not paid prior to the termination;
(b) FOR CONVENIENCE. The date on which the President and Chief Executive
Officer or the Chairman of the Board chooses to notify the Executive
that such person, in his/her sole discretion, has determined that it is
in the best interest of the Network to terminate the Executive's
employment ("Termination For Convenience"). In the event of such
termination, the Executive will continue to be paid the Executive's
Base Salary then in effect for one (1) year unless the Executive
accepts a position with another company. In such an event, the Network
would only pay the severance to the date on which the Executive accepts
a position with another company.
(c) NETWORK'S BREACH. The date on which the Executive terminates his
employment because the Network has materially breached this Agreement
("Termination For Network's Breach"). In such case, the Executive
shall notify the Network of his intentions to terminate his
employment and the specific reason(s) therefor, and the Network, on at
least ten (10) business days notice, shall have an opportunity to
respond thereto; and, provided further, if the basis for such
termination is susceptible of being cured by the Network, the Executive
shall afford the Network a reasonable period, not to exceed 60 days,
to effect such cure, and the Executive may not terminate his employment
during said 60 day period. In the event of such termination, and
if the Network does not challenge whether it breached the Agreement
the Executive will continue to be paid Executive's Base Salary then
in effect for one (1) year or until the Executive accepts a position
with another company. If the network challenges the assertion that it
breached the Agreement, then it shall only owe the Base Salary for
one (1) year or until the Executive accepts a position with another
company, if the Executive prevails in showing that the Network breached
this Agreement.
(d) EXPIRATION OF TERM. The expiration of the Term of Employment as
described in Section 1 of this Agreement ("Termination for Expiration
of Term"). Before the expiration of the term the parties
may extend the term of this Agreement by mutual agreement. If the
Network elects not to extend the term, then the Executive shall be
entitled to be paid Executive's Base Salary then in effect for one (1)
year or until the Executive accepts a position with another company.
Otherwise, the Network will have no further liability to the Executive
hereunder and no further payments will be made to him, except for any
Bonus Awards given but not paid as of such termination, and except to
the extent that the Executive qualifies for benefits under any employee
benefit plan available to the Executive as provided in Section 7.
12. NONCOMPETE COVENANTS. In consideration of this Agreement the Executive
specifically agrees that during his or her employment, and in the event of
Termination For Cause or Termination for Expiration of Term, he will not for a
period of one (1) year from the date of such termination, directly or
indirectly, work for any person or entity engaged in the home shopping
broadcasting business or engaged in any e-commerce internet based business
("Competitor") or engage in any relationship with such Competitor including but
not limited to that of owner, partner, director, officer, principal, agent,
employee, consultant, or in any other similar position or relationship with a
Competitor ("Covenant Not to Compete"). In the event of Termination For
Conveneience or Termination For Network's Breach, the Executive shall not be
subject to this Covenant Not to Compete.
(a) Executive agrees that the Covenant Not to Compete is a
material part of Executive's obligations under this Agreement for which
the Network has agreed to compensate Executive as provided in this
Agreement. Accordingly, if Executive at any time materially breaches
this Covenant Not to Compete and the Network is in compliance with all
of its obligations hereunder then all rights of Executive to
compensation under this Agreement shall immediately terminate, Network
shall have no further liability to Executive and no further payments
(if any are otherwise required to be made) shall be required to be made
to Executive.
(b) Executive expressly agrees that the services he will
render are of a special and extraordinary character that gives them a
unique value; that the loss of such services could not be reasonably or
adequately compensated by an action for damages; and that the Network
may enforce this noncompete covenant without proof of actual damages.
Executive expressly agrees that his services have special and unique
value to the Network and that the Network would be irreparably injured
by a breach of this Section. Further, Executive acknowledges the
legitimate business interest of the Network in the protection of its
trade secrets, confidential business lists and records, viewer/client
goodwill and the training provided during employment. Necessarily,
then, any relationship of Executive with another Competitor would
involve the transfer of one or all of these items to that entity. The
Executive agrees that the provisions in this Section are reasonably
necessary for the protection of the Network's business; that they are
not unreasonably restrictive of his rights; and that he does not feel
that any of these restrictions placed upon him are prejudicial to the
public interest.
(d) If the Covenant Not to Compete in this Section is held to be
unenforceable in any jurisdiction because of the duration or scope
thereof, the court making such determination shall have the power to
reduce the duration and/or scope of the provision or covenant, and the
provision or covenant in its reduced form shall be enforceable;
provided, however, that the determination of such court shall not
affect the enforceability of this Section in any other jurisdiction.
(e) Executive acknowledges that the provisions of this Covenant Not to
Compete are necessary in order to protect the legitimate business
interests of the Network, and that as such, the provisions of this
Agreement are reasonably related to such end. Executive further
acknowledges (1) in the event that his employment with the Network
terminates for any reason, he will be able to earn a livelihood without
violating the terms of this Agreement and (2) his ability to earn a
livelihood without violating this Agreement is a material condition to
his employment with the Network.
13. NO INDUCEMENTS. Executive further agrees during his employment and for a
period of one (1) year following the Executive's last day of employment with the
Network, that the Executive will not attempt, either directly or indirectly, to
induce any other employee of the Network or its affiliates or subsidiaries to
leave the Network.
14. NETWORK'S CONFIDENTIAL INFORMATION. Executive hereby agrees that he will
not, during the course of his employment with the Network or at any time
thereafter, communicate or disclose to any person or entity either directly or
indirectly or under any circumstances, any proprietary knowledge or confidential
information whatsoever acquired while an employee of the Network concerning the
Network's operations or any other confidential information regarding the Network
without the written consent of the Network.
