-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PoDUhBs6ipSbrC6tZ0UDvIZBl9Sgv0YOz4Q/4eOBOtvXaMoDacpl9vtA2oVxegQR 9QAz5PUvyGRi+dfA06dHeQ== 0000950144-96-006745.txt : 19961001 0000950144-96-006745.hdr.sgml : 19961001 ACCESSION NUMBER: 0000950144-96-006745 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOP AT HOME INC /TN/ CENTRAL INDEX KEY: 0000810029 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 621282758 STATE OF INCORPORATION: TN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25596 FILM NUMBER: 96637299 BUSINESS ADDRESS: STREET 1: 5210 SCHUBERT RD CITY: KNOXVILLE STATE: TN ZIP: 37912 BUSINESS PHONE: 6156880300 MAIL ADDRESS: STREET 1: P O BOX 12600 CITY: KNOXVILLE STATE: TN ZIP: 37912 10-K 1 SHOP AT HOME, INC. FORM 10-K 06-30-96 1 ------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------- FORM 10-K (Mark One) [x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended June 30, 1996 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee Required] 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 or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 5210 Schubert Road P.O. Box 12600 Knoxville, Tennessee 37912 -------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (423)688-0300 ------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- COMMON STOCK, $.0025 par value 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 --- --- 1 2 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 September 18,1996 was: $39,657,206. Number of shares of Common Stock outstanding as of September 18, 1996: 10,575,255. Documents Incorporated by Reference The Registrant's definitive Proxy Statement in connection with the 1996 Annual Meeting of Shareholders planned to be held December 6, 1996 which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year ended June 30, 1996 is incorporated by reference in Part III of this Annual Report on Form 10-K. 2 3 SHOP AT HOME, INC. FORM 10-K PART I ITEM 1. BUSINESS GENERAL Shop at Home, Inc. ("Company"), a Tennessee corporation, is headquartered in Knoxville, Tennessee, and was incorporated in 1986. The Company's principal business is the sale of merchandise and retail products through televised programs broadcast to owners of satellite dish receivers, cable television system subscribers, and television station viewers. The Company creates twenty-four hours of live programming each day, and broadcasts that programming by satellite. It is viewable by up to 35 million (estimated) households throughout North America. This same programming (and occasionally other programs also produced live or on tape) is provided to the Company's owned and operated television stations in Boston and Houston, and to an "ad hoc" network of over 50 independently owned television stations and cable systems around the country for all or a portion of each broadcast day. The Company's business offices, broadcast studios, inbound call center, and fulfillment operations are headquartered in Knoxville, Tennessee. In addition to its Tennessee office, the Company owns and operates television stations in Boston (WMFP), and in Houston (KZJL), and manages cable affiliate development offices in Atlanta, Georgia, and Denver, Colorado. The Company's programming features a variety of consumer products including, but not limited to, sports collectibles and memorabilia, collectible coins, collectible knives and swords, fitness products, health and beauty products, jewelry, individual gemstones and opals, and other merchandise that appeals to collectors, catalog customers, and TV home shoppers. The Company offers its products at competitive prices that represent enticing values to the consumer. The Company uses show hosts to present and explain the benefits and values of its products to its television audience, takes customer orders at its own call center and ships customer orders through its own fulfillment center or through its affiliated vendors. The Company differentiates itself from its competitors in a variety of ways including emphasis on unique collectible items and packages in sports memorabilia, coins and other predominantly male oriented product categories. Additionally, the Company selects and offers higher quality, higher priced merchandise in jewelry, 3 4 gemstones, and cosmetics. The Company has also successfully developed and utilized proprietary products and brand names in its jewelry and cosmetic lines. BUSINESS STRATEGY The Company's primary mission is to achieve positive earnings per share by attaining accelerated revenue growth and a consistent level of profitability. A key factor in achieving these objectives is the Company's marketing strategy of establishing dominance in niche markets that are underserved by other TV home shopping and retail competitors. The Company constantly strives to broaden its niche product categories, offer unique items and improve its level of customer service. Management has focused internal emphasis on revenue growth, improvement in gross margins, expense control, cable distribution growth and building its infrastructure to maintain its fast growth pace. The Company has recently increased the capacity of the organization in systems, finance, physical distribution, planning, customer service, and affiliate relations. Areas of emphasis during the upcoming fiscal year include merchandising, call center operations, investor relations, and TV cable carriage distribution. RECENT DEVELOPMENTS In October 1995, the Company signed an agreement giving it the right to acquire 49% of the ownership of Television station KLDT, in the Dallas, Texas market. The Company is responsible for the programming of this station which broadcasts to over 600,000 cable television households. Dallas is the country's 8th largest market with over 1.8 million television households. The Company recently completed its acquisition of the remaining 51% portion of Television station KZJL, Houston, Texas, that it did not own. Houston is the nation's 10th largest television market with approximately 1.5 million television households. The Company recently sold the operating assets of its wholly owned subsidiary, RF Scientific Transportables, which provided mobile uplink services. This subsidiary had not operated profitably over the past few years, and its closing will eliminate the continuing operating loss in excess of $100,000. A priority for the Company in the past four years has been the attainment of higher gross margins. Internal programs focused on improved buying techniques, stronger vendor partnerships, and a more favorable merchandise mix have enabled the 4 5 Company to improve its gross margin percentage to 38.7% from 36.1% and 34.3% in fiscal 1996, 1995 and 1994 respectively. The Company successfully completed two agreements with Telecommunications, Inc. (TCI), the first of which will add at least 4 million up to 10 million, cable households as early as November 1996 on a part time basis. The second agreement gives the Company the right to solicit and negotiate with each of the individual cable systems in TCI's network of over 12 million cable households. The Company is in the initial development stage of creating an Internet Website. Since a significant portion of the Company's revenues are derived from the sale of collectible merchandise, especially to male consumers (who are major users of PCs and the Internet), the Company sees this as an excellent opportunity to extend and promote its products. The Company expects to continue its accelerated growth rate which is taxing the limits of its current facility in Knoxville, Tennessee. Accordingly, the Company has retained the services of the James N. Gray Construction Co., Inc. to advise on site location, facility requirements, and transition planning as the Company evaluates its physical facility needs for the next several years. "MUST CARRY" REGULATIONS Television station ownership allows the Company to take advantage of the "must carry" rules of the Federal Communications Commission ("FCC") under the Cable Act of 1992 (the "Cable Act"). Generally, the "must carry" rules require most cable systems to use up to one-third of their channels to carry the broadcast signals of local, full power television stations, including those which broadcast predominantly home shopping programming. The current strategy of the Company has been developed based on the present status of the "must carry" provisions of the Cable Act of 1992. The long term strategy of the Company is largely dependent on the ultimate outcome of the lawsuit known as Turner Broadcasting System v. FCC, challenging the validity of the must carry provisions of the Cable Act. Under the must carry provisions, cable systems (with the exception of some small systems) are required to set aside up to one-third of their channels for local, full power broadcast stations that request to be carried. 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. Further, with some exceptions, the cable operator may not charge a fee for carrying these broadcast signals. On June 27, 1994, the United States Supreme Court issued an opinion in the Turner case in which the Court decided that cable system operators engage in "speech" protected by the First Amendment by virtue of their decisions regarding the programming broadcast over their systems, and the Cable Act constituted a governmental restriction on that speech. The Court held that restriction would be permissible only if (i) the restriction furthers an important governmental interest, (ii) the governmental interest is not suppression of free expression, and (iii) the incidental restriction on the cable system operators' free speech is not greater than is essential to the furtherance of the government interest. The Court remanded the case to the District Court for trial in accordance with this standard. 