<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
March 31, 1999 0-25596
SHOP AT HOME, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1282758
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-5249
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 263-8000
Indicate by check mark whether the registrant(1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock $.0025 par value 24,324,937
(Title of class) (Shares outstanding at
April 16, 1999)
<PAGE>
SHOP AT HOME, INC. AND SUBSIDIARIES
Index
Three and Nine Months Ended March 31, 1999 and 1998
- --------------------------------------------------------------------------
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
Item 3 - Quantitative And Qualitative Disclosure About
Market Risk 18
Part II OTHER INFORMATION 19
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>
March 31, June 30,
1999 1998
--------------------- -------------------
<S> <C> <C>
(Unaudited)
Cash $8,821 $21,224
Accounts receivable - net 9,423 3,830
Inventories - net 5,765 4,332
Prepaid expenses 1,323 404
Deferred tax assets 1,057 990
--------------------- -------------------
Total current assets 26,389 30,780
Related party - note receivable, net of discounts of $104 and
$134, respectively 681 660
Property & equipment - net 27,923 20,557
FCC and NFL Licenses - net 83,008 84,831
Goodwill, net 2,408 2,532
Other assets 6,027 4,410
===================== ===================
Total assets $146,436 $143,770
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $23,801 $18,784
Current portion - capital leases and long term debt - 161
Deferred revenue 183 267
--------------------- -------------------
Total current liabilities 23,984 19,212
Long-term debt 75,000 75,254
Deferred income taxes 945 3,551
Redeemable Preferred Stock:
Redeemable at $10 per share
$10 par value, 1,000,000 shares authorized,
106,123 and 137,943 shares issued and outstanding at
March 31, 1999 and June 30, 1998, respectively 1,075 1,393
Stockholders' equity:
Common stock - $.0025 par value,
30,000,000 shares authorized, 24,324,937 and 23,313,191 shares issued at March
31, 1999
and June 30, 1998, respectively 61 58
Additional paid in capital 51,399 48,848
Accumulated deficit (6,914) (4,546)
Accumulated other comprehensive income 886 -
===================== ===================
Total liabilities and stockholders' equity $146,436 $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 Nine Months Ended
March 31, March 31,
------------------------------------- ----------------------------------------
1999 1998 1999 1998
----------------- ------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net revenues $37,098 $26,163 $110,442 $70,457
Operating expenses:
Cost of sales (excluding items
listed below) 22,866 15,622 65,869 40,866
Salaries and wages 2,674 1,881 8,120 5,161
Transponder and cable charges 6,760 4,461 19,370 12,554
Other general and administrative
expenses 3,685 3,133 10,489 7,930
Depreciation and amortization 1,327 413 3,609 1,193
Move-related expenses 197 - 873 -
----------------- ------------------ -------------------- ------------------
Total operating expenses 37,509 25,510 108,230 67,694
----------------- ------------------ -------------------- ------------------
Operating income (loss) (411) 653 2,212 2,763
Other income 102 1,044 676 1,214
Interest expense 2,389 286 6,590 741
----------------- ------------------ -------------------- ------------------
Income (loss) before income
Taxes (2,697) 1,411 (3,802) 3,236
Income tax expense (benefit) (987) 536 (1,445) 1,238
----------------- ------------------ -------------------- ------------------
Net income (loss) $(1,710) $875 $(2,357) $1,998
----------------- ------------------ -------------------- ------------------
Other comprehensive income:
Tax benefit of exercise of stock options 886 - 886 -
----------------- ------------------ -------------------- ------------------
Comprehensive income $(824) $875 $(1,404) $1,998
================= ================== ==================== ==================
Basic Earnings (Loss) Per Share $(.07) $.07 $(.10) $.17
================= ================== ==================== ==================
Diluted Earnings (Loss) Per Share $(.07) $.06 $(.10) $.14
================= ================== ==================== ==================
</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
Nine Months Ended March 31, 1999 and 1998
(Thousands of Dollars)
<CAPTION>
1999 1998
(Unaudited) (Unaudited)
------------------ -------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(2,357) $1,998
Gain on sale of assets - (900)
Non-cash expenses included in net income
Depreciation and amortization 3609 1,193
Deferred income taxes (1,787) 869
Deferred interest expense (22) -
Provision for bad debt - 355
Provision for inventory obsolescence 70 (351)
Changes in current and non-current items
Accounts receivable (5,593) (4,257)
Inventories (1,503) (1,718)
Prepaid expenses and other assets (1,536) 183
Accounts payable and accrued expenses 4,862 3,380
Deferred revenue (84) 194
================== ===================
Net cash (used) provided by operations (4,341) 946
================== ===================
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable-related party - (800)
Purchase of equipment (1,724) (488)
Purchase of assets (6,235) (6,325)
Purchase of licenses - (71,500)
Other assets (1,925) (5,546)
Proceeds from sale of asset - 900