15. EXECUTIVE REPRESENTATIONS. To induce the Network to enter into this
Agreement and to employ Executive, Executive represents and warrants to the
Network as of the date hereof and during the term of this Agreement the
following:
(a) The execution, delivery and performance of this Agreement by Executive
does not conflict with result in a breach of, or constitute a default
under any covenant not to compete or any other agreement, instrument,
or license, to which Executive is a party or by which Executive is
bound.
(b) Executive has not:
(i) Been convicted of any felony;
(ii) Committed any criminal act with respect to Executive's current
or any prior employment (including any criminal act involving
a violation of the Communication Act of 1934, as amended, or
regulations promulgated by the FCC);
(iii) Committed any act that materially threatened to result in
suspension, revocation, or adverse modification of any FCC
license of any broadcast station or which subjected any
broadcast station to fine or forfeiture; or
(iv) Committed any material violation of the Securities Act of 1933
and the Securities Exchange Act of 1934 as amended.
(c) Executive is not dependent on alcohol or illegal drugs. Executive
recognizes that the Network shall have the right to conduct drug
testing of its employees and that Executive may be called upon in such
a manner.
16. AGREEMENT OF CONFIDENTIALITY. Both during and after the Term of Employment,
neither Party will disclose the financial terms of this Agreement to persons not
involved in the operations of the business of the Network, except as required by
applicable law, regulation, the rules or regulations of a stock exchange or
association on which securities of the Network or any parent Network thereof are
listed or legal process (including, without limitation, oral questions,
interrogatories, requests for information or documents, subpoenas, civil
investigative demands, orders, judgments or decrees). As to persons involved in
the operations of the business of the Network, disclosure of such terms may be
made only on a need-to-know basis. This restriction shall not apply to members
of the Executive's immediate family nor to the Executive's professional
advisers, lenders and investors, provided such persons agree to keep the
financial terms confidential and not disclose them to third parties.
17. NO WAIVER. Any waiver by either Party or a breach of any provision of this
Agreement shall no operate as to be construed to be a waiver of any other breach
of such provision of this Agreement. The failure of a Party to insist upon
strict adherence to any term of this Agreement on one or more occasions shall
not be considered a waiver or deprive that Party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
18. MODIFICATION. Neither this Agreement nor any part of it may be waived,
changed or terminated orally, and any amendment or modification must be in
writing and signed by each of the Parties.
19. ASSIGNABILITY. This Agreement may be assigned by the Network and is not
assignable by the Executive.
20. COUNTERPARTS. This Agreement may be executed in any number of counterparts,
each of which shall, when executed, be deemed to be an original and all of which
shall be deemed to be one and the same instrument.
21. TENNESSEE LAW AND VENUE. Executive agrees that this Agreement shall be
governed by and construed in accordance the laws of the State of Tennessee,
notwithstanding any conflicts of law doctrines of any jurisdiction to the
contrary, and the Executive further agrees that any action to enforce this
Agreement may be brought in the Circuit or Chancery Court of any Judicial
District in Tennessee and the Executive specifically consents for himself and
his property to the jurisdiction and venue of such courts and waives any right
to claim that such courts are an inconvenient or improper forum.
22. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the
Parties relating to the subject matter of this Agreement and supersedes all
other prior written or oral agreements. The Executive acknowledges that, in
entering into this Agreement, he does not rely on any statements or
representations not contained in this Agreement.
23. SEVERABILITY. Any term or provision of this Agreement which is determined to
be invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
24. NOTICES. Except as otherwise specifically provided in this Agreement, all
notices and other communications required or permitted to be given under this
Agreement shall be in writing and delivery thereof shall be deemed to have been
made when such notice shall have been either (i) deposited in first class mail,
postage prepaid, return receipt requested, or any comparable or superior postal
or air courier service then in effect, or (ii) transmitted by hand delivery to
the party entitled to receive the same at the address indicated below or at such
other address as such party shall have specified by written notice to the other
party hereto given in accordance herewith. The Executive agrees to give the
Network copies of any such notices by facsimile to the facsimile numbers
indicated below:
If to the Network: Shop At Home, Inc.
5388 Hickory Hollow Parkway
Antioch, Tennessee 37013-3128
Attention: President & Chief Financial Officer
Facsimile: (615) 263-8081
With a copy to: Shop At Home, Inc.
5388 Hickory Hollow Parkway
Antioch, Tennessee 37013-3128
Attention: Executive Vice President
& General Counsel
Facsimile: (615) 263-8911
If to the Executive:
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties as of the first date written above.
EXECUTIVE SHOP AT HOME, INC.
By:
Arthur D. Tek Kent E. Lillie
President & Chief Executive Officer
ADDENDUM TO THE EMPLOYMENT AGREEMENT
Arthur D. Tek
Executive Vice President and Chief Financial Officer
This Addendum entered this the _____ day of September, 1999, amends the
Employment Agreement of Arthur Tek that was originally entered on the 25th day
of February 1999. The terms of the Employment Agreement are controlling except
as specifically amended by this Addendum.
Specifically, within two (2) years after a Change of Control as defined
below, the Executive shall be entitled to be paid the Executive's Base Salary
then in effect for a period of two (2) years or the remainder of the term of the
Employment Agreement, whichever is shorter, from the date he either (a) resigns
or (b) is terminated for any reason other than For Cause.
