<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 1998 0-25596
SHOP AT HOME, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1282758
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-5249
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 263-8000
Indicate by check mark whether the registrant (1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock $.0025 par value 24,934,117
(Title of class) (Shares outstanding at
January 31, 1999)
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Index
Three and Six Months Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5-6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2 - Management's Discussion And Analysis of
Financial Condition And Results of Operations 10-17
Part II OTHER INFORMATION 18
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule (For SEC use only)
<PAGE>
<TABLE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
December 31, June 30,
1998 1998
--------------------- -------------------
<S> <C> <C>
(Unaudited)
Cash $11,097 $21,224
Accounts receivable - net 8,299 3,830
Inventories - net 5,536 4,332
Prepaid expenses 1,630 404
Deferred tax assets 990 990
--------------------- -------------------
Total current assets 27,552 30,780
Related party - note receivable, net of discounts of $112 and
$160, respectively 674 660
Property & equipment - net 27,743 20,557
FCC and NFL Licenses - net 83,665 84,831
Goodwill, net 2,449 2,532
Other assets 4,037 4,410
===================== ===================
Total assets $146,120 $143,770
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $23,083 $18,784
Current portion - capital leases and long term debt - 161
Deferred revenue 88 267
--------------------- -------------------
Total current liabilities 23,171 19,212
Long-term debt 75,000 75,254
Deferred income taxes 2,818 3,551
Redeemable Preferred Stock:
Redeemable at $10 per share
$10 par value, 1,000,000 shares authorized,
137,943 shares issued and outstanding at
December 31, 1998 and June 30, 1998 1,393 1,393
Stockholders' equity:
Common stock - $.0025 par value,
30,000,000 shares authorized, 23,434,117 and
23,313,191 shares issued at
December 31, 1998 and June 30, 1998, respectively 59 58
Additional paid in capital 48,912 48,848
Accumulated deficit (5,233) (4,546)
===================== ===================
Total liabilities and stockholders' equity $146,120 $143,770
===================== ===================
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
<TABLE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------- ----------------------------------------
1998 1997 1998 1997
----------------- ------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited) (Unaudited)
Net sales $39,526 $23,065 $73,344 $44,294
Operating expenses
Cost of sales (excluding items
listed below) 23,082 12,897 43,003 25,244
Salaries and wages 2,814 1,663 5,446 3,280
Transponder and cable charges 6,729 4,228 12,611 8,082
Other general and administrative
expenses 3,985 2,429 6,803 4,798
Depreciation and amortization 1,249 393 2,282 780
Non-recurring and move-related
expenses 422 - 676 -
----------------- ------------------ -------------------- ------------------
Total operating expenses 38,281 21,610 70,821 42,184
----------------- ------------------ -------------------- ------------------
Operating income 1,245 1,455 2,523 2,110
Other income 65 574 170
235
Interest expense (2,201) (171) (4,202) (455)
----------------- ------------------ -------------------- ------------------
Income (loss) before income
taxes (721) 1,349 (1,105) 1,825
Income tax expense (benefit) (279) 593 (425) 702
----------------- ------------------ -------------------- ------------------
Net income (loss) $(442) $756 $(680) $1,123
================= ================== ==================== ==================
Basic Earnings (Loss) Per Share $(0.02) $.06 $(.03) $.10
================= ================== ==================== ==================
Diluted Earnings (Loss) Per Share $(0.02) $.05 $(.03) $.08
================= ================== ==================== ==================
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
<TABLE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997
(Thousands of Dollars)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (680) $ 1,123
Non-cash expenses included in net income (loss):
Depreciation and amortization 2,282 780
Deferred income taxes 590 633
Deferred interest expense (16) -
Provision for bad debts - 231
Changes in current and non-current items
Accounts receivable (4,475) (3,073)
Inventories (1,204) (1,012)
Prepaid expenses and other assets (1,373) (204)
Accounts payable and accrued expenses 2,970 145
Deferred revenue (179) (41)
------------------
------------------
Net cash used in operations (2,085) (1,418)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable-related party 2 (800)
Purchase of property, plant and equipment (7,513) (488)
Other assets - (385)
Payment of deposit on proposed acquisition - (3,964)
Purchase of license (140) -
------------------
------------------
Net cash used in by investing activities (7,651) (5,637)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants 227 620
Purchase and retirement of common stock (203) -
Additional long-term debt - 3,000
Repayment of long-term debt and capital leases (415) (1,110)
------------------ ------------------
Net cash (used in) generated by financing activities (391) 2,510
------------------ ------------------
NET DECREASE IN CASH (10,127) (4,545)
Cash beginning of period 21,224 5,077