5 6 On December 12, 1995, a three judge panel of the District Court issued its decision upholding the validity of the must carry provisions of the Act. The Court (with one judge dissenting) found that these provisions did not violate the First Amendment in that there was substantial evidence from which the Congress could have drawn reasonable inferences that the must carry regulations were necessary to protect the economic health of the broadcast television industry and the burden imposed on the cable industry was not substantial. Since that date, the Supreme Court has agreed to review this decision, and the matter is set for oral arguments to be made to the Court on October 7, 1996. It cannot be reasonably predicted when the resulting decision of the Supreme Court will be issued, but a decision would be expected before the end of the Court's annual session in early summer of 1997. As of this date, the must carry provisions remain effective and cable system operators must continue to adhere to them until, and unless, the Court rules otherwise. There is no assurance that the Supreme Court will ultimately uphold the validity of the must carry provisions of the Cable Act. In the event the must carry requirements are not in force, the Company anticipates that it would continue to seek carriage of its programming on commercial television stations and directly with cable television systems by purchasing broadcast time. These additional expenditures would significantly increase the Company's operating costs, and there is no assurance that the Company could readily replace the households it might lose as a result of an adverse court decision. OWNED AND OPERATED STATIONS In the pursuit of its strategy to build full time distribution, the Company purchased its first television station in February of 1995, WMFP, Channel 62, licensed to Lawrence, Massachusetts and serving the greater Boston area. The station broadcasts at maximum FCC allowable power from atop the 35th floor of #1 Beacon Street, in downtown Boston. Boston is the 6th largest television market in the country with 2,105,100 television households, and 1,571,610 cable households. Metropolitan Boston's 5,717,000 residents spend in excess of $47 billion on total annual retail sales. Total consideration for the purchase of WMFP was $7,000,000 comprised of cash, long term debt, common stock, and series A preferred stock. In fiscal 1995, the Company also purchased a 49% interest and an option to 6 7 acquire the remaining 51% of television station KZJL, Channel 61, licensed to Houston, Texas. On September 5, 1996, the Company acquired this 51% interest. The station signed on the air on June 3, 1995 and broadcasts from a 1500 foot tower in the Houston "antenna farm". Houston is the 10th largest Designated Marketing Area with 1,561,350 television households and 834,900 cable households. Houston is ranked 8th in the United States Buying Power Index and has total retail sales of over $28 billion. Shop At Home programming runs exclusively on the station for the majority of each broadcast day. Total consideration for the 49% interest was a total of $2,500,000 in cash, long term debt and common stock. The remaining 51% was purchased for $1,400,000 payable over 11 years at 6%. Cost to the Company to construct the station was approximately $2.2 million. CABLE CARRIAGE AFFILIATIONS The business planning of the Company for future revenue growth and the general expansion of the opportunities for the Company center upon carriage. Carriage is the distribution of the Company's programming into television homes in the United States and some coverage into other North American homes. A Company priority is to achieve an increase in the number of cable homes which receive the programming of the Company's home shopping format. In mid-1993, an aggressive strategy was launched to build a cable distribution for the Company's programming. Since that time, the Company has been successful in continuously increasing its cable distribution and increasing its aggressiveness in building strong ties to major cable Multiple System Operators. The Company's programming is now viewed in more than 50 cable markets, including nine of the country's top ten Designated Market Areas. During fiscal 1996, the Company has added over 25 new cable markets on either a full time or part time basis. In addition, the Company has secured coverage on superstation WWOR which gives the Company access to more than 23 million households for some portion of each week. The Company has also entered into two carriage agreements with Telecommunications, Inc. (TCI), one of which will add at least 4 million households (800,000 FTE's) as early as November 1996, and can grow to a total of 10 million households within a year of initiation of carriage. The second agreement gives the Company the right to solicit and negotiate with the individual cable systems in TCI's network of over 12 million cable households. 7 8 The Company anticipates that it will continue to be successful in securing similar additional cable distribution during the next year and accordingly has increased its Affiliate Relations staff. BROADCAST OPERATIONS The Company's programming is distributed to satellite dish owners, television stations and cable television systems, from the Company's studios in Knoxville, Tennessee. The programming is transmitted by means of the Company's satellite uplink facilities to transponders leased or subleased by the Company on domestic communications satellites. The transponders then re-transmit the signals received from the Company to satellite dish receivers located throughout the United States and parts of Canada and Mexico. Owners of home satellite dish receivers, the Company's principal market of customers prior to mid-1993, are generally able to receive programming directly from the satellite. The signal is also received by affiliated cable television systems and television stations who re-broadcast the Company's signal. On December 1, 1995, the Company commenced broadcasting on transponder 4C of AT&T's state of the art satellite 402R, thereby terminating its use of the S3-18 transponder. PRODUCT ASSORTMENT The Company's programming features a variety of consumer products including jewelry, gemstones, opals, sports cards and memorabilia, rare coins and currency, collectible knives and swords, electronics, fitness equipment, health and beauty products, and home related items. The Company seeks to offer high quality products that are not readily available or are differentiated from its competitors. From time to time, the Company also offers exceptional values when it is able to take advantage of close-out merchandise and pricing from selected vendors. The Company has multiple sources of products and believes its relationships with most of its vendors is excellent. The Company believes certain products which it sells are readily available through multiple suppliers. The Company also acquires unique products from a select group of vendors (some of whom are shareholders) and believes it will be able to continue to identify sources of specialty products. These unique products are what the Company believes help to differentiate it from its competitors. 8 9 The Company's programs use a show host approach whereby information is conveyed about the products with a demonstration of the use of the products to the television audience. The viewer may purchase any product the Company offers at any time after such product's offering, subject to availability. Thus a viewer is not limited to purchasing a product only during that particular product's air time. The Company continually monitors product sales and revises its product offerings in an effort to maintain a productive and profitable product mix. The Company is continuously evaluating new products and vendors as it strives to broaden its merchandise selection. PROGRAMMING The Company segments most of its programming into product or theme categories. The Company often provides multiple broadcasts (two or more) during peak viewing times. The Company provides one full-time live broadcast and part-time live, taped, or simulcast broadcasts on two satellite transponders that the Company leases from ESPN. The Company has studio and broadcasting capacity to produce two live shows simultaneously. The Company seeks to differentiate itself from other televised home shopping programmers by utilizing an informal, personal style of presentation and by offering unique and more "upscale" types of products with a heavy emphasis on sports and sports related products. Rare coins, collectible sports items, and other limited-availability items provide viewers with alternatives to the products offered on other home shopping programming. Specialized products are presented and described by knowledgeable on-air hosts. The Company believes that continued use of such "niche" programming is important to the future growth of the Company. CUSTOMER RELATIONS The Company maintains its own call center and customer service operations at its headquarters in Knoxville, Tennessee. Customers can place orders with the Company 24 hours a day, seven days a week via the Company's toll free 800 numbers. The Company uses both Customer Sales Representatives (CSRs) and an automated touch-tone ordering system to accept customer orders. A majority of the Company's customers pay for their purchases by credit card and the Company also accepts payment by money order, personal check, certified check, debit cards and wire transfers. The Company has recently developed and implemented a new training program to further raise its service and productivity levels. 9 10 The Company ships customer orders as quickly as possible utilizing UPS, Federal Express, and Parcel Post for the majority of its shipments. To increase speed of service the Company ships both from its warehouse facility in Knoxville and directly to the customer from selected vendors with whom it has arranged "drop ship" agreements. The Company also operates a separate customer service department to facilitate and handle customer inquiries about ship dates, product, and billing information. The Company offers a full 30 day return policy to insure customer satisfaction and to promote the purchase of its merchandise. Mechanical, electronic, and other items may be covered by additional manufacturer warranties; however, the Company does not offer additional warranties on the products it sells. The Company strives to continuously improve its customer service and utilizes outside agencies to conduct objective comparisons with other TV home shopping competitors. Additionally, the Company periodically surveys and researches its customers to solicit ideas for better products, programming, and service. From time to time the Company conducts promotional campaigns to launch new shows and products, increase its revenue per household, and introduce new viewers to its programming. Multiple media are used to communicate these events including on-air promotion, show host emphasis, package stuffers, direct response mailers and TV commercials. FEDERAL REGULATION AND LEGISLATION The FCC grants licenses to construct and operate uplink equipment, which transmits signals to satellites. These licenses are generally issued without a hearing if suitable frequencies are available. Presently, the Company has licenses issued by the FCC for the operation of two domestic fixed satellite service earth stations that are renewable on a one (1) year basis. In the event the FCC fails to renew or terminates the licenses for one or both of these vehicles, the Company's ability to provide programming will be significantly affected. The Company does not have any agreements for backup transmission of its programming to satellites, but it believes it could obtain such services, although it might incur substantial additional costs in