Change of Control means: (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Network (in one
transaction or in a series of related transactions) to a person that is not
controlled by the Network, (b) the approval by the Network's shareholders of any
plan or proposal for the liquidation or dissolution of the Network, or (c) a
change in control of the Network of a nature that would be required to be
reported (assuming such event has not been "previously reported") in response to
Item I (a) of the Current Report on Form 8-K, as in effect on the effective date
of this Addendum, pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934, whether or not the Network is then subject to such reporting
requirement; provided, however, that, without limitation, such a change in
control shall be deemed to have occurred at such time as (i) any Person becomes
after the date of this Addendum the "beneficial owner" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934), directly or indirectly, of 30% or
more of the combined voting power of the Network's outstanding securities
ordinarily having the right to vote at elections of Directors or (ii)
individuals who constitute the Board of Directors of the Network on the date of
this Addendum cease for any reason to constitute at least a majority thereof,
provided that any person becoming a Director subsequent to such date whose
election, or nomination for election by the Network's shareholders, was approved
by a vote of at least a majority of the Directors comprising or deemed pursuant
hereto to comprise the Board on the date of this Addendum shall be, for purposes
of this clause (ii), considered as though such person were a member of the Board
on the date of this Addendum or (iii) any person owns or controls more
outstanding shares of Shop At Home common stock than J.D. Clinton.
<PAGE>
The Executive agrees that in the event he resigns because of a Change
of Control, that he shall be subject to the terms of the Noncompete provisions
spelled in Section 12 of his Employment Agreement for a period of two (2) years.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties as of the first date written above.
EXECUTIVE SHOP AT HOME, INC.
By:
Arthur D. Tek Kent E. Lillie
President & Chief Executive Officer
<PAGE>
EXHIBIT 10.56
LEASE AGREEMENT
BETWEEN
INSOUTH BANK and SHOP AT HOME, INC.
This Lease Agreement, dated September 1st, 1999, is between INSOUTH
Bank, a Tennessee banking corporation ("Lessor"), and Shop at Home, Inc., a
Tennessee corporation ("Lessee").
Recital of Facts
The following recitals are set forth for the purpose of stating the
facts and circumstances which form the background and basis for this Agreement:
[A] Lessor is the owner of certain real estate located in Davidson
County, Tennessee, described on Exhibit A attached hereto,
upon which it has constructed a commercial office building
("Building"), located at 5380 Hickory Hollow Parkway,
consisting of two floors and approximately 42,500 square feet;
and
[B] Lessor wishes to lease to Lessee and Lessee wishes to take
from Lessor a portion of the first floor of the Building as
shown on the floor plan attached hereto as Exhibit B (the
"Leased Premises").
Agreements of the Parties
In consideration of the above recitals and the mutual terms and
conditions set out herein, the parties agree as follows:
1. PREMISES. Lessor hereby leases to Lessee, and Lessee hereby leases
and accepts from Lessor the Leased Premises. The Leased Premises are conveyed
subject to all easements, encumbrances and other matters of public record or
matters known to Lessee.
2. NET RENTABLE AREA. "Net Rentable Area", as used in this Lease, shall
mean 9,244 square feet. This area has been computed by as follows:
a. All floor area computed from Lessor's architect's plans of
the Building or, at Lessor's option, from field measurements, by
measuring from the inside surface of the outer glass or finished column
wall of the Building to the inside surface of the opposite outer wall,
excluding only:
(i) Stairs with their enclosing walls;
(ii) All elevator shafts and elevator machine
rooms with their enclosing walls; and
(iii) Tank rooms, flues, vents, stacks, ducts, and
pipe shafts with their enclosing walls,
except those in columns and projections
necessary to the Building and ducts, if any,
in floor areas; and
b. A portion of the common areas of the Building allocated to
the Lessee.
3. TERM. The term (the "Term") of this Lease shall commence on the 1st
day of occupancy or November 1st, 1999, whichever date is earlier ("Commencement
Date"), and shall end at 6:00 p.m., Nashville, Tennessee time, on the last day
of the preceding month of the Commencement Date, 2004. The Lessee shall have
reasonable access to the Building to make the improvements to the Leased
Premises, if the parties agree that Lessee can use its own contractor to make
such improvements, beginning upon the execution of this Lease
4. OPTION TO RENEW. Lessee shall have the right and option to renew the
term of this Lease for five (5) additional terms of one year each, (together the
"Renewal Terms"), commencing upon the expiration of the initial term hereof.
Each Renewal Term will commence automatically, without further action of either
the Lessor or the Lessee, unless the Lessee gives written notice to Lessor of
its intention to terminate the Lease at the end of the then current term, which
notice must be given at least 180 days prior to the end of the then current
term. Any such renewal shall be subject to all of the terms and provisions of
this Lease, except that Lessee shall have no right to extend the Lease beyond
the five (5) Renewal Terms.