------------------ ------------------
Cash end of period $11,097 $532
================== ==================
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
<TABLE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
Six Months Ended December 31, 1998 and 1997
(Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
-------------------------- --------------------------
(Unaudited)
<S> <C> <C>
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Stock issued for loan guarantee $ 40 $ -
========================== ==========================
Assets acquired through capital lease $ - $ 149
========================== ==========================
Conversion of note payable into shares of common stock $ - $ 1,191
========================== ==========================
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 31, 1998 (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
All dollar values in tables and the financial statements have been expressed in
thousands (000s) except for per share data. The financial information included
herein is unaudited for the quarter and six months ended December 31, 1998:
however, such information reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial condition and results of operations of the
interim periods. The condensed consolidated balance sheet data for the fiscal
year ended June 30, 1998 was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
The accounting policies followed by the Company are set forth in the Company's
financial statements in the Shop At Home, Inc. and Subsidiaries Annual Report
on Form 10-K/A for the fiscal year ended June 30, 1998.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
NOTE 2 - INVENTORY
The components of inventory at December 31, 1998 and June 30, 1998 are as
follows:
December 31, 1998 June 30, 1998
-------------------- -------------------
(Thousands of Dollars)
Work in process $ 643 $ 152
Finished goods 4,966 4,201
-------------------- -------------------
5,609 4,353
Allowance (73) (21)
-------------------- -------------------
Total $5,536 $ 4,332
==================== ===================
NOTE 3 - STOCK TRANSACTION
The Company's Board of Directors authorized management to repurchase in the
open market, at its discretion, up to 2 million shares of the Company's common
stock. Shares purchased under this program will be retired in accordance with
the terms of the Indenture. By the end of December 1998, the Company had
repurchased a total of 90,300 shares at a cost of $203,175.
NOTE 4 - NET EARNINGS/(LOSS) PER SHARE
Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed by dividing the net income by the weighted average number
of shares of common stock and assumed conversions of dilutive securities and
potential common shares outstanding during the respective periods. Dilutive
securities are represented by options, warrants, redeemable preferred stock
and convertible debt outstanding and are included in the computation only for
periods in which net income was generated.
The following table sets forth for the periods indicated the calculation of net
earnings (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (442) $ 756 $ (680) $ 1,123
Preferred stock dividends
(3) (3) (13) (11)
----------------- ----------------- ---------------- ----------------
Numerator for basic earnings per share-
income (loss) available to common
stockholders
(445) 753 (693) 1,112
Effect of dilutive securities:
Preferred stock dividends
3 3 13 11
Interest on convertible debt
- 12 - 50
----------------- ----------------- ---------------- ----------------
Numerator for diluted earnings per share-
income (loss) available to common
stockholders after assumed conversions $ (442) $ 768 $ (680) $ 1,173
================= ================= ================ ================
Denominator:
Denominator for basic earnings per share-
weighted-average shares 23,435,115 11,640,756 23,366,315 11,283,237
----------------- ----------------- ---------------- ----------------
Effect of dilutive securities:
a) Stock options and warrants 3,164,695 3,080,113
- -
b) Convertible preferred stock 137,943
- - 137,943
c) Convertible debt
- - - 237,513
----------------- ----------------- ---------------- ----------------
Dilutive potential common shares 3,302,638 3,455,569
- -
----------------- ----------------- ---------------- ----------------
Denominator for diluted earnings per share
adjusted weighted-average shares and
assumed conversions 23,435,115 14,943,394 23,366,315 14,738,806
================= ================= ================ ================
Basic earnings per share $ (0.02) $ 0.06 $ (0.03) $ 0.10
================= ================= ================ ================
Diluted earnings per share $ (0.02) $ 0.05 $ (0.03) $ 0.08
================= ================= ================ ================
</TABLE>
Although these amounts are excluded from the computation 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> <C>
a) Employee stock options and warrants 3,175,266 2,968,658
b) Convertible preferred stock 137,943 137,943
c) Convertible debt - -
</TABLE>
NOTE 5- MANAGEMENT STOCK OPTIONS OUTSTANDING
At December 31, 1998, options to purchase up to 2,052,000 shares of common
stock, including 155,000 shares issued to outside directors, at prices ranging
from $1.00 to $6.97 per share were outstanding to employees and members of
management. Options vest annually over a period of up to five years. The
options expire the earlier of 5 years from date of vesting or 30 days after
termination of employment.