================== ===================
Net cash used in investing activities (9,884) (83,759)
================== ===================
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants 2,440 669
Common stock issued - 40,250
Payment of stock issuance costs - (2,963)
Purchase and retirement of common stock (203) -
Repayments of debt and capitalized leases (415) (11,519)
Additional long-term debt - 78,000
================== ===================
Net cash provided by financing activities 1,822 104,437
================== ===================
NET INCREASE/(DECREASE) IN CASH (12,403) 21,624
Cash beginning of period 21,224 5,078
================== ===================
Cash end of period $8,821 $26,702
================== ===================
</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)
Nine Months Ended March 31, 1999 and 1998
(Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
-------------------------- --------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Stock issued for loan guarantee $ 40 $ -
========================== ==========================
Conversion of note payable into shares of common stock $ - $ 1,190
========================== ==========================
Conversion of preferred stock into shares of common stock $ 318 $ -
========================== ==========================
Income tax benefit from exercise of non-qualified stock options $ 886 $ 245
========================== ==========================
</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
March 31, 1999 (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
All dollar values have been expressed in thousands (000s) unless otherwise
noted and except for per share data. The financial information included
herein is unaudited for the quarter and nine months ended March 31, 1999;
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 - INVENTORIES
The components of inventories at March 31, 1999 and June 30, 1998 are as
follows:
March 31, June 30,
1999 1998
-------------------- -------------------
(Thousands of Dollars)
Work in process $246 $152
Finished goods 5,610 4,201
-------------------- -------------------
5,856 4,353
Valuation allowance (91) (21)
-------------------- -------------------
Total $5,765 $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 two million shares of the Company's
common stock. Shares purchased under this program have been retired in
accordance with the terms of the Indenture. The Company repurchased a total of
90,300 shares at a cost of $203 by the end of December 1998, with no
additional purchases made since then.
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 Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(1,710) $875 $(2,357) $1,998
Preferred stock dividends (4) (4) (15) (15)
----------------- ----------------- ---------------- ----------------
Numerator for basic earnings per share-
income (loss) available to common
stockholders (1,714) 871 (2,372) 1,983
Effect of dilutive securities:
Preferred stock dividends 4 4 15 15
Interest on convertible debt - - - 50
Numerator for diluted earnings per share-
Income (loss) available to common
----------------- ----------------- ---------------- ----------------
Stockholders after assumed conversions $(1,710) $875 $(2,357) $2,048
================= ================= ================ ================
Denominator: (000s)
Denominator for basic earnings per share-
Weighted-average shares 23,997 12,227 23,567 11,593
----------------- ----------------- ---------------- ----------------
Effect of dilutive securities:
a) Stock options and warrants - 2,659 - 2,854
b) Convertible preferred stock - 138 - 138
Convertible debt - - - 158
----------------- ----------------- ---------------- ----------------
Dilutive potential common shares 23,997 2,797 23,567 3,150
----------------- ----------------- ---------------- ----------------
Denominator for diluted earnings per share
Adjusted weighted-average shares and
assumed conversions - 15,024 - 14,743
================= ================= ================ ================
Basic earnings (loss) per share $(.07) $.07 $(.10) $.17
================= ================= ================ ================
Diluted earnings (loss) per share $(.07) $.06 $(.10) $.14
================= ================= ================ ================
</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 3,961 - 4,175 -
b) Convertible preferred stock 127 - 137 -
</TABLE>
NOTE 5- MANAGEMENT STOCK OPTIONS OUTSTANDING
At March 31, 1999, options to purchase up to 2.4 million shares of common
stock, including 145,000 shares issued to outside directors, at prices
ranging from $1.00 to $13.00 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 five years from date of vesting
or 30 days after termination of employment.
NOTE 6- 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, in January 1999, the Company remitted approximately $1.4 million
which included tax collected and recorded on the books of $1.2 million and
accrued interest of $191 thousand. 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 entirety.
No amount has been assessed as a potential penalty as of March 31, 1999.
In February 1999, the Company made a $1 million non-refundable payment with
respect to its pending acquisition of station WBPT in Bridgeport, Connecticut
as part of a total purchase price of $20 million. The Company is obligated
to close the acquisition by early June 1999.