5. BASE RENTAL.
During the Term of this Lease, Lessee shall pay a base annual rental in
the sum of One Hundred Forty Seven Thousand Nine Hundred Twenty Five and
No/Dollars $147,904.00) payable in installments of Twelve Thousand Three Hundred
Twenty Five and 33/100 Dollars ($12,325.33) per month for each and every month
during the said Term. This rental is based upon an annual rental rate of $16.00
per square foot of Net Rentable Area. During each year of the Renewal Terms, if
the option to renew is exercised, the base annual rate, the monthly installments
and the per square foot rate shall be as follows: <TABLE> <CAPTION>
Renewal Term Base Annual Rental Monthly Rental Sq. Foot Rate
<S> <C> <C> <C>
1st One Year Renewal Term $152,526 $12,710.50 $16.50
2nd One Year Renewal Term 157,148 13,095.67 17.00
3rd One Year Renewal Term 161,770 13,480.83 17.50
4th One Year Renewal Term 166,392 13,866.00 18.00
5th One Year Renewal Term 171,014 14,251.17 18.50
</TABLE>
The base annual rental as increased from Lease Year to Lease Year is
hereinafter referred to as the "Base Rental". The words "Lease Year" shall mean
a period of twelve successive months, with the first Lease Year beginning on the
commencement date of the Term of this Lease.
b. The Base Rental, together with any adjustments of rent provided for
herein, shall be due and payable in twelve (12) equal installments on the first
day of each calendar month during each year of the Term of this Lease and the
Renewal Term of the Lease. Lessee agrees to pay the Base Rental to Lessor at
Lessor's address as provided herein or at such other address as Lessor may
designate from time to time. The Base Rental shall be paid monthly in advance.
If the term of this Lease commences on other than the first day of a calendar
month or terminates on other than the last day of the calendar month, then the
installments of Base Rental for such month or months shall be prorated and the
prorated installments shall be paid in advance as provided above.
6. OPERATING EXPENSES. The Base Rental has been computed to take into
consideration the payment of the Lessee's portion of the operating expenses for
the Building, other than tenant electricity.
7. RENT. Lessee shall pay to Lessor the Base Rental provided above and
all other sums due under this Lease promptly, as provided in this Lease. Receipt
of any payment by Lessor from Lessee after Lessor has learned of any breach of
this Lease, terminated this Lease, commenced any suit to enforce this Lease, or
obtained final judgment for possession of the Leased Premises, shall in no event
be deemed a waiver of any of Lessor's rights under this Lease. Nor shall any
such receipt be construed to reinstate, continue, or extend the term of this
Lease.
8. IMPROVEMENTS TO LEASED PREMISES. Lessee agrees to furnish Lessor
with a detailed floor plan layout and working drawings reflecting the partitions
and improvements desired by Lessee in the Leased Premises as soon as they are
available and the Lessee shall not start the improvements until the Lessor has
had reasonable time to review and approve such plans. By agreement of the
parties the Lessor may allow the Lessee to improve the Leased Premises using its
own contractor or may provide improvements directly. After receipt of said
plans, Lessor will cause the Leased Premises to be prepared in accordance
therewith, or if the Lessee is using its own contractor to make such
improvements, that the Lessor shall have the right to review and approve the
plans and the contractor, such approval not to be unreasonably withheld. If the
Lessor is providing the improvements, the Lessor shall not be required to
install any partitions or improvements that are not in conformity with the plans
and specifications for the Building, a copy of which plans and specifications
are attached to this Lease as Exhibit C and incorporated herein by reference, or
which are not approved by Lessor's architect. If the Lessee uses its own
contractor to make the improvements, it agrees to have any changes to the plans
and specifications for the Building approved by the Lessor, such approval not to
unreasonably withheld.
The cost of all improvements in excess of $184,880.00, hereinafter
referred to as the Tenant Cost Allowance, and the Tenant Work Letter to be
agreed to by the parties, shall be paid by Lessee to Lessor as additional rent
promptly upon being invoiced therefor. If the Lessee improves the Leased
premises by using its own contractor, then the Lessor shall pay the improvements
allowance to the Lessee's contractor as they are billed up to a maximum of
$184,880.00, after which the Lessee will be responsible for paying any
additional amounts. The taking of possession by Lessee shall conclusively
establish that said improvements have been completed in accordance with approved
plans and specifications therefor, and that the Leased Premises are in good and
satisfactory condition at the time possession is taken. If the cost of all
improvements for the Lessee does not equal $184,880.00, the parties agree to
negotiate an equitable downward adjustment in Base Rental.
9. USE, TERMINATION AND SURRENDER. Lessee shall use and occupy the
Leased Premises as office space only, including computer and Internet
operations, and for no other purpose. Lessee's use of the Leased Premises shall
not violate any ordinance, law, recorded restrictions, government regulations,
or the "Rules and Regulations" attached hereto as Exhibit D, and made a part
hereof by reference. Lessee will, at Lessee's expense, take good care of the
Leased Premises and the fixtures and appurtenances therein. Lessee shall neither
cause nor allow any waste or injury of the Leased Premises. Lessee shall, at
Lessee's expense, but under the direction of Lessor, promptly repair any injury
or damage to the Leased Premises, the Building, or the land upon which the
Building is located, caused by the misuse or neglect thereof by Lessee, by any
persons allowed on the Leased Premises by Lessee, or by Lessee's moving in or
out of the Leased Premises. Upon expiration or termination of this Lease, for
any cause, Lessee agrees to deliver up and surrender to Lessor the Leased
Premises in as good condition as at the date of possession by Lessee, ordinary
wear and tear excepted. All alterations, additions, or improvements (including,
but not limited to, carpets, draperies, and drapery hardware) made or installed
by Lessee in or to the Leased Premises shall become the property of Lessor at
the expiration of this Lease, unless the parties agree otherwise.