NOTE 6- SUBSEQUENT EVENTS - CONTINGENCIES AND COMMITMENTS
Upon the acquisition of WMFP by a subsidiary of the Company in February 1995,
management concluded that the Company did not have nexus in the State of
Massachusetts for sales and use tax purposes. To support this position, the
Company requested a ruling from the State Department of Revenue (DOR). In
January 1999, the DOR ruled that the Company did have nexus and was obligated
to collect and remit the use tax on all sales to Massachusetts customers. As
a result, the Company remitted approximately $1.4 million which included tax
collected and recorded on the books as of December 31, 1998 of $1.2 million and
accrued interest of $191.
There is a possibility that the Department of Revenue could impose a penalty.
If a penalty is imposed, the Company intends to pay it under protest and
challenge the ruling in its entirely. No amount has been accrued for a
potential penalty as of December 31, 1998.
In February 1999, the Company entered into an agreement with Oracle Corporation
and intends to do the same with iXL, Inc. to launch a new website,
"Collectibles.com". The total project will approximate a $10,000,000 investment
consisting of both hardware and software replacement.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations of
the Company is qualified in its entirety by the more detailed information and
financial data, including the Consolidated Financial Statements and Notes
thereto included elsewhere herein.
General
The Company, founded in 1986, is a nationally televised home shopping retailer
offering high-quality merchandise, at prices competitive with traditional
retailers and catalog companies, as well as unique merchandise and memorabilia
that may be unavailable or have limited availability elsewhere. The Company
derives revenues primarily from the sale of merchandise marketed through
its home shopping programming carried by television stations owned by the
Company, by television stations with whom the Company has entered into
agreements to purchase broadcast time, by the carriage of those television
broadcasts on cable television systems under the "must-carry" or retransmission
consent provisions of federal law, by the direct carriage on cable television
systems under agreements with cable system operators and by the direct
reception of the Company satellite transmission by individuals who own
satellite downlink equipment. Beginning in 1997, another source of revenues
had been the Company's wholly-owned subsidiary, Collector's Edge of Tennessee,
Inc., ("Collector's Edge"). Collector's Edge is engaged in the business of
wholesale sales of sports trading cards under license with National Football
League Properties, Inc., and National Football Players, Incorporated.
Collector's Edge was organized in February, 1997 and acquired the assets of
an existing company that had been engaged in the same business for
approximately four years. The Company also receives some revenues from the sale
of broadcast time on its owned television stations for the broadcast of
infomercials.
As of December 31, 1998, the Company's programming was viewable during all or a
part of each day by approximately 65 million cable households, of which
approximately 7.0 million cable households receive the programming on
essentially a full-time basis (20 or more hours per day) and the remaining 58.2
million cable households receive it on a part-time basis. Households may
be counted more than once if they receive signals from multiple sources, i.e.
cable and broadcast in the same market. In order to measure its 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 the Company's programming
which accounts for both the quantity and quality of time available to the
Company. To derive this full-time equivalent cable household base ("FTE Cable
Household"), the Company has developed a methodology to assign a relative value
of each daypart to the Company's overall sales, which is based on sales in
markets where the programming is carried on a full-time basis. Each daypart
has a value based on historical sales. The Company believes that changes in
the number of FTE Cable Households provide a consistent measure of the growth
of the Company and applies this methodology to all affiliates. Accordingly,
the Company uses the revenue per average FTE Cable Household as a measure of
pricing new affiliat contracts and estimating their anticipated revenue
performance.