The Company has entered into agreements with computer software and hardware
vendors to replace its core systems and to launch a new website,
collectibles.com. The Company estimates that these agreements will require
payments of approximately $13 million.
NOTE 7- SUBSEQUEST EVENT - AGREEMENT WITH YAHOO, INC.
On April 28, 1999, the Company entered into an agreement with Yahoo!, Inc., a
leading internet portal, under which the two companies will cross-promote
various products and services. The agreement, calls for the Company to provide
Yahoo! with auction products online as well as television time for Yahoo!
merchandise.
In return, Yahoo! has agreed to provide the Network with online banner
advertising and other promotional services, including co-sponsored events.
The agreement is for a term of one year and will automatically be extended for
an additional six month period unless one of the parties chooses to terminate
the agreement.
<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 has 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 additional
revenues from the sale of broadcast time on its owned television
stations for the broadcast of infomercials.
As of March 31, 1999, the Company's programming was viewable during all or a
part of each day by approximately 67.0 million cable households, of which
approximately 8.2 million cable households receive the programming on
essentially a full-time basis (20 or more hours per day) and the remaining
58.8 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 affiliate 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 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 12.7 million at March 31, 1998,
to 16.6 million at March 31, 1999. 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 revenues of certain items included in the Company's
Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
1999 1998 1999 1998
------------------ ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (excluding items
listed below) 61.6 59.7 59.6 58.0
Salaries & wages 7.2 7.2 7.4 7.3
Transponder & cable 18.2 17.0 17.5 17.8
Other general operating and
administrative expense 10.0 11.9 9.4 11.3
Depreciation & amortization 3.6 1.6 3.3 1.7
Move-related expenses .5 - .8 -
Other income .3 4.0 .6 1.7
Interest expense 6.4 1.1 6.0 1.1
Net income (loss) before income
Taxes (7.3) 5.4 (3.4) 4.6
Income tax expense (benefit) (2.7) 2.0 (1.3) 1.8
Net income (loss) (4.6) 3.4 (2.1) 2.8
</TABLE>
Three months ended March 31, 1999 vs. three months ended March 31, 1998
Net Revenues. The Company's revenues for the quarter ended March 31,
1999, were $37.1 million, an increase of 41.8% from revenues of $26.2 million
for the same quarter in 1998. The core business of the shopping network
accounted for 94.2% of revenues on an average of 16.1 million FTE Cable
Households in the quarter ended March 31, 1999 compared to an average of 11.9
million FTE Cable Households in the 1998 quarter, representing a 35.3%
increase in FTEs. The remaining 5.8% of 1999 revenues resulted from
approximately $2.1 million in revenues from Collector's Edge, as compared
to $1.1 million in revenues or 4.2% for the same quarter in 1998.
In addition, the 1999 period includes infomercial revenue of $631 thousand
compared to $358 thousand in 1998 representing a 76.2% increase. This increase
is due primarily to the addition of the Cleveland, San Francisco and
Raleigh-Durham stations acquired at the end of March 1998.
Cost of Sales. Cost of sales represents the purchase price of
merchandise and inbound freight. For the quarter ended March 31,
1999, the cost of sales increased to 61.6% from 59.7% in the comparable 1998
period. This increase is mainly due to a higher percentage of sales
attributable to lower-margin product categories, primarily electronics and
coins which collectively represented approximately 29% of revenues for the
three months ended March 31, 1999 compared to 20% of revenues for the 1998
period.
Salaries and Wages.Salaries and wages for the quarter ended March 31,
1999 were $2.7 million, an increase of 42.2% over the comparable 1998
quarter. Salaries and wages as a percent of revenues, however, remained stable
at 7.2% for both the 1999 and 1998 periods after giving effect to $304
thousand or .8% of salaries capitalized as part of the installation of new
computer software systems.
Transponder and Cable. Transponder and cable costs for the quarter
ended March 31, 1999 were $6.8 million, an increase of $2.3 million or 51.5%
over the comparable 1998 quarter. During the same period full-time equivalent
households grew 35.3%. The cable carriage cost component of this expense
category increased as a percentage of revenues to 17.0% from 15.6%. The
additional expense in cable cost is the result of the Company's FTE average
increasing to 16.1 million from 11.8 million for the quarters ending March 31,
1999 and 1998, respectively. Carriage costs as a percentage of revenues
initially tend to be higher in periods during which the Company enters a new
market. Due to the fixed nature of this expense, however, the ratio
of expense to revenues usually decreases as the viewing audience grows and
related revenues increase. As a market matures, if carriage costs do not
migrate down to a cost-effective level, 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 March 31,1999 were
$3.7 million, an increase of $.6 million or 17.6% over the comparable 1998
quarter. This increase is primarily due to credit card fees and
telephone costs related to higher revenues, and to utilities, rent and
miscellaneous expenses, which rose primarily due to the acquisition of
television stations and the move to the new headquarters facility in
Nashville. With the revenue increase of 42%, this expense category, which is
largely comprised of fixed expenses, expressed as a percentage of revenues,
has decreased to 10.0% in 1999 from 11.9% in 1998.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended March 31, 1999 were $1.3 million, an increase of $914 or 221.0%
over the comparable 1998 quarter. The major components of this increase are
$547 thousand associated with the amortization of license cost and
depreciation for the three television stations acquired at the end of
March 1998 and $203 thousand additional depreciation on the Company's new
headquarters.
Move-Related Expenses. Move-related expenses were $197 thousand in
the quarter ended March 31, 1999 and were primarily related to employee
relocation.
Interest. Interest expense for the quarter ended March 31, 1999 was
$2.4 million, an increase of $2.1 million or 735.4% over the comparable 1998
quarter. This increase is due to the issuance of $75 million 11%
Senior Secured Notes due 2005, which the Company successfully issued in March
1998.
Other Income. Other income decreased to $102 for the quarter ended
March 31, 1999, from $1.4 million for the same period in 1998, representing a
90.2% decrease. The decrease was primarily due to a one-time $900 thousand
gain in 1998 on the sale of the Company's contractual right to acquire a
Knoxville station.
Nine months ended March 31, 1999 vs. nine months ended March 31, 1998.
Net Revenues. The Company's net revenues for the nine months ended
March 31, 1999 were $110.4 million, an increase of 56.8% over net revenues
of $70.1 million for the same period last year. The core business of the
shopping network accounted for 94.4% of net revenues based on an average of
16.1 million FTE Cable Households in the nine months ended March 31, 1999
compared to an average of 10.1 million FTE Cable Households in the same period
in 1998. During the nine months ended March 31, 1999, the Company generated
revenues per FTE Cable Household of approximately $8.63 compared with
approximately $8.66 per FTE Cable Household for the same period of the prior
year. The major reason for the decrease in revenues per household is due
to the addition of an average of 6.0 million FTEs during the nine months
ended March 1999 compared to the same period in 1998, representing a 59%
increase. These additional households have not yet reached their full
revenue potential as mature households. The remaining 5.6% of 1999 net
revenues resulted from approximately $4.5 million from Collector's Edge.
Also included in net revenues was infomercial income, generated by
its broadcast operations in Boston, Houston, Cleveland, San Francisco
and Raleigh-Durham, of $1.3 million compared to $922 thousand in the
comparable 1998 nine month period, representing a 41.5% increase. The
Company also sold approximately $451 thousand of broadcast time to certain
vendors during the 1998 period. The Company did not continue this practice in
the 1999 period.
Cost of Sales. Cost of sales represents the purchase price of
merchandise and inbound freight. For the nine month period ended March 31,
1999, the cost of sales increased to 59.6% from 58.0% in the comparable 1998
period. This increase is mainly due to a higher percentage of
sales attributable to lower-margin product categories, primarily electronics
and coins which collectively represented approximately 23.7% of revenues for
the nine months ended March 31, 1999 compared to 26.0% of revenues for the
1998 period.
Salaries and Wages.Salaries and wages for the nine months ended March
31, 1999 were $8.1 million, an increase of 57.3% compared to the same period
in 1998. Salaries and wages as a percent of revenues remained consistent in
both years reflecting the addition of new personnel commensurate with
the increase in revenues.
Transponder and Cable.Transponder and cable costs for the nine months
ended March 31, 1999 were $19.4 million, an increase of $6.8 million or 54.4%
compared to the same period in 1998. The cable component of this expense
category remained constant at 16.3% for both periods. Although the percentage
remained constant, the 1999 period reflects the reduction of cable costs of
stations KCNS, San Francisco and WRAY, Raleigh-Durham which were acquired in
March 1998 and therefore not included in the 1999 period. The additional
expense in cable costs is the result of the Company's FTE average increasing
to 16.1 million from 10.1 million for the nine month periods ending March 31,
1999 and 1998, respectively. As a percentage of revenues, the costs
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
to cost-effective levels, management generally attempts to renegotiate the
carriage contract.
Other General Operating and Administrative Expenses. Other general,
operating and administrative expenses for the nine months ended March 31, 1999
were $10.5 million, an increase of $2.6 million or 32.3% compared to the nine
months ended March 31, 1998. As a percentage of revenues, this constituted a
decrease to 9.4% in 1999 from 11.3% in 1998 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
nine months ended March 31, 1999 was $3.6 million, an increase of $2.4
million or 202.5% compared to the nine months ended March 31, 1998. The
largest part of this increase was the $1.6 million of additional license cost
amortization and depreciation for the three new television stations acquired
in March 1998 and $417 thousand of additional depreciation of the Company's
new facility in Nashville.
Move-Related Expenses. Move-related expenses were $873 thousand in
the nine months ended March 31, 1999. These expenses primarily relate to
employee relocation, rental of temporary facilities, the grand opening, of
the Company's Nashville headquarters and employee stay bonuses associated with
the related relocation.
Interest. Interest expense for the nine months ended March 31, 1999
was $6.6 million, an increase of $5.8 million or 789.4% compared to the nine
months ended March 31, 1998. The increase was due to the issuance
of $75 million 11% Senior Secured Notes due 2005, which the Company
successfully issued in March 1998.
Other Income. Other income decreased to $676 thousand for the nine
months ended March 31, 1999 from $1.2 million for the comparable 1998 period
representing a 44.4% decrease. The major portion of this decrease is the
result of the inclusion of a $900 thousand gain on the sale of the Company's
Knoxville station.
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 March 31, 1999, the Company had current assets of $26.4 million compared
to current liabilities of $24.0 million, resulting in working capital of $2.4
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 nine months ended March 31, 1999, the Company used approximately
$5.6 million to fund accounts receivable, approximately $1.5 million for
inventory $919 of prepaid items, and approximately $1.9 million
comprised of the $1 million deposit for the pending acquisition of station
WBPT, Bridgeport, Connecticut and approximately $700 thousand for the
combination of prepaid royalties and various athletics promotional expenses
for future card releases. These expenditures were offset in part by almost
$5.1 million in additional payables. In addition, the Company spent
approximately $8.0 million for equipment and repaid capital leases of $400
thousand. These expenditure include 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 completed in March 1998.
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 March 31, 1999 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 assessed for a potential penalty as of March 31, 1999.
In order to fund its acquisition of station WBPT in Bridgeport, Connecticut,
the Company has obtained a bank commitment for a senior loan of $20 million
in additional funds needed to close on this station in early June 1999.
The Company is highly leveraged and has limited additional debt capacity. As a
result, the Company is evaluating placement of equity, privately and/or
publicly to fund the implementation and development of its website
"collectibles.com", the Company's systems conversion and other potential
station acquisitions. If the Company is unable to obtain capital from
external sources, the aforementioned growth and improvements may be delayed
or abandoned.
Year 2000
The Company intends to 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 a 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
Windows NT systems and is currently testing the Y2K compliance "patch" to
Windows NT. 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 Company's web server and a software program
utilized by Human Resources.
The Company has established a Year 2000 committee and part of its 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 $2.1 million on new computer hardware and
systems to date and is replacing most of the primary computer systems with
Oracle software 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 million (in addition to what has already been
spent).
The following is the time table for Shop At Home's Year 2000 compliance effort:
April 1999 All internal (hardware and software) and external (supplier)
factors identified. 90% completed at end of April 1999.
May Mailings to external suppliers scheduled to go out.
June Internal problems addressed and corrected and questionnaires
to external suppliers evaluated. Begin testing internal
systems.
July Continue testing internal systems. Begin contingency
planning.
August Complete contingency planning. Begin contingency testing.
August Internal Oracle implementation with new hardware and
software complete.
September Continue contingency testing.
October 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 related to:
a) bankcard processors. The Company believes there are several providers
for this service as alternatives.
b) long distance telephone service providers. Similarly, in addition
to the two providers used by the Company currently, the Company
believes there are alternative providers.
c) the satellite transponder provider. The contractor is bound to
provide this service. If there were no alternative then the Company's
signal would cease to be transmitted across the country.
The Company is contacting these vendors to verify their claims 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 the necessary
resources to remedy them are available. The Y2K problem has many aspects
and potential consequences however, some of which are not reasonably
foreseeable. There is 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 only item classified
as other comprehensive in the Company's 1999 financial statements is the tax
benefit received from the exercise of non-qualified stock options and the
exercise and disqualifying disposition of incentive stock options in the
amount of $886 thousand.
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. 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 currently 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/ Arthur Tek
Executive VP & Chief Financial Officer
Date:_____________________________
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