Upon the termination of this Lease, Lessee will have removed all of
Lessee's personal property which does not constitute an alteration, addition or
improvement made to the Leased Premises and will have repaired all injury done
by or in connection with removal of said personal property and surrender the
Leased Premises (together with all keys to the Leased Premises) in as good a
condition as they were at the beginning of the Term, ordinary wear and tear
excepted.
10. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. Lessee will not make any
alterations, additions or improvements in or about the Leased Premises without
the prior written consent of Lessor. Lessee will not do anything to or on the
Leased Premises which will increase the rate of fire or other insurance on the
Building or the Leased Premises or subject any such insurance to being void or
suspended. If Lessee's acts, omissions, or occupancy of the Leased Premises
causes the rate of fire or other insurance on the Building or Leased Premises to
increase, Lessee shall pay, as additional rent, the amount of any increase in
premium promptly upon demand by Lessor.
In making any improvements or additions to the Leased Premises, Lessee
shall use only contractors approved by Lessor. Lessee shall promptly pay any
charges arising out of or in connection with the performance of any work allowed
under this section, and shall keep the Leased Premises and the Building free and
clear of any and all liens or other claims. Lessee agrees to indemnify and hold
Lessor harmless from and against any and all losses, costs, damages, or
liabilities resulting from or attributable to any liens or claims of liens for
work done or materials furnished in connection with the Leased Premises. At
Lessor's request, Lessee shall remove any lien or claim of lien within thirty
(30) days after notice from Lessor, by purchasing a cash or surety bond
sufficient to discharge the lien claim. In having any improvements made to the
Leased Premises pursuant to this section, Lessee shall be responsible for
compliance with all lawful requirements, rules, regulations, and ordinances,
including, without limitation, the Occupational Safety and Health Act and all
amendments thereto.
11. SUBORDINATION. This Lease is subject and subordinate to any
Mortgage or Deed of Trust which may now or hereafter encumber the Building, and
to all renewals, modifications, consolidations, replacements, or extensions
thereof. This section shall be self-operative, without need for any further
instrument of subordination in favor of any mortgagee. At Lessor's request,
Lessee shall promptly execute any appropriate Estoppel Certificate, Attornment
Agreement, or other similar instrument which Lessor or any mortgagee may
request. Upon the request of any party succeeding to the interest of Lessor as a
result of the enforcement of any Deed of Trust or Mortgage upon the Building,
Lessee shall automatically become the tenant of such successor-in-interest
without changing the terms or other provisions of this Lease. Lessee further
agrees to provide any lienholder or successor-in-interest of the Building with
written certification as to any true facts concerning the circumstances of
Lessee's interest in the Leased Premises, and agreeing to reasonable notice
provisions in favor of such lienholder or successor-in-interest.
12. PERSONAL PROPERTY TAXES, RENT TAXES, AND OTHER TAXES. Lessee shall
pay, or cause to be paid, before delinquency, any and all taxes and assessments
levied or assessed upon Lessee's leasehold improvements, equipment, furniture,
fixtures, and other personal property located on the Leased Premises and any and
all taxes assessed by any governmental authority for services rendered by
Lessee. If any of Lessee's leasehold improvements, equipment, furniture,
fixtures, and other personal property are assessed and taxed against Lessor as
being part of the Building, Lessee shall pay the Lessor its share of such real
estate taxes within thirty (30) days after delivery to Lessee of a statement of
the amount of such taxes applicable to Lessee's property. Lessee shall reimburse
Lessor for any sales, use, or other taxes (except income tax) charged to Lessor,
with respect to sums paid by Lessee or received by Lessor under this Lease. The
sums payable to Lessor under this Lease shall be received by Lessor net of any
taxes other than Lessor's income tax. Lessee shall reimburse Lessor for the
amounts provided herein within thirty (30) days after receipt of notice of such
amounts.
13. ASSIGNMENT AND SUBLETTING. Lessee may not (a) assign this Lease, or
any interest hereunder; (b) sublet the Leased Premises, or any part thereof; or
(a) license or permit the use of the Leased Premises by any party other than
Lessee without the prior written consent of Lessor, evidenced by an instrument
of equal dignity with this Lease, which consent the Lessor will not unreasonably
withhold. Consent to one (1) assignment, sublease or other use of the Leased
Premises shall not destroy or waive this provision. All later assignments,
subleases, or uses of the Leased Premises shall likewise be made only upon the
prior written consent of Lessor. All subtenants, assignees, licensees, and other
persons occupying the Leased Premises shall become liable directly to Lessor for
all of the obligations of Lessee under this Lease, without in any way relieving
Lessee's liabilities hereunder. Receipt of rent payments or other payments by
Lessor from any subtenant, assignee, licensee, or other person, shall not
constitute a waiver of Lessor's rights under this section, or a consent to any
use of the Leased Premises by such party.
14. SERVICES, WATER, CLEANING, GAS, AND ELECTRICITY. Lessor shall
furnish the services provided in this section, subject to the limitations
provided.
a. Lessor shall furnish the services as indicated below
without charge (except as provided in b. below with regard to
electricity, at the proper season, on a 24-hour per day, 7-day per
week, basis:
(i) Air conditioning and heating sufficient to cool or
heat the Leased Premises
(ii) Common use restrooms and toilets
(iii) Cleaning services, which need not be performed during
business hours
b. Lessor shall also furnish electric current on the Leased
Premises in accordance with the specifications of Lessee; provided,
that all such electricity shall be separately metered and paid by
Lessee.
15. ENTRY. Lessor may enter the Leased Premises at reasonable hours to
show the premises to lenders, contractors, governmental representatives, or
prospective purchasers or tenants, to inspect the premises, or to make necessary
repairs to the Leased Premises or to any adjoining space within the Building.
Entry by Lessor shall not entitle Lessee to any rent abatement.
16. ASSIGNMENT BY LESSOR. Lessor shall have the right to transfer and
assign, in whole or in part, all of its right, title and interest in and to this
Lease, the Building, and the property upon which the Building is located. If
Lessor transfers its interest in the Lease, Building, or property to any party,
and simultaneously leases the same back from that party, the transaction shall
not be treated as an assumption of Lessor's obligations under this Lease, and
this Lease shall thereafter be subject and subordinate at all times to the
leaseback to Lessor.
17. DEFAULT. The following events shall constitute events of default by
Lessee under this Lease:
a. If Lessee fails to pay any Base Rental or additional rent
reserved under this Lease when due and shall not cure such failure
within ten (10) days after written notice thereof;
b. If Lessee fails to comply with any term, provision, or
covenant of this Lease, other than the payment of Base Rental or
additional rent, and shall not cure such failure within thirty (30)
days after written notice thereof; provided, that if the default cannot
reasonably be cured within a thirty (30) day period, Lessee shall have
a reasonable time to cure the default before Lessor exercises its
rights to terminate the Lease under the following section, provided
that Lessee has begun affirmative and reasonable efforts to cure the
default within the initial thirty (30) day period;
c. If Lessee become insolvent, transfers any property in fraud
of Lessee's creditors, or assigns its assets for the benefit of
creditors;
d. If Lessee files a Petition under any section of the Federal
Bankruptcy Code, as amended, or under any similar law or statute of the
United States or any State thereof; or if Lessee is adjudicated a
debtor or insolvent in proceedings filed against Lessee under any such
laws or statutes; or
e. If any court appoints a Receiver or Trustee for all or
substantially all of Lessee's assets.
18. RIGHTS AND REMEDIES. Upon the occurrence of any event of default,
Lessor shall have the option to pursue any one or more of the following remedies
after giving the appropriate written notice, if any, to Lessee informing Lessee
of the default and provided that Lessee does not cure the default or begin
diligent efforts to cure the default as set forth above:
a. Lessor may forfeit and terminate this Lease. In such event,
Lessee shall immediately surrender the Leased Premises to Lessor. If
Lessee fails to do so, Lessor may, without prejudice to any other
remedy available to Lessor, enter upon and take possession of the
Leased Premises and expel or remove Lessee and any other parties
occupying the Leased Premises or any part thereof and any personal
property or trade fixture located therein. Lessee agrees to pay Lessor
on demand the amount of all loss and damages suffered by Lessor by
reason of such termination, whether caused by the inability to relet
the premises on satisfactory terms or otherwise.
b. Lessor may enter upon and take possession of the Leased
Premises without terminating this Lease and without relieving Lessee of
Lessee's obligations to make all payments of Base Rental, additional
rent, or other sums owed hereunder. In such event, Lessor may expel or
remove Lessee or any person occupying the Leased Premises or any part
thereof, and any personal property or trade fixtures located therein,
and may relet the Leased Premises as agent for and in the name of
Lessee, at any rent readily obtainable, and may receive the rent of
said Leased Premises. In such event, Lessee shall pay Lessor on demand
any deficiency that may arise by reason of such reletting and the
expenses of such reletting for the residue of the term of this Lease.
c. Pursuit of any of the rights and remedies set forth in the
preceding paragraphs of this section shall not preclude pursuit of any
other remedies provided by law or equity, or by this Lease. Nor shall
pursuit of any remedy provided by this Lease constitute a forfeiture or
waiver of any rent due to Lessor hereunder or any damages accruing to
Lessor by reason of Lessee's default.
No waiver by Lessor of any violation or breach of any of the
terms, provisions and covenants of this Lease shall be deemed or
construed to constitute a waiver of any other covenants contained
herein. Forbearance by Lessor to enforce one or more of the remedies
herein provided upon event of default shall not be deemed or construed
to constitute a waiver of such default.
d. In every instance of default, Lessee shall bear the cost of
Lessor's reasonable expenses, including attorney's fees and other legal
expenses, incurred in any effort to enforce Lessor's right under this
Lease, whether by negotiation, litigation or otherwise.
19. LATE CHARGE. Lessee acknowledges that late payment of sums due
under this Lease shall cause Lessor to incur administrative costs and other
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, without limitation, the
costs of processing any accounting charges, and late charges imposed upon Lessor
by the terms of any existing indebtedness secured by Deeds of Trust on the
Building. Accordingly, if any installment of Base Rental, additional rent, or
any other sum due under this Lease shall not be paid by Lessee by the tenth
(10th) day after said amount is due, then Lessee shall pay to Lessor a late
charge equal to five percent (5%) of the past due amount, plus any attorney's
fees incurred by Lessor by reason of Lessee's failure to pay the amounts when
due. The parties agree that such late charge represents a fair and reasonable
estimate of the costs that Lessor will incur by reason of late payment by
Lessee. Acceptance of late charges by Lessor shall not constitute a waiver of
Lessee's default in making late payment, nor prevent Lessor from exercising any
other rights and remedies granted by this Lease.
20. CONDEMNATION. If the whole or any part of the Leased Premises is
taken for any public or any quasi-public use under any statute or by right of
eminent domain, or by purchase under threat of condemnation, then this Lease
shall automatically terminate as of the date that title to the Leased Premises
is conveyed.
If any part of the Building or the land upon which the Building is
located, is taken or sold under threat of condemnation, but no part of the
Leased Premises are so conveyed, then Lessor shall have the option to terminate
this Lease upon ninety (90) days notice to Lessee. Otherwise, this Lease shall
remain in effect without abatement of rent.
In any event, all compensation awarded or paid upon a total or partial
taking, or a sale under threat of condemnation, shall belong to and be the
property of Lessor; provided, however, that the Lessor shall pay to the Lessee
such portion of the award equal to the value of the Lessee's interest in the
Leased Premises. In addition, the Lessee shall have the right to prosecute any
claim directly against the condemning authority in any condemnation proceeding
for loss of business, depreciation, or damage to Lessee's property, or cost of
removal of Lessee's property; provided, however, that Lessee's claim shall in no
way diminish or otherwise adversely affect Lessor's award or purchase price.
21. DAMAGE OR DESTRUCTION. If the Building or the Leased Premises are
totally destroyed, or so damaged that rebuilding or repairs cannot be completed
within one hundred eighty (180) days from the date of damage, whether by storm,
fire, water damage, earthquake, or other casualty, either party may thereafter
terminate this Lease by giving notice to the other. Such termination shall be
effective as of the date of such destruction or damage, the sums due under this
Lease shall be accounted for as of that date. If the Leased Premises are damaged
by any such casualty such that rebuilding or repairs can be completed within one
hundred eighty (180) days, rental shall abate in proportion to the area of the
Leased Premises which, in Lessor's judgment, cannot be used or occupied by
Lessee as a result of the casualty. Lessor shall have one hundred eighty (180)
days to restore the Leased Premises after the date of the casualty damage,
unless prevented from doing so for reasons beyond Lessor's control, in which
event the restoration period will be extended. Notwithstanding anything in this
section to the contrary, Lessee's obligations under this Lease, including the
obligation to pay rent, shall not abate if damage or destruction to the Leased
Premises or Building results from the negligence of Lessee, its agents,
employees, licensees or invitees.
22. CASUALTY INSURANCE. Lessee shall maintain at its expense, fire and
extended coverage insurance on all of its personal property, including removable
trade fixtures, located in the Leased Premises, and on all additions and
improvements made by Lessee to the Leased Premises. Lessee shall furnish Lessor
with satisfactory evidence that Lessee has obtained the required casualty
insurance.
23. LIABILITY INSURANCE. Lessee shall obtain and keep in force during
the term of this Lease, at Lessee's expense, policy or policies of comprehensive
general liability insurance with premiums thereon fully paid on or before due
date, insuring Lessor and Lessee against liability arising out of the ownership,
use, occupancy, or maintenance of the Leased Premises and all areas appurtenant
thereto. The policy or policies shall be issued by an insurance company
satisfactory to Lessor, and shall afford minimum protection of not less than Two
Million Dollars ($2,000,000) in respect of personal injury or death arising out
of any one occurrence, and of not less than Two Million Dollars ($2,000,000) for
property damage arising out of any one occurrence. The policy or policies shall
have a landlord's protective liability endorsement attached. Lessee shall
provide Lessor with satisfactory evidence that Lessee has obtained the required
liability insurance. Lessee will increase the protection afforded by the
liability insurance at Lessor's reasonable request.
24. INDEMNITY. Lessee agrees on behalf of itself and any party holding
by, through, or under Lessee, to indemnify and hold harmless Lessor, its agents,
contractors, and employees in the following manner:
a. Against any default under this Lease by Lessee, or any
party holding by, through, or under Lessee, for any and all damages,
costs, claims, or liabilities of any nature whatsoever sustained by
Lessor or any party holding by, through, or under Lessor, as a result
of such default or failure;
b. Against any and all claims, damages, losses and
liabilities, of any nature whatsoever, and of any cause or origin,
attributable in any manner to the negligence of Lessee, its agents,
contractors, employees, or licensees, or to the use and occupancy of
the Leased Premises or Building by Lessee, its agents, contractors,
employees, licensees or invitees; and
c. Against any and all damage or injury to the Leased
Premises, to Lessee's own property, to Lessee, its agents, contractors,
employees, invitees, or licensees arising from any use or condition of
the Leased Premises, and from any act or failure to act by Lessee with
respect thereto.
25. WAIVER OF SUBROGATION. Lessee and Lessor each waive any and all
rights for recovery against the other, or against the officers, employees,
agents, and representatives of the other, for loss or damage to persons or
property, which loss or damage is insured against by any insurance policy in
force at the time of such loss or damage. Lessee shall give notice to its
insurance carrier or carriers that this waiver of subrogation is contained in
this Lease. Lessee shall not be required to bear the costs of obtaining from
Lessor's insurer a waiver of any rights of recovery by way of subrogation
against Lessee. Notwithstanding this section, the waiver of subrogation provided
herein shall not be effective if its inclusion would cancel any insurance policy
maintained by either party.
26. REPAIRS. Lessor shall not be required to make any repairs or
improvements to the Leased Premises, except structural repairs necessary to
safety and tenantability, unless otherwise agreed in writing. Lessee shall
report in writing to Lessor any defective condition in the Leased Premises known
to Lessee, and which condition is required, in Lessee's opinion, to be repaired
by Lessor.
27. QUIET ENJOYMENT. Lessor agrees that Lessee shall peacefully have,
hold, and enjoy the Leased Premises, subject to the other terms of this Lease.
28. BROKER'S COMMISSION. The parties hereto represent and warrant to
each other than there are no claims for brokerage commissions or finder's fees
in connection with the execution of this Lease, except as listed below, and that
each of the parties agrees to indemnify the other against, and hold it harmless
from, all liabilities arising from any such claim by a person or entity claiming
through it, including attorney's fees.
29. NOTICE. Any notice by either party to the other shall be valid only
if in writing, and shall be deemed to be duly given only if delivered personally
or sent by registered or certified mail, return receipt requested, addressed to
Lessee at 5388 Hickory Hollow Parkway, Antioch, Tennessee, 37013-3128, Attn:
General Counsel and to Lessor at InSouth Bank, P.O. Box 879, Brownsville,
Tennessee 38012, Attn: Mr. Phil Clinton, or at such other address as either
party shall designate by notice to the other. Notice shall be deemed given, if
delivered personally, upon delivery thereof, and if mailed, upon mailing
thereof.
30. ACCEPTANCE OF LEASE. This Lease shall become a binding contract
upon execution by Lessor at its offices after receipt of this Lease duly
executed by Lessee.
31. ENTIRE AGREEMENT AND ENFORCEABILITY. This Lease contains the entire
agreement between Lessor and Lessee. No representations, inducements, promises,
or agreements, or all or otherwise, between Lessor and Lessee, and not embodied
herein, shall be of any force or effect. If any provision of this Lease shall be
unenforceable, the remaining terms and provisions hereof shall not be affected,
and shall remain enforceable. If the application of any term or provision of
this Lease to any person or circumstances shall to any extent be invalid,
unenforceable, or inappropriate, such term or provision shall remain applicable
as to those persons or circumstances to which it shall be valid, enforceable,
and appropriate. Each provision of this Lease shall be valid and enforceable to
the fullest extent permitted by law.
32. COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall comprise but a single instrument.
33. RECORDATION. This Lease shall not be recorded, but a Memorandum of
Lease executed on or as of the commencement date of this Lease, describing the
Leased Premises, the term of the Lease, and referring to the Lease, may be
recorded by either party, and the other party agrees to execute such memorandum
of Lease.
34. ALTERATION. This Lease may not be altered, changed, or amended,
except by instrument in writing, of equal dignity herewith, and signed by both
parties to this Lease. No conduct or statement by Lessor shall constitute a
cancellation, termination, or modification of this Lease, or a waiver of any
provision hereof, unless evidenced by written instrument executed by Lessor.
35. RIGHTS AND REMEDIES. Lessor's rights and remedies under this Lease
are in addition to any rights and remedies available to Lessor by any statute,
agreement, or otherwise.
36. BINDING EFFECT; PRONOUNS. This Lease shall be binding upon and
inure to the benefit of Lessor, its successors and assigns, and shall be binding
upon and inure to the benefit of Lessee, its successors, and to the extent
assignment may be approved by Lessor hereunder, Lessee's assigns. The pronouns
of any gender shall include the other genders, and either the singular or the
plural shall include the other, wherever appropriate.
37. TENNESSEE CONTRACT. This Lease is declared to be a Tennessee
contract, and all of the terms hereof shall be construed according to the laws
of the State of Tennessee. The venue for any dispute between the parties shall
be exclusively the courts found in Davidson County, Tennessee.
38. MARGINAL HEADINGS. The marginal headings in this Lease are for
convenience only, and shall have no meaning or effect upon the construction or
interpretation of any part of this Lease.
39. AUTHORIZATION. Each individual executing this Lease on behalf of
the Lessor and the Lessee represents and warrants that he has been duly
authorized by the Lessor or the Lessee to do so.
<PAGE>
EXECUTION
The parties have executed this Agreement as of the date and year first
above written. By their execution of this Agreement, the parties represent to
one another that they have read this Agreement, understand its terms and
conditions and intend to be bound thereby.
LESSEE: LESSOR:
SHOP AT HOME, INC. INSOUTH BANK
By: By:______________________________
Title: Title:_____________________________
<PAGE>
Exhibit 21 Subsidiaries of the Company
Name State of Incorporation or Organization
SAH Acquisition Corporation Tennessee
SAH Acquisition Corporation II Tennessee
SAH-Northeast Corporation Tennessee
SAH-Boston License Corp. Tennessee
SAH-New York License Corp. Tennessee
SAH-Houston Corporation Tennessee
SAH-Houston License Corp. Tennessee
Partners-SATH, L.L.C. Tennessee
Collectors' Edge of Tennessee, Inc. Tennessee
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000810029
<NAME> Shop at Home, Inc.
<MULTIPLIER> 1000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 12,499
<SECURITIES> 0
<RECEIVABLES> 9,512
<ALLOWANCES> 543
<INVENTORY> 7,234
<CURRENT-ASSETS> 30,718
<PP&E> 38,594
<DEPRECIATION> 3,191
<TOTAL-ASSETS> 170,697
<CURRENT-LIABILITIES> 48,364
<BONDS> 75,893
834
0
<COMMON> 61
<OTHER-SE> 45,236
<TOTAL-LIABILITY-AND-EQUITY> 170,697
<SALES> 151,966
<TOTAL-REVENUES> 152,609
<CGS> 91,816
<TOTAL-COSTS> 57,416
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 561
<INTEREST-EXPENSE> 8,964
<INCOME-PRETAX> (5,652)
<INCOME-TAX> (2,348)
<INCOME-CONTINUING> (3,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,304)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