entering into new arrangements. In addition, the Company's ability to expand its programming capability is limited by the requirement that it obtain licenses for additional uplink facilities. Each of the Company's television stations operate pusuant to a license issued by the FCC. Television broadcast licenses are issued for a period of five (5) years, and the license for KZJL will expire in 1998 and the license for WMFP will expire in 1999. The Company may apply to renew these licenses, and third parties may challenge those applications or file competing applications. Although the Company has no reason to believe its licenses will not be renewed in the ordinary course, there can be no assurance that the licenses will be renewed. The television broadcast industry is subject to extensive and changing regulation. The Communications Act of 1934, as amended, and FCC rules require the FCC to consent to assignments of FCC licenses or the transfer of control of FCC licensees. There are currently under consideration new regulations regarding a variety of matters which could have an adverse affect of the ownership and operation of broadcast properties, or which could increase the value of such holdings. FCC regulations also require broadcast stations to maintain certain records for public inspection and to submit periodic reports to the FCC, including reports concerning the ownership of the licensee, the employment practices of the station, and other matters. While the Company has no reason to believe that it is not in full compliance with all applicable regulations, it is subject to periodic inspections by the FCC and there can be no assurance of full compliance. The FCC has the power to assess monetary penalties for violations of applicable law and regulations, and it can, in particularly egregious cases, seek to revoke the station's license or to decline to renew the license. 10 11 COMPETITION The television home shopping industry is highly competitive and is dominated by two companies, Home Shopping Network and QVC Network. The Company's programming competes directly with Home Shopping Network, QVC, or other home shopping networks in almost all of the Company's markets. Home Shopping Network and QVC are well-established and significantly better capitalized than the Company, and each network reaches a significantly 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 the Company's programming is often not carried by cable systems on a full time basis and the Company may have less desirable television channel placement on cable systems. The Company expects the home shopping industry to grow and expand. As a result, the Company expects increased competition for viewers, personnel, and television station carriage from present competitors, as well as new entries into the market. New companies that announced or launched competitive services during the last year were largely unsuccessful including Global Shopping Network, Outlet Mall Network, and Hollywood Showcase. The Company believes that there is significant value in its long (10 year) operating history, and the fact that it is one of only four broadly distributed electronic retailers in America. As a seller of merchandise at retail, the Company competes for consumer expenditures with other types of retail businesses, including department, discount, warehouse, jewelry and specialty stores, mail order, and catalog companies and other direct sellers. SEASONALITY Although the television home shopping business in general is seasonal, with the major selling season occurring during the last quarter of the calendar year, the Company has not experienced the usual seasonality primarily because it has, over the past three years, significantly increased its carriage and therefore, each quarter has 11 12 increased over the sales of the previous quarter. The home shopping industry is also 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. Over the last five years, the Company's revenues in the last quarter of the calendar year approximated 26%. EMPLOYEES The Company had approximately 236 paid employees as of June 30, 1996, some of whom are part time. The Company believes its relationship with its employees is good. Presently no collective bargaining agreements exist between the Company and its employees. 12 13 SHOP AT HOME, INC. AND SUBSIDIARIES ITEM 2. PROPERTIES The Company leases office space in Atlanta, Georgia primarily to house its executive office and a portion of its affiliate relations department. The Company currently leases approximately 17,000 square feet of studio, office, and warehouse space in Knoxville, Tennessee from a corporation controlled by W. Paul Cowell, a director. As the Company grows, it will need additional office, studio, and warehouse space. Although no additional space is available at the Company's current location in Knoxville, management believes the Company can obtain suitable large facilities at other locations, if needed. The Company's Knoxville lease is currently on a term lease with a scheduled expiration date of June 30, 1997. The Company is in the process of extending this lease to December 31, 1997 if needed. In addition, the Company through its subsidiaries WMFP in Boston, MA and KZJL in Houston, Texas leases space to house their station transmitters. ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation which arises in the normal course of its business. The Company is not currently a party to any litigation which, if adversely determined, would have a material adverse effect on the Company, its liquidity or its operations. The Company is a defendant in a case filed in February, 1995 in the United States District Court for the Southern District of California by Upper Deck Authenticated, Ltd. The plaintiff alleges that it possesses the exclusive right to market, sell and distribute sports memorabilia and collectibles featuring the name, autograph, signature or likeness of certain famous athletes. The plaintiff alleges that each of the defendants, including Shop at Home, violated its exclusive rights by selling and marketing collectibles and memorabilia featuring these athletes. In addition, the plaintiff alleges that certificates of authenticity provided by the defendants, including Shop at Home, to certain purchasers of autographed sports memorabilia and collectibles failed to comply with the requirements of California law. On this basis, the plaintiff asserts a right to relief based upon unfair competition, section 43(a) of the Lanham Act, section 17200 of the California Business and Professional Code, unjust enrichment, dilution and misappropriation of the athletes' right of publicity. The plaintiff requests that the court grant a preliminary and permanent injunction against each Defendant, issue a declaratory judgment, impose a constructive trust, and grant compensatory and punitive damages, together with attorney's fees. 13 14 SHOP AT HOME, INC. AND SUBSIDIARIES Shop at Home has filed its answer to the Complaint admitting that Shop at Home has sold items featuring the athletes but denying the other allegations made in the Complaint. Shop at Home's answer asserts, among other defenses, the "first sale doctrine," which provides that once an item is sold in commerce the originator of the item (in this case the athlete) loses all rights to control the subsequent sale of the item. In addition, Shop at Home's answer asserts that the plaintiff's "exclusive right" is not "exclusive" as other organizations from whom Shop at Home acquires its merchandise, possess a lawful right to the use the athletes' names, signatures, photographs or likenesses. Further, Shop at Home asserts that its certificates of authenticity comply in all respects with applicable law. Recently, the plaintiff filed a motion for permission to amend its complaint to add an additional plaintiff--Upper Deck Company--and to add several new defendants. The Amended Complaint alleges that the plaintiffs' rights extend not only to autographed memorabilia (the subject of the first complaint), but also to any item that features an athlete's name, specimen autograph, player number, likeness, biographical information or statistical information. The Amended Complaint alleges that Shop at Home had advertised and sold both autographed and unautographed merchandise featuring the indicia of the athletes at issue, and that the plaintiffs have both exclusive and nonexclusive licenses to exploit commercially the indicia of these athletes. The Amended Complaint requests compensatory damages, restitution, punitive damages, reasonable attorney's fees prejudgment interest and costs, all in an unspecified amount. As of this date, the Court has not ruled on the Plaintiff's motion. In any event, Shop at Home believes that it has a valid defense in the action and plans to defend the matter vigorously. This case has not been set for trial. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 15 SHOP AT HOME, INC. AND SUBSIDIARIES PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS In June 1995, the Company was approved by NASDAQ to be listed on the NASDAQ SmallCap market. The range of high and low bid quotations for the Company's Common Stock by fiscal quarters during the two most recent years, as obtained from the National Quotation Bureau, Inc., directly and by one of the Company's principal market makers, is provided below. These quotations reflect inter-dealer prices without retail markup, markdown, or commissions and may not necessarily represent actual transactions. Effective June 9, 1995, the Company's stock was listed on NASDAQ's SmallCap Market and the bid prices shown after that date reflect the high-low closing bid quote on NASDAQ.
High Bid Low Bid -------- ------- 07/01/94 -- 09/30/94 $2.75 $2.00 10/01/94 -- 12/31/94 $2.625 $2.00 01/01/95 -- 03/31/95 $3.625 $3.00 04/01/95 -- 06/30/95 $3.50 $2.25 07/01/95 -- 09/30/95 $3.00 $2.625 10/01/95 -- 12/31/95 $5.19 $2.375 01/01/96 -- 03/31/96 $3.25 $2.00 04/01/96 -- 06/30/96 $3.875 $2.9375
The approximate number of shareholders of the Company's Common Stock of record on June 30, 1996, was 694. Since the Company's inception in 1986, the Company has paid no dividends with respect to its Common Stock. It is reasonable to project that the Company intends to retain earnings to finance the growth and development of the Company's business and does not expect to pay any cash dividends on its Common Stock in the foreseeable future. 15 16 SHOP AT HOME, INC. AND SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA The following selected financial information for the years ended June 30, 1996, 1995, 1994, 1993, and 1992 has been derived from the consolidated financial statements of the Company and should be read in conjunction with the financial statements, the related notes thereto, and other financial information included elsewhere herein.