The Company owns and operates five UHF television stations located in the San
Francisco, Boston, Houston, Cleveland and Raleigh markets, four of which are
among the top 13 television markets in the United States.
Principal elements in the Company's cost structure are (i) cost of goods sold,
(ii) transponder and cable costs, and (iii) salaries and wages. The Company's
cost of goods sold is a direct result of both the product mix and the Company's
ability to negotiate more favorable prices from its vendors. Transponder and
cable costs include expenses related to carriage under affiliation and
transponder agreements. Carriage costs have increased on an absolute basis in
recent years. The Company's increased carriage costs are primarily attributable
to the initiation of the Company's programming in new markets. FTE Cable
Households have grown from 10.4 million at December 31, 1997, to 16.9 million
at December 31, 1998. The Company expects this trend will continue as the
Company enters new markets and expands the number of hours in its part-time
markets.
Overview of Results of Operations
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain items included in the Company's Condensed
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
1998 1997 1998 1997
------------------ ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (excluding items
listed below) 58.4 55.9 58.6 57.0
Salaries & wages
7.1 7.2 7.4 7.4
Transponder & cable
17.0 18.3 17.2 18.2
Other general operating and
administrative expense
10.1 10.5 9.3 10.8
Depreciation & amortization
3.2 1.7 3.1 1.8
Non-recurring and move-related
expenses -
1.1 - .9
Total operating expenses 96.8 93.7 96.5 95.2
Other income
.6 .3 .8 .4
Interest expense
(5.6) (.7) (5.7) (1.0)
Net income (loss) before income
taxes
(1.8) 5.8 (1.5) 4.1
Income tax expense (benefit) (.7) (.6)
2.5 1.6
Net income (loss) (1.1) 3.3 (.9)
2.5
</TABLE>
Three months ended December 31, 1998 vs. three months ended December 31, 1997
Revenues. The Company's revenues for the quarter ended December 31,
1998, were $39.5 million, an increase of 71.4% from revenues of $23.1 million
for the same quarter in 1997. The core business of the shopping network
accounted for 95.3% of revenues on an average of 16.7 million FTE Cable
Households in the quarter ended December 31, 1998 compared to an average of
10.0 million FTE Cable Households in the 1997 quarter, representing a 67%
increase in FTEs. The remaining 4.7% of 1998 revenues resulted from
approximately $1.9 million in sales from Collector's Edge, as compared to
$1.6 million in sales for the same quarter in 1997.
In addition, the 1997 period includes $309, or 1.3% representing brokered time
sold in 1997 only. Included in net sales in 1998, was infomercial income,
generated by the Company's television stations in Boston, Houston,
Cleveland, San Francisco and Raleigh-Durham of $369 compared to $293 in the
comparable 1997 quarter representing a 25.9% increase.
Cost of Sales. Cost of sales, represents the purchase price of
merchandise and inbound freight. For the three month period ended December 31,
1998, the cost of sales increased to 58.4% from 55.9% in the comparable 1997
period. This increase is mainly attributable to higher product costs which
were not reflected in higher selling prices, primarily in sports, plush toys,
electronics and coins sales categories which collectively represent
approximately 77% of sales for the three months ended December 31, 1998
compared to 62% of sales for the 1997 period.
Salaries and Wages. Salaries and wages for the quarter ended December
31, 1998, were $2.8 million, an increase of 69.2% compared to the comparable
1997 quarter. Salaries and wages as a percent of sales, however, remained
stable at 7.1% (1998) compared to 7.2% (1997).
Transponder and Cable. Transponder and cable costs for the quarter
ended December 31, 1998 were $6.7 million, an increase of $2.5 million or 59.1%
compared to the comparable 1997 quarter. During the same period full-time
equivalent households grew 65.7%. Carriage costs decreased as a percentage of
sales from 18.3% to 17.0%. This reflects management's efforts to reduce
carriage costs by either dropping or renegotiating contracts where carriage
costs exceed targets. Carriage costs as a percentage of sales initially tend
to be higher in periods during which the Company enters a new market. Due to
the fixed nature of this expense, however, the ratio of expense to sales
usually decreases as the viewing audience grows and related sales increase.
As a market matures, if carriage costs do not migrate down toward the target,
management attempts to renegotiate the carriage contract and may exit a
market if acceptable margins cannot be obtained.
Other General Operating and Administrative Expenses. Other general,
operating and administrative expenses for the quarter ended December 31, 1998
were $4.0 million, an increase of $1.6 million or 64.1% compared to the
comparable 1997 quarter. This increase is primarily attributable to an increase
in credit card fees and telephone costs related to the increase in sales, and
to increases in utilities, rent and miscellaneous expenses. With the sales
increase of over 71%, this expense category, which is largely comprised
of fixed expenses, expressed as a percentage of sales, decreased to 10.1% in
1998 from 10.5% in 1997.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended December 31, 1998 were $1.2 million, an increase of $856 or
217.8% compared to the comparable 1997 quarter. The major components of this
increase are, $537 associated with the amortization of license costs and
depreciation for the three television stations acquired in March 1998, and
$198 additional depreciation on the Company's new facility in Nashville.
Non-Recurring and Move-Related Expenses. Non-recurring and
move-related expenses were $422 in the quarter ended December 31, 1998.
These expenses primarily relate to employee relocation, rental of temporary
facilities, the Company's grand opening and stay bonuses associated with the
Company's relocation to Nashville and one-time additional charges from a cable
affiliate.
Interest. Interest expense for the quarter ended December 31, 1998 was
$2.2 million, an increase of $2.0 million or 1187.1% compared to the comparable
1997 quarter. This increase reflects the impact of the issuance of $75 million
11% Senior Secured Notes due 2005, which the Company successfully issued in
March 1998.
Other Income. Other income increased to $235 for the quarter ended
December 31, 1998, from $65 for the same period in 1997, representing a 261.5%
increase. This was primarily due to interest income on the investment of cash
balances.
Income Tax (Benefit) Expense. The income tax benefit for the quarter
ended December 31, 1998, was ($279), compared to income tax expense of $593 in
the comparable 1997 quarter. For the quarters ended December 31, 1998 and 1997,
income tax (benefit)/expense represents an effective tax rate of 38%.
Net Income (Loss). As a result of the above revenues and expenses, the
Company generated a net loss of ($442) for the quarter ended December 31, 1998,
compared to net income of $756 for the comparable 1997 quarter.
Six months ended December 31, 1998 vs. six months ended December 31, 1997.
Net Sales. The Company's net sales for the six months ended December
31, 1998, were $73.3 million, an increase of 65.5% from net sales of $44.3
million for the six months ended December 31, 1997. The core business of the
shopping network accounted for 93.0% of net sales based on an average of 16.2
million FTE Cable Households in the six months ended December 31, 1998 compared
to an average of 9.2 million FTE Cable Households in the same period in 1997.
In the six months ended December 31, 1998, the Company generated sales per
FTE Cable Household of approximately $8.33 compared with approximately $8.68
per FTE Cable Household for the same period of the prior year. The major reason
for the decrease in sales per household is due to the addition of an average
of 6.6 million FTEs during the six months ended December 1998 compared to the
same period in 1997, representing a 65.7% increase. These additional households
have not yet reached their full sales potential as mature households. The
remaining 7.0% of 1998 net sales resulted from approximately $3.0 million in
sales from Collector's Edge.
Also included in net sales was infomercial income, generated by its
broadcast operations in Boston, Houston, Cleveland, San Francisco and
Raleigh-Durham, of $673 compared to $564 in the comparable 1997 six month
period, representing a 19.3% increase. The Company also sold approximately $309
of broadcast time to certain vendors during the 1997 period. It did not
continue this practice in the 1998 period.
Cost of Sales. Cost of sales, represents the purchase price of
merchandise and inbound freight. For the six month period ended December 31,
1998, the cost of sales increased to 58.4% from 57% in the comparable 1997
period. This increase is mainly attributable to higher product costs which
were not reflected in higher selling prices, primarily in sports, plush toys,
electronics and coins sales categories which collectively represent
approximately 78% of sales for the six months ended December 31, 1998 compared
to 62% of sales for the 1997 period.
Salaries and Wages. Salaries and wages for the six months ended
December 31, 1998, were $5.4 million, an increase of 66.0% compared to the six
months ended December 31, 1997. Salaries and wages as a percent of sales,
remained at 7.4% in both years reflecting the addition of new personnel
commensurate with the increase in sales.
Transponder and Cable. Transponder and cable costs for the six months
ended December 31, 1998 were $12.6 million, an increase of $4.5 million or
56.0% compared to the six months ended December 31, 1997. Carriage costs
decreased as a percentage of sales to 17.2% from 18.2%. Carriage costs as a
percentage of sales initially tend to be higher in periods during which the
Company enters a new market and/or adds a significant number of new households.
Due to the fixed nature of this expense, however, its relationship usually
decreases as revenues develop and the audience matures. The Company's ultimate
goal is for carriage costs to stabilize in mature markets at approximately 15%
of revenues. As a market matures, if carriage costs do not move down toward
the target, management generally attempts to renegotiate the carriage contract.
Towards the end of the 1998 period, the Company replaced some of its higher
cost coverage with lower, more cost effective coverage.
Other General Operating and Administrative Expenses. Other general,
operating and administrative expenses for the six months ended December 31,
1998 were $6.8 million, an increase of $2.0 million or 41.8% compared to
the six months ended December 31, 1997. This constituted a decrease
expressed as a percentage of sales to 9.3% in 1998 from 10.8% in 1997 and is
attributable to a number of factors, including legal and consulting expenses,
operating supplies and advertising.
Depreciation and Amortization. Depreciation and amortization for the
six months ended December 31, 1998, was $2.3 million, an increase of $1.5
million or 192.7% compared to the six months ended December 31, 1997, and is
comprised of the $1 million of additional license cost amortization and
depreciation for the three new television stations acquired in March 1998 and
$92 of additional depreciation of the Company's new facility in Nashville.
Non-Recurring and Move-Related Expenses.Non-recurring and move-related
expenses were $676 in the six months ended December 31, 1998. These expenses
primarily relate to employee relocation, rental of temporary facilities, the
Company's grand opening and stay bonuses associated with the Company's
relocation to Nashville and one-time additional charges from a cable affiliate.
Interest. Interest expense for the six months ended December 31, 1998
was $4.2 million, an increase of $3.7 million or 823.5% compared to the six
months ended December 31, 1997. The increase reflects the impact of the
issuance of $75 million 11% Senior Secured Notes due 2005, which the Company
successfully issued in March 1998.
Income Tax (Benefit) Expense. Income tax benefit for the six months
ended December 31, 1998 was ($425) compared to an income tax expense of $702 in
the six months ended December 31, 1997. Income taxes (benefit)/expense and are
provided at 38%.
Net (Loss)/Income. As a result of the above revenues and expenses, the
Company generated a net loss of ($680) for the six months ended December 31,
1998, compared to net income of $1.1 million for the six months ended December
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical capital sources have included an initial public
offering of Common Stock, proceeds from the private and public placement of
Common Stock, proceeds from the exercise of warrants, bank lines of credit,
public placement of debt, funds from operations and long-term debt incurred in
connection with acquisitions.
As of December 31, 1998, the Company had total current assets of $27.6 million
and total current liabilities of $23.2 million for working capital of $4.4
million. The Company's positive working capital position is primarily
attributable to the infusion of excess cash from the public offering completed
in March 1998, which will continue to be used to fund capital expenditures and
general working capital requirements.
During the six months ended December 1998, the Company used approximately $4.5
million to fund accounts receivable, approximately $1.2 million for inventory
and increased prepaid items, approximately $1.4 million relating to future
sports promotions. These expenditures were offset in part by almost $3 million
in additional payables. In addition, the Company incurred capital expenditures
of approximately $7.5 million and repayment of capital leases of $.4 million.
These expenditures included upgrades to the equipment at the San Francisco and
Raleigh stations to increase the power and quality of these broadcast signals;
acquisition, renovation and equipping of its new Nashville facilities; and
normal recurring capital expenditures. These capital expenditures were funded
from the proceeds of the public stock and public notes offerings.
The Company acquired three broadcast television stations: KCNS located in San
Francisco, California, WRAY located in the Raleigh-Durham, North Carolina
market, and WOAC in the Cleveland, Ohio market, in March 1998 (the
"Acquisition"). The Company expects that the notes offering and the Acquisition
and the resulting discontinuation of existing time brokerage agreements with
KCNS, WRAY and WOAC has and will continue to impact the results of operations
as follows: (i) costs of carriage will decrease due to the termination of the
time brokerage agreements, (ii) costs related to station operations will
increase, (iii) depreciation and amortization will significantly increase as a
result of the Acquisition, (iv) interest expense will increase as a result of
the notes offering, (v) infomercial income may increase, and (vi) net revenues
will increase as a result of additional households resulting from the newly
acquired stations. Notwithstanding the increase in interest expense resulting
from the notes offering, the Company believes that funds necessary to meet the
Company's capital requirements for the foreseeable future will be available
from the proceeds of the stock and notes offering, funds from operations (after
giving effect of the items listed in (i) through (vi) above) and additional
financing, if necessary or desirable. The Indenture associated with the notes
offering will permit the Company, subject to satisfaction of certain
conditions, to incur indebtedness which may be used for future capital needs
of the Company, including the acquisition of additional broadcast properties
subject to satisfaction of certain conditions.
Upon the acquisition of WMFP by a subsidiary of the Company in February 1995,
management concluded that the Company did not have nexus in the State of
Massachusetts for sales and use tax purposes. To firm up this position, the
Company requested a ruling from the State Department of Revenue (DOR). In
January 1999, the DOR ruled that the Company did have nexus and was obligated
to collect and remit the use tax on all sales to Massachusetts customers. As a
result, the Company remitted approximately $1.4 million which included tax
collected and recorded on the books as of December 31, 1998 of $1.2 million and
accrued interest of $191.
There is a possibility that the Department of Revenue could impose a penalty.
If a penalty is imposed, the Company intends to pay it under protest and
challenge the ruling in its entirely. No amount has been accrued for a
potential penalty as of December 31, 1998.
Year 2000
The Company will achieve compliance through systems replacement and believes
existing capital budgets are adequate for any remaining hardware and software
replacements.
The Company is supported by redundant IBM RS6000s, each of which interfaces
directly with our Year 2000 (Y2K) compliant backup disk system. The new version
of the AIX operating system is also compliant. The Company's relocation to
Nashville, Tennessee, helped compliance efforts by requiring the replacement of
key network equipment. Since the move, the Company upgraded approximately 90%
of its LAN application servers and computer systems to compliant Windows NT
systems. Additionally, the PBX, voice response system and Aspect Callcenter
software and server were all upgraded and are compliant. There are still
outstanding Y2K issues with the WWW web server and a software program utilized
by Human Resources.
The Company has established a Year 2000 committee and part of their focus
will be on businesses external to Shop At Home and on systems and service
suppliers which are electronically linked to the Company's business units. The
Company has provided many major vendors with an EDI software package which is
Y2K compliant and the Company is not presently aware of any material problems
in the Year 2000 compliance plans of its major vendors or service providers;
however, the Company is in the process of further discovery and analysis of its
vendors and other possible non-compliant suppliers.
Shop at Home has spent approximately $1.6 million on new computer hardware and
systems to date. Shop at Home is replacing most of the primary computer systems
as part of Y2K compliance and to build the infrastructure necessary for growth.
The total cost of system replacements (both hardware and software) will
approximate $10,000,000 (in addition to what has already been spent). The
source of funding will be from operations and equity funding.
To implement the conversion, the Company entered into an agreement with Oracle
Corporation and intends to do the same with iXL, Inc. The Oracle conversion
will provide a Y2K compliant integrated solution for all of the Company's
business processes. It is anticipated that implementation, including Y2K
compliance, will be operational by summer 1999. In addition, the Company
believes these expenditures and the dramatic changes they will bring to be
necessary to support its future growth, its new website, Collectibles.com
and other business objectives.
The following is the time table for Shop At Home's Year 2000 compliance effort:
February 15, 1999 - Mailings to external suppliers scheduled to go out.
March 15, 1999 - All internal (hardware and software) and external (supplier)
factors identified.
June 1, 1999 - Internal problems addressed and corrected and questionnaires to
external suppliers evaluated. Begin testing internal systems.
July 1, 1999 - Continue testing internal systems. Begin contingency planning.
August 1, 1999 - Complete contingency planning. Begin contingency testing.
August 15, 1999 - Internal Oracle implementation with new hardware and software
complete.
September 1, 1999 - Continue contingency testing.
October 1, 1999 - Complete all evaluation and testing. Review all portions of
Y2K documentation.
The "worst case" scenario would be for the Company's critical vendors to have
Y2000 problems. Such vendors would be Bank card processors (Company believes
there are several providers for these service as alternatives), long distance
telephone service providers (similarly, in addition to the two providers used
by the Company currently, the Company believes there are alternative
providers), or our satellite transponder provider (the contractor is bound to
provide this service, if there were no alternative then our signal would cease
to be transmitted across the country). We are contacting these vendors to get
their assurance that they are Y2000 compliant. Shop at Home's contingency
plans include seeking alternatives to vendors that are not compliant. Efforts,
if necessary, will be made to find replacement sources of all primary servicers
that cannot provide adequate assurance of compliance.
Despite the concern surrounding discussions of Year 2000, the Company does not
anticipate major interruptions. The development and testing of a contingency
plan will help to ensure this. The Company believes its Y2K program is
adequate to detect in advance compliance issues, and that the necessary
resources to remedy them are available. However, the Y2K problem 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 Statement is effective
for fiscal years beginning after December 15, 1997. The Company had no items
that would be classified as other comprehensive income in the quarter ended
December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement will
become effective for the Company's June 30, 1999 fiscal year financial
statements and will impact interim reporting beginning with the quarter
ending September 30, 1999. The Company is evaluating SFAS 131 to determine the
impact, if any, on its reporting and disclosure requirement.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 $11.3
million. 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 investments 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 such debt is at a fixed rate.
The Company obtains, on consignment, the vast majority of products which it
sells through its programming, and the prices of such products are subject to
changes in market conditions. These products are purchased domestically, and,
consequently, there is no foreign currency exchange risk.
The Company has no activities related to derivative financial instruments or
derivative commodity instruments.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes In Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission Of Matters To A Vote Of Security Holders.
None
Item 6. Reports On Form 8-K.
8-K filed on February 3, 1999 disclosed that James Bauchiero
would be leaving his position as Chief Financial Officer to
pursue other opportunities.
Exhibits
Exhibit 27 Financial Data Schedule (For SEC use only)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/S/ Kent E. Lillie
Kent E. Lillie, President
Date:
/S/ Joseph Nawy
Joseph Nawy, VP, Finance
Date:_____________________________
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000810029
<NAME> SHOP AT HOME,INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-1-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 11,097
<SECURITIES> 0
<RECEIVABLES> 8,299
<ALLOWANCES> 509
<INVENTORY> 5,536
<CURRENT-ASSETS> 27,552
<PP&E> 31,351
<DEPRECIATION> 3,609
<TOTAL-ASSETS> 146,120
<CURRENT-LIABILITIES> 23,171
<BONDS> 75,000
1,393
0
<COMMON> 59
<OTHER-SE> 48,912
<TOTAL-LIABILITY-AND-EQUITY> 146,120
<SALES> 73,344
<TOTAL-REVENUES> 73,344
<CGS> 43,003
<TOTAL-COSTS> 70,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,202
<INCOME-PRETAX> (1,105)
<INCOME-TAX> (425)
<INCOME-CONTINUING> (680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (680)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