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92 ------- ------- ------- ------- ------- Current assets $ 5,273,163 $ 2,750,656 $ 3,218,623 $ 1,541,712 $ 1,950,658 Current liabilities 8,993,793 7,371,600 3,779,660 3,975,204 1,944,491 Total assets 20,286,670 18,157,431 4,770,262 3,130,104 3,556,868 Long-term debt 7,805,048 6,865,493 283,275 161,384 178,223 Redeemable preferred stock 1,393,430 1,405,000 - 0 - - 0 - - 0 - Stockholders' equity 2,108,399 2,520,338 707,327 (1,006,484) 1,434,154 Net revenues 40,016,114 26,787,013 21,717,344 19,878,478 21,156,903 Infomercial Income 659,461 189,048 - 0 - - 0 - - 0 - Net loss (1,405,472) (1,281,989) (1,052,335) (2,440,638) (60,104) Net loss per share of common stock (.14) (.14) (.13) (.33) (.01) Cash dividends per common share -0- - 0 - - 0 - - 0 - - 0 -
16 17 SHOP AT HOME, INC. AND SUBSIDIARIES ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage relationship to total revenue of certain items included in the Company's Statements of Operations.
YEAR ENDED JUNE 30 1996 1995 1994 ------ ------ ------ NET REVENUES 100% 100% 100% COST OF GOODS SOLD 61.3 63.9 65.7 GROSS PROFIT 38.7 36.1 34.3 OTHER OPERATING INCOME 1.7 0.7 0.0 PROMOTION AND ADVERTISING CHARGES .6 1.0 1.0 SALARIES AND WAGES 11.3 12.6 13.4 TRANSPONDER AND CABLE CHARGES 15.1 12.0 8.9 OTHER GENERAL OPERATING AND ADMINISTRATIVE EXPENSES 13.1 13.7 13.5 DEPRECIATION AND AMORTIZATION 2.2 2.0 1.9 OTHER EXPENSE (1.9) (0.5) (0.4) INCOME TAX EXPENSE (BENEFIT) .3 0.0 0.0 NET LOSS (3.5) (4.6) (4.8)
RESULTS OF OPERATIONS FISCAL 1996 VS. FISCAL 1995 The Company's net revenues for the fiscal year ended June 30, 1996, were $40,016,000, an increase of $13,229,000 or 49.4% over the prior year. The increase was primarily attributable to greater cable coverage which resulted from the addition of approximately 2,700,000 full time equivalent households resulting in a total of 5,400,000 full time equivalent households by the end of June 1996. This two-fold increase in households is attributable mainly to the combined carriage in the Boston, Houston, and Dallas markets which the Company did not broadcast to in the prior fiscal year (approximately 60%) and the additional part time carriage on various full power 17 18 SHOP AT HOME, INC. AND SUBSIDIARIES stations throughout the United States (approximately 40%). The sales increase was the result of increased sales volume and not an increase in sales prices. During the year, the Company introduced and developed new product lines in Health & Beauty, Fitness and Collectible Knives. In addition, there was a broadening of the Coin product line and the Company re-introduced its "Dominator" collectible card. These new and expanded product lines helped generate new sales to broaden the customer base. Gross profit increased by $5,834,000 or 60.4%, primarily as a result of increased sales related to expanded carriage throughout the United States and increased gross margins. The Company's average gross profit margin increased to 38.7% from 36.1% in the previous year as a result of improved purchasing, selection and development of more unique merchandise and product lines. Higher margins were obtained throughout most product categories, particularly in the jewelry and sports product lines. In addition to net revenues the Company generated $659,000 in informercial revenue from its stations WMFP in Boston and KZJL in Houston. This represented a 248% increase over the informercial revenue of the prior year and was the first full year of informercial revenue. The Company anticipates continued improvement in this area. The Company "develops" a market by broadcasting its programming over a period of time. Consequently there is a timing difference of approximately 6 to 9 months whereby the expenses out pace future revenues. In these instances, the Company's profitability in a specific new market will be initially depressed until future revenue streams exceeds expenses. Operating expenses for fiscal 1996 increased $5,920,000, or 53.8% over 1995. The major items resulting in the increase were: a) additional cable carriage and signal distribution costs of approximately $2,798,000 or 86.7%; b) an increase in salaries of approximately $756,200 or 22.5% related to variable labor costs associated with the higher volume of customer calls and some additions to management; c) an increase of $367,900 or 162.0% in legal expenses associated with the contemplated Paxson merger and certain litigation; d) an increase in depreciation, amortization, station management costs and utilities of approximately $975,000 or 22.7% primarily associated with the operating costs and acquisitions of fixed assets of the Boston and Houston television stations, which were owned for a full year in 1996; e) the Company's operating expenses for Houston exceeded revenues by $305,000 until January 1996 when Houston became profitable; and f) an increase in telephone cost of $179,000 or 38.3%; credit card discounts of $354,000 or 53.5% related primarily to the higher business revenues in 1996. 18 19 SHOP AT HOME, INC. AND SUBSIDIARIES Other expenses were negatively impacted by $610,000 or 479.1% primarily due to increased interest expense on the additional $2,000,000 in debt secured in August 1995 and the full year of expense from new debt incurred in fiscal 1995. FISCAL 1995 VS. FISCAL 1994 The Company's net revenues for the fiscal year ended June 30, 1995, were $26,787,000, an increase of $5,070,000 or 23.3% over the prior year. The increase was primarily attributable to greater cable coverage which resulted in the addition of approximately 700,000 full time equivalent households to a total of 2,700,000 full time equivalent households by the end of June 1995. The sales increase was the result of increased sales volume and not the result of an increase in sales prices. During the year, the Company introduced a copyrighted line of specialty jewelry called, Bella Luce. Bella Luce is high quality gold (14K) pieces, (rings, bracelets, earrings, necklaces, etc.) with high quality, synthetic gemstones. Gross profit increased by $2,227,000 or 29.9%, primarily as a result of increased sales related to expanded carriage throughout the United States. The Company's average gross profit margin increased to 36.1% from 34.3% in the previous year as a result of improved purchasing, selection of more unique merchandise and better vendor pricing. Higher margins were obtained throughout most product categories, particularly in the jewelry and sports product lines. The Company generated other operating income of $189,000 in fiscal 1995 from the sale of infomercial time at its new station in Boston. The Company anticipates further increases in this type of income in the future from the Houston station in which it has acquired an ownership interest. Operating expenses for fiscal 1995 increased $2,616,000, or 31.1%. The major items resulting in the increase were: a) transponder and cable costs increases of $1,298,000 or 67.3% of which approximately $480,000 related to the necessary duplication of transponder costs for the period of January through June 1995 and approximately $820,000 related to the cost of acquiring increased cable coverage; b) an increase in salaries of approximately $440,000 or 15.1% related to variable labor costs associated with the higher volume of customer calls and also additions to management; c) an increase in other general and administrative expenses of $703,000 or 24.0% which includes $180,000 related to the resolution of issues pertaining to prior years activities; and d) an increase in depreciation and amortization related to fixed 19 20 SHOP AT HOME, INC. AND SUBSIDIARIES and intangible assets resulting from the acquisitions of WMFP in Boston and KZJL in Houston. The acquisition of WMFP in Boston and the partial interest in KZJL in Houston occurred in the latter part of the fiscal year and subsequently revenues derived from these two stations did not have a material impact on revenues in relation to the operational costs necessary to build the infrastructure to handle the increased level of business from these stations. In addition, when entering a new market, it is generally necessary to promote and develop that market in order for the viewers to become aware of the presence of a new station. Until the awareness fully occurs, the early stages of development expenses could outpace revenues. With respect to Houston, the future anticipated revenues will directly relate to the actual cable coverage. As of June 30, 1995, KZJL had no cable coverage in Houston, approximately 10% coverage as of September 1995, and increase to approximately 65% of the market's available cable households by December 1995. LIQUIDITY AND CAPITAL RESOURCES Fiscal 1996 was a year of continuing growth for Shop at Home. The Company continued its aggressive approach of expansion into cable markets. Fiscal 1996 was the Company's first full year of operations for its subsidiaries, WMFP in Boston and KZJL in Houston. The first six months of operation, the Houston station operated at a loss of $305,000 until January 1996 when it became profitable. As these subsidiaries continue to mature they should add increasing amounts of working capital to the company. Management believes the growing market value of these broadcast assets and the addition of long-term, full time, predictable coverage will significantly and positively add long term value and revenue to the Company. At June 30, 1996 the Company had a net working capital position of ($3,720,000), an increase of $861,000. This increase was attributable primarily to the $400,000 cash conversion of non performing assets and the issuance of common stock in payment of approximately $609,000 of accounts payable. By the end of fiscal 1996, the Company had closed down R.F. Scientific Transportable, Inc. and put in place operating efficiencies in its Houston subsidiary, the combined effect of which should have a positive impact on carriages and cash flow in the excess of $400,000. Much of the growth in liabilities is reflective of the Company's increased sales volume. The Company believes that it enjoys strong, long-term relationships with its vendors. It is common in the retail business to have a low working capital ratio and Shop at Home 20 21 SHOP AT HOME, INC. AND SUBSIDIARIES believes that its ability to meet future vendor obligations will be adequate. In 1996 the Company completed the installation of a new computer system which facilitates Shop at Home's ability to meet increased sales demands. In July 1996 the Company instituted a new credit card processing system which provides instant sales verification and moves the point of cash receipts to the time of shipment. The Company believes internally generated funds from operations, together with borrowings similar to the $2,000,000 loan consummated in August 1995, and the sale of common stock and warrant rights, if needed, will be sufficient to meet the Company's capital requirements during the next fiscal year. Additionally, the Company believes that it possesses significant leverage in its assets, particularly in its Boston and Houston television stations, which it believes it can use for future financing possibilities, if necessary. In March 1995, the FASB issued Statement of Accounting Standards No 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of which i) requires that long-lived assets to be held and used be reviewed for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable, ii) requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell, and iii) provides guidelines and procedures for measuring impairment losses that are different from previously existing guidelines and procedures. The Company adopted the provisions of Statement 121 in fiscal year 1996 and the changes did not have a material effect on the Company's financial position or results of operations. Additionally, in October 1995, the FASB issued Statement of Accounting Standards No. 123. Accounting and Disclosure of Stock-Based Compensation which encourages but does not require companies to recognize stock awards based on their fair value at the date of grant. The Company currently follows, and expects to continue to follow, 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 equal the market price of the underlying stock on the date of grant, no compensation expense is recognized. Although the Company is permitted to continue to follow the provisions of APB 25 under Statement 123, certain pro forma disclosure will be required beginning in 1996, as if Company had accounted for its stock options under the Statement 123 fair value method. No such options were issued in fiscal year 1996. 21 22 SHOP AT HOME, INC. AND SUBSIDIARIES ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Auditors 23 Consolidated Balance Sheets at June 30, 1996 and June 30, 1995 24-25 Consolidated Statements of Operations for the years ended June 30, 1996, June 30, 1995, and June 30, 1994 26 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, June 30, 1995, and June 30, 1994 27 Consolidated Statements of Cash Flows for the years ended June 30, 1996, June 30, 1995, and June 30, 1994 28-29 Notes to Consolidated Financial Statements 30-46
22 23 SHOP AT HOME, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Shop at Home, Inc. We have audited the accompanying consolidated balance sheets of Shop at Home, Inc. and Subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shop at Home, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Knoxville, Tennessee COOPERS & LYBRAND L.L.P. September 6, 1996 23 24 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND 1995 ASSETS
1996 1995 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 1,914,759 $ 202,146 Accounts receivable - trade 380,077 507,166 Accounts receivable - related parties 7,680 - Inventories 2,611,142 1,683,472 Prepaid expenses 279,505 159,300 Deferred tax assets 80,000 198,572 ----------- ----------- Total current assets 5,273,163 2,750,656 PROPERTY & EQUIPMENT, NET 3,470,226 3,937,939 FCC LICENSES, NET 10,516,041 10,745,106 GOODWILL, NET 605,154 630,416 OTHER ASSETS 422,066 93,314 ----------- ----------- TOTAL ASSETS $20,286,670 $18,157,431 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 24 25 SHOP AT HOME, INC. AND SUBSIDIARIES LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995 ----------- ----------- CURRENT LIABILITIES Current portion - capital leases $ 109,444 $ 140,202 Current portion of long-term debt 741,262 924,720 Accounts payable - trade 3,201,320 3,463,630 Accounts payable - related party 449,550 762,809 Credits due to customers 1,100,120 617,904 Other payables and accrued expenses 1,665,806 971,998 Deferred revenue 1,512,291 495,337 ----------- ----------- Total current liabilities 8,979,793 7,366,600 ----------- ----------- LONG-TERM LIABILITIES Capital leases, less current portion 53,649 146,116 Long term debt, less current portion 5,669,063 4,415,076 Deferred income taxes 2,082,336 2,304,301 REDEEMABLE PREFERRED STOCK $10 par value, 1,000,000 shares authorized, 137,943 and 140,000 issued and outstanding in 1,393,430 1,405,000 1996 and 1995 respectively COMMITMENTS (NOTES 6, 8, 10, AND 14) STOCKHOLDERS' EQUITY Common stock - $.0025 par value, 30,000,000 shares authorized, 10,575,255 and 10,144,080 shares issued in 1996 and 1995 respectively 26,438 25,360 Additional paid and capital 9,927,767 8,935,332 Accumulated deficit (7,845,826) (6,440,354) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,286,670 $18,157,431 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 25 26 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AS OF JUNE 30,
1996 1995 1994 ----------- ----------- ----------- NET SALES $ 40,016,114 $ 26,787,013 $ 21,717,344 COST OF SALES 24,516,348 17,120,791 14,278,024 ------------ ------------ ------------ Gross Profit 15,499,766 9,666,222 7,439,320 OTHER OPERATING INCOME 659,461 189,000 - ------------ ------------ ------------ OPERATING EXPENSES Promotion and advertising costs 241,170 269,420 224,314 Salaries and wages 4,112,858 3,356,624 2,917,045 Transponder and cable charges 6,024,743 3,226,481 1,928,065 Other general operating and administrative expenses 5,673,540 3,639,749 2,936,338 Depreciation and amortization 877,861 517,523 399,773 ------------ ------------ ------------ Total operating expenses 16,930,172 11,009,797 8,405,535 ------------ ------------ ------------ LOSS FROM OPERATIONS (770,945) (1,154,576) (966,215) ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest, net (794,558) (216,486) (71,935) Miscellaneous 66,637 89,072 (14,185) ------------ ------------ ------------ Total other income (expense) (737,921) (127,414) (86,120) ------------ ------------ ------------ LOSS BEFORE INCOME TAXES (1,508,666) (1,281,989) (1,052,335) INCOME TAX BENEFIT 103,394 - - ------------ ------------ ------------ NET LOSS $ (1,405,472) $ (1,281,989) $ (1,052,335) ============ ============ ============ NET LOSS PER SHARE OF COMMON STOCK $ (0.14) $ (0.14) $ (0.13) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES 10,284,085 9,436,870 $ 8,224,583 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 26 27 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1996, 1995, AND 1994
ADDITIONAL TREASURY COMMON PAID IN ACCUMULATED STOCK STOCK CAPITAL DEFICIT AT COST ------- ---------- ----------- -------- Balance - June 30, 1993 (7,378,864 shares) $18,447 $3,121,349 $(4,106,030) $(40,250) Issuances of common stock (1,525,454 shares) 3,813 1,992,333 - - Proceeds from sales of warrants and options - 770,000 - - Net loss - - (1,052,335) - ------- ---------- ----------- -------- Balance - June 30, 1994 (8,904,118 shares) 22,260 5,883,682 (5,158,365) (40,250) Issuances of common stock (389,215 shares) 973 999,027 - - Retirement of treasury stock (115) (40,135) - 40,250 (46,000 shares) Issuances of common stock (896,747 shares) 2,242 2,097,758 - - Preferred stock dividend accrued - (5,000) - - Net loss - - (1,281,988) - ------- ---------- ----------- -------- Balance - June 30, 1995 (10,144,080 shares) 25,380 8,935,332 (6,440,364) 0 Issuance of common stock in connection with financing (100,000 shares) 250 249,750 - - Issuance of common stock in connection with conversion of preferred stock (2,000 shares) 5 20,565 - - Exercise of employee stock options (126,000 shares) 315 127,125 - - Issuance of common stock in payment of payable obligations (203,175 shares) 508 609,015 - - Preferred stock dividend accrued - (14,000) - - Net loss - - (1,405,472) - ------- ---------- ----------- -------- Balance - June 30, 1996 (10,575,255 shares) $26,438 $9,927,787 $(7,845,826) $ 0 ======= ========== =========== ========
The accompanying notes are an integral part of these consolidated financial statements. 27 28 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995, AND 1994
1996 1995 1994 ----------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net loss $(1,405,472) $(1,281,989) $(1,052,335) Non-cash expenses included in net loss Depreciation and amortization 877,861 517,523 399,773 Loss on sale of equipment 19,165 13,814 Deferred income taxes (103,394) - - Change in provision for inventory obsolescence (88,122) - - Changes in current and non-current items Accounts receivable 119,409 (38,135) (312,853) Inventories (230,024) (110,577) (119,738) Prepaid expenses and other assets (197,019) 102,563 (142,830) Accounts payable and accrued expenses 805,455 2,759,182 41,269 Deferred revenue 1,016,954 (5,888) 236,691 ----------- ----------- ----------- Net cash (used) provided by operations 814,813 1,942,679 (936,209) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITES: Cash payments for acquisitions - (1,289,072) - Purchase of equipment (507,494) (2,370,582) (213,952) Proceeds from sale of equipment 400,000 - 5,076 Other assets - - (4,300) FCC licenses (38,000) - - ----------- ----------- ----------- Net cash used by investing activities (145,494) (3,659,654) (213,176) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options 127,440 - 2,450,118 Repayments of debt (985,851) (662,115) (651,351) Additional long-term debt 2,056,380 1,620,488 625,000 Capital lease payments (154,675) (114,278) (125,267) ----------- ----------- ----------- Net cash provided by financing activities 1,043,294 844,096 2,198,800 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 1,712,613 (872,880) 1,049,115 Cash beginning of period 202,146 1,075,026 25,911 ----------- ----------- ----------- Cash end of period $ 1,914,759 $ 202,146 $ 1,075,026 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 28 29 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1996, 1995, AND 1994, CONTINUED
1996 1995 1994 -------- ---------- -------- SCHEDULE OF NONCASH FINANCING ACTIVITIES Stock issued for inventory and reduction of accounts payable $609,015 $ - $316,028 ======== ========== ======== Accounts payable recorded for acquisition costs $ - $ - $ 59,433 ======== ========== ======== Cost of equipment purchased through capital lease obligation $ 31,450 $ 290,561 $ - ======== ========== ======== Notes payable issued for acqusitions of BCST and MFP, Inc. $ - $3,750,000 $ - ======== ========== ======== Stock issued for acquisitions of BCST and MFP, Inc. $ - $4,500,000 $ - ======== ========== ======== Stock issued in connection with financing $250,000 $ - $ - ======== ========== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $795,125 $ 139,097 $ 77,526 ======== ========== ========
The accompanying notes are an integral part of these consolidated financial statements. 29 30 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Shop at Home, Inc. and its 100% owned subsidiaries, RF Scientific Transportables, Inc, Broadcast Cable and Satellite Technologies, Inc., and MFP, Inc., (collectively the "Company"). All of the operating assets of RF Scientific Transportables, Inc., were sold in the latter part of the year and subsequently, RF Scientific ceased operations. RF Scientific was in the business of providing mobile uplink services. All intercompany accounts 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. Broadcast Cable and Satellite Technologies, Inc.'s (BCST), principal asset consists of ownership of 49% of the issued and outstanding shares of capital stock of Urban Broadcasting Systems, Inc., (UBS). UBS held a construction permit from the FCC, under which the Company constructed television station KZJL, Channel 61, a full power television station licensed to Houston, TX. Because of financial dependence of UBS on the Company, UBS has been consolidated into the accompanying financial statements. See subsequent event (Note 14). MFP, Inc., operates a commercial television station, WMFP, Channel 62, serving the Boston television market area. MFP, Inc. was acquired in February 1995 (Note 13). 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 three months or less to be cash equivalents. 30 31 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVENTORIES Inventories, which consist of products held for sale such as jewelry and sports collectibles, are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. 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. Depreciation is computed under straight line and accelerated methods over the estimated useful lives of the assets as reflected in the following table: Furniture and fixtures 5 - 7 years Operating equipment 5 - 30 years Leasehold improvements 4 years
SALES RETURNS The Company allows customers to return merchandise for full credit or refund if they return the merchandise within 30 days from the date of receipt. At June 30,1996 and 1995, the Company had recorded provisions of $1,100,120 and $617,904, respectively, for 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 and prior to the disposition of R. F. Scientific, the sale of uplink truck services. 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 by the user. Deferred revenue consists of sales proceeds relative to unshipped merchandise. INCOME TAXES Shop at Home, Inc. files a consolidated federal income tax return with its subsidiaries. The companies file separate state returns. 31 32 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective July 1, 1993, the Company adopted Financial Accounting Standard Board (FASB) Statement No. 109, "Accounting for Income Taxes" on a prospective basis. Prior to that date, the Company followed the provisions of Accounting Principles Board Opinion No. 11 in accounting for income taxes. The adoption of FASB 109 did not materially affect the 1994 consolidated financial statements. LOSS PER SHARE Loss per share was computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the respective periods. Common stock equivalents, including options, warrants, and the convertible preferred stock have been excluded from the computation because they are antidilutive. FCC LICENSES During fiscal 1995 the Company acquired two subsidiaries who own licenses from the Federal Communications Commission (FCC) under which they operate television stations. The value ascribed to these FCC licenses in connection with the acquisitions will be amortized over 40 years. Amortization of these licenses was $268,562 in 1996 and $53,761 in 1995. GOODWILL Management periodically evaluates the net realizability of the carrying amount of goodwill. Goodwill recorded in connection with the acquisition of WMFP represents the excess purchase price over the fair value of the net identifiable assets acquired. The goodwill is being amortized over 40 years using the straight-line method and amounted to $15,517 for 1996. Goodwill for R.F. Scientific Transportable, Inc. of $7,787 was written off during 1996. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. 32 33 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist principally of accounts receivable, accounts payable, accrued expenses and debt. The fair value of these financial instruments approximate their carrying value. IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the FASB issued Statement of Accounting Standards No 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of which i) requires that long-lived assets to be held and used be reviewed for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable, ii) requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell, and iii) provides guidelines and procedures for measuring impairment losses that are different from previously existing guidelines and procedures. The Company adopted the provisions of Statement 121 in fiscal year 1996 and the changes did not have a material effect on the Company's financial position or results of operations. STOCK-BASED COMPENSATION Additionally, in October 1995, the FASB issued Statement of Accounting Standards No. 123, Accounting and Disclosure of Stock-Based Compensation which encourages but does not require companies to recognize stock awards based on their fair value at the date of grant. The Company currently follows, and expects to continue to follow, 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. Although the Company is permitted to continue to follow the provisions of APB 25 under Statement 123, certain pro forma disclosures will be required beginning in 1996, as if Company had accounted for its stock options under the Statement 123 fair value method. No such options were issued in fiscal year 1996. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified for comparative purposes to conform with the current year presentation. 33 34 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of the following major classifications at June 30, 1996 and 1995.
1996 1995 ---------- ----------- Leasehold improvements $ 285,074 $ 281,116 Operating equipment 4,736,119 4,983,903 Furniture and fixtures 194,651 190,783 ---------- ----------- 5,215,844 5,455,802 Accumulated depreciation (1,745,618) (1,517,863) ---------- ----------- Property and equipment, net $3,470,226 $3,937,939 ========== ===========
Depreciation expense totaled $585,995, $463,496, and $394,602 for the fiscal years ended June 30, 1996, 1995, and 1994 respectively. NOTE 3 - CAPITAL LEASES The Company has acquired various equipment under the provisions of long term leases. Equipment held under capital leases, which is included in property and equipment is summarized as follows:
1996 1995 ------- -------- Operating equipment $660,032 $566,482 Less accumulated depreciation (396,267) (238,269) -------- -------- $263,765 $328,213 ======== ========
Future minimum lease payments under capitalized leases are as follows at June 30, 1996:
1997 $ 126,967 1998 56,184 1999 3,348 ---------- Total minimum lease payments 186,499 Less amount representing interest (23,406) Present value of minimum lease payments 163,093 Less current portion (109,444) ---------- Long term portion $ 53,649 ==========
34 35 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - LONG-TERM DEBT
Long term debt consist of the following at June 30: 1996 1995 ---- ---- Note payable to bank collateralized by uplink truck and equipment. This loan was paid in full on August 17, 1995. - $ 312,819 Note payable bearing interest at 8%, due in equal monthly installments of principal of $20,833, plus interest through June 6, 2000, collateralized by common stock of BCST. $1,000,000 1,250,000 Notes payable due in April 2000, with interest payable at 12% quarterly, collateralized by certain equipment. 800,000 800,000 Note payable bearing interest at 9.5% due in monthly installments of $26,106 with a balloon payment due in March 2000. 2,399,858 2,480,908 Note payable to related party bearing interest at 15% due in monthly installments of $9,700, collateralized by certain equipment. 435,101 463,933 Note payable in monthly installments of $3,000, including interest at 6.57% repaid in 1996. - 32,136 Note payable to related party bearing interest at prime plus 2% (10.75% at June 30, 1996) due in monthly installments of principal and interest totaling $43,494 through September 1, 2000.* 1,775,366 - Total long term debt 6,410,325 5,339,796 Less current maturities (741,262) (924,720) ---------- ---------- Long term debt less current portion $5,669,063 $4,415,076 ========== ==========
* This note originated in August 1995, at $2,000,000 payable to Global Network Television, Inc. (Global), J.D. Clinton, a director of the Company is the sole shareholder and Chairman of Global and that Corporation is an indirect principal shareholder of the Company. The loan is collateralized by a security interest in inventory, accounts receivable, certain equipment, furniture and fixtures, as well as stock of MFP, Inc. and an assignment of the proceeds of any sale of the FCC license of station WMFP. The note is convertible into common stock of the Company at a conversion rate of $3 per common share of principal. 35 36 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The aggregate future required principal payments at June 30, 1996 for the above liabilities are as follows: 1997 $ 741,262 1998 798,332 1999 862,168 2000 933,501 2001 3,072,141 ---------- $6,407,404 ==========
NOTE 5 - REDEEMABLE PREFERRED STOCK The following is a brief summary of the terms and conditions of Series A of the 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. During fiscal year 1995, the Company issued 140,000 shares of preferred stock, $10.00 par value, in connection with a merger with MFP, Inc., a Delaware corporation. The Series A preferred stock will rank 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 will have the option to require the Company to redeem their shares, after 5 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. 36 37 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 of 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, 1996 and 1995, the Company was $19,000 and $5,000 respectively, in arrears of its dividend payments due. These dividend payments are payable only when declared by the Board of Directors. 37 38 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - COMMON STOCK In August 1995, Shop at Home, Inc. issued, to a related party, 100,000 shares of common stock in connection with the securing of $2,000,000 of long term debt (Note 4) from the related party; in September the Company issued 2,000 shares in conversion of its Redeemable Preferred Stock (Note 5); in October 1995 and May 1996, the Company issued a total of 126,000 shares in connection with the exercise of employee stock options (Note 10); and during the period of March through June 1996, Shop at Home, Inc. issued a total of 203,175 shares of common stock, of which 44,000 shares were issued as payment of payable obligations and 159,175 shares were issued in exchange for certain sport cards and collectibles acquired for resale (Note 8). By agreement, the stock was valued at $3.00 per share or approximately $609,000. The Company has 19,519 additional shares remaining to be issued under this agreement. On June 30, 1994, Shop at Home, Inc. sold 400,000 shares of its common stock for $2.00 per share and also sold for $240,000 an option to purchase up to 600,000 additional shares of common stock at a purchase price of $2.50 per share. This option may be exercised at any time after December 31, 1995, but on or before June 30, 1999. During fiscal 1994 the Company also issued 125,454 shares of Common Stock valued at $316,028 in exchange for inventory acquired for resale and to satisfy outstanding payable obligations. Effective June 9, 1993, an agreement was entered into between Shop at Home, Inc., SAH Holdings, L.P. and Global Network Television, Inc., whereby Shop at Home, Inc. agreed to sell 1,000,000 shares of its common stock to SAH Holdings at $1.00 per share. The Company also agreed to sell to SAH Holdings a warrant to acquire 1,300,000 shares of common stock in Shop at Home, Inc. for a purchase price of $1.00 per share. The common stock and warrant were sold to SAH Holdings on August 6, 1993 for $1,130,000. The warrant is exercisable through August 6, 1997. The Company agreed to sell to SAH Holdings an additional warrant to acquire up to 2,000,000 shares of common stock for a purchase price of $1.00 per share. This warrant was sold for $400,000 and is exercisable on various dates through 1997. The Company paid a transaction fee to Media One, Inc., a related party, of $75,000 and legal fees of $44,882 for costs associated with these transactions. In fiscal 1995 the Company also issued shares of common and preferred stock in connection with the acquisitions of BCST and MFP, Inc. For details of those issuances see Notes 12 and 13. 38 39 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - INCOME TAXES The components of temporary differences and the approximate tax effects that give rise to the Company's net deferred tax liability at June 30, 1996 and 1995, are as follows: 1996 1995 ----------- ------------ Deferred tax assets: Net operating loss carryforwards $ 2,324,269 $ 2,110,797 Other 384,495 198,572 Valuation allowance (1,263,991) (901,850) ----------- ------------ Total deferred tax assets 1,444,773 $ 1,407,519 ----------- ------------ Deferred tax liabilities: License 3,331,736 3,369,167 Depreciation 115,373 144,081 ----------- ------------ Total deferred tax liabilities 3,447,109 3,513,248 ----------- ------------ Net deferred tax liabilities $ 2,002,336 $ 2,105,729 =========== ============ Current deferred tax asset $ 80,000 $ 198,572 Long-term deferred tax liabilities (2,082,336) (2,304,301) ----------- ------------ Net deferred tax liabilities $(2,002,336) $ (2,105,729) =========== ============
39 40 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At June 30, 1996 the Company had net operating loss carry forwards which expire as follows: June 30, 2002 $ 125,164 June 30, 2003 806,757 June 30, 2004 664,610 June 30, 2008 2,331,197 June 30, 2009 819,270 June 30, 2010 754,918 June 30, 2011 614,062 ---------- $6,115,978 ==========
Income tax benefit varies from the amount computed by applying the federal corporate income tax rate of 34% to loss before tax benefit as follows:
1996 1995 --------- --------- Computed "expected" income tax benefit $(499,732) $(435,876) Increase (decrease) in income tax benefit resulting from: State income tax benefit, net of federal effect (58,792) (51,280) Change in valuation allowance 362,411 476,582 Nondeductible portion of meals and entertainment 8,480 10,574 Other 84,239 - --------- --------- Actual income tax benefit $(103,394) $ 0 ========= =========
In connection with the acquisitions of BCST and MFP, Inc., the Company reduced the valuation allowance for deferred tax assets by an aggregate of $1,263,438, 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. 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. 40 41 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS TRANSPONDER USE AGREEMENT In December 1995, the Company's transponder lease with AT&T's 402R became effective. This lease calls for initial monthly payments of $96,000 in the first year and increasing to $105,000 and $115,000 in year two and three respectively. Transponder expense was $1,379,000 in 1996, $1,281,000 in 1995, and $812,000 in 1994. In December 1994, the Company entered into a transponder use agreement for one year with Broadcast International, Inc. for the use of one 36 MHZ transponder on Satellite Spacenet 3. The agreement called for rental payments of $80,000 per month and terminated in December 1995. On April 1, 1993, the Company entered into a transponder use agreement with B&P The Space connection for the use of one 36 MHZ, C-band transponder on satellite Galaxy III. The agreement required rental payments of $40,000 per month and terminated on December 31, 1994. PURCHASE COMMITMENT During 1994, the Company entered into an agreement to purchase, over a period of 18 months, $1,750,000 of inventory, of which 50% may be paid for with the Company's common stock. The Company also has an option to purchase an additional $1,750,000 of this inventory. Terms on this commitment require the Company to pay the greater of $97,222 per month or the value of the actual inventory shipped during the month. Any amount up to one-half of the contractual commitment may be satisfied through the issuance of Company common stock on terms as set forth in the contract. To satisfy part of this requirement, the Company issued 100,454 shares of its common stock to this vendor for inventory purchased in 1994. The Company issued stock under terms specified in the agreement valued at $241,028 during the year ended June 30, 1994 in connection with this transaction. Additionally, the Company sold $175,000 of the inventory back to the stockholder for $350,000 during the year ended June 30, 1994. The stockholder has assigned to the Company all of his rights to the license to sell the inventory, and thus had to purchase inventory from the Company for resale to third parties. At June 30, 1995, the Company had purchased $624,200 of inventory under the terms of this agreement. 41 42 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 1996, the Company entered into a "Restated Agreement" whereby it was obligated to purchase the remaining balance of merchandise it had not acquired of approximately $720,000. The payment of which was part in cash and part in stock. (Note 6). As of June 30, 1996 the remaining obligation under this revised agreement was approximately $57,500. LEASE COMMITMENTS The Company leases its Knoxville office and studio space from William and Warren, Inc., an entity owned by a principal owner and director of the Company. Payments under this lease totaled $143,325, $132,592, and $136,933 in fiscal years ended June 30, 1996, 1995, and 1994, respectively. The Company has agreements with various carriers to lease air time. The terms of the agreements vary from week to week to one year periods. The expenses for leased air time, primarily for cable access fees, was $4,646,000 in 1996, $1,945,000 in 1995 and $1,118,000 in 1994. Rental expense for the office and studio and miscellaneous equipment was $483,059, $184,434 and $148,619, for the fiscal years ended June 30, 1996, 1995, and 1994 respectively. NOTE 9-RELATED PARTY TRANSACTIONS During the fiscal years ended June 30, 1996, 1995, and 1994, the Company engaged in significant transactions with the Company's directors, significant stockholders, officers or interests of these parties. The following is a summary of major transactions with these related parties not disclosed elsewhere in the consolidated financial statements or notes thereto: 1996 1995 1994 ---- ---- ---- PURCHASES - MERCHANDISE V.J.M. (Victor Mueller) $ 795,689 $989,272 $ 578,775 Howards Sports Collectibles 2,116,088 553,462 1,389,227 Combine International, Inc. 452,348 98,843 158,005 OTHER OPERATING EXPENSES Lakeway Container 63,978 81,827 25,370 Airbank 22,213 37,604 27,673 MediaOne - 157,567 224,359
42 43 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the year ended June 30, 1995, the Company contracted with MediaOne, Inc., to provide certain consulting services to the Company. A director and officer of MediaOne, Inc., also serves as a director of the Company. In addition, MediaOne, Inc., acted as the commissioned broker for MFP, Inc., a Delaware corporation, from whom the Company acquired Television Station WMFP, Lawrence, Massachusetts. In consideration of its services, MediaOne was owed approximately $115,000 by the Company at June 30, 1995. NOTE 10 - STOCK OPTIONS 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. A maximum of 1,500,000 shares of common stock may be issued upon the exercise of options and SARs. From its adoption through June 30, 1996, stock options for 635,000 shares of common stock have been granted under the plan. No option or SAR may be granted after October 15, 2001. No option that is an incentive stock option and any corresponding SAR that 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. Additionally, 1,150,000 common shares (830,000 vested) were reserved for options granted to certain executive officers, directors, employees and others as of June 30, 1996. These options vest annually over a period of five years and expire the earlier of five years from the date of vesting or 30 days after termination of employment. 43 44 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity and price information regarding stock options including the option to acquire 600,000 shares of common stock discussed in Note 6 are as follows:
Shares Price Range -------- ------------- Balance June 30, 1993 60,000 $1.00 - $2.37 Granted 1,400,000 $1.00 - $2.88 --------- ------------- Balance June 30, 1994 1,460,000 $1.00 - $2.88 Granted 170,000 $2.13 - $2.88 --------- ------------- Balance June 30, 1995 1,630,000 $1.00 - $2.88 Granted 325,000 $2.81 - $3.25 Exercised (126,000) $1.00 - $2.44 Canceled (44,000) $2.44 - $2.81 --------- ------------- Balance June 30, 1996 1,785,000 $1.00 - $3.25 ========= =============
NOTE 11 - CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk include cash on deposit in a financial institution. Management believes the financial institution holding the cash is financially sound. The television home shopping business in general is seasonal, with the major selling season occurring the last quarter of the calendar year. The home shopping industry is also 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. NOTE 12 - ACQUISITION OF BROADCAST CABLE & SATELLITE TECHNOLOGIES, INC. On December 6, 1994, the Company purchased all of the issued and outstanding capital stock of Broadcast, Cable and Satellite Technologies, Inc., a Texas corporation from Television Media Resources, L.C., a Texas limited liability company. The purchase price consisted of (a) $250,000 paid in cash to TMR, (b) the issuance to TMR of 389,215 shares of common stock, valued at $2.57 per share and (c) the delivery to TMR of the Company's promissory note in the principal amount of $1,250,000. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of BCST have been included in the consolidated operating results since the date of acquisition. The purchase price, including the acquisition costs, was allocated to the net assets acquired based on fair values at the date of acquisition as follows: 44 45 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FCC License $ 2,668,846 Goodwill 993,000 Other assets 68,031 Deferred tax liability (993,000) Accounts payable (179,740) Debt assumed (32,137) ----------- $ 2,525,000 ===========
The principal asset of BCST consists of the ownership of 49% of the issued and outstanding shares of capital stock of Urban Broadcasting Systems, Inc., ("UBS"). UBS held a construction permit from the FCC which was utilized to construct Television Station KZJL, Channel 61, a full-power television station licensed in Houston, Texas. Construction was completed and the station became operational in June 1995. The remaining 51% of the stock of UBS is owned by Charles E. Walker, a resident of the State of California. During the ninety (90) day period immediately following the first anniversary of the Houston station's commencement of regular program test operations, BCST has the option to purchase the 51% capital stock ownership in UBS held by Walker for the lesser of $1,400,000 or 51% of the appraised value of UBS as of the date the option is exercised. On September 5, 1996 the Company executed this option (Note 14). The purchase price for Walker's 51% ownership interest in UBS is payable by delivering to Walker a promissory note in the principal amount of the purchase price, which note which bears interest at the rate of 6%, payable interest only monthly for the first twelve (12) months, and thereafter principal and interest in equal monthly payments over a period of 120 months. The note is secured by a pledge of the stock of UBS. BCST was organized in April 1993 and had not commenced operations at the time of acquisition. BCST had not generated any revenues from operations and had minimal organizational related expenses. NOTE 13 - ACQUISITION OF MFP, INC. On February 24, 1995, the Company purchased all of the issued and outstanding capital stock of MFP, Inc. through a merger with SAH Merger Corp., a newly formed Tennessee corporation and a wholly owned subsidiary of Shop at Home, Inc., MFP, Inc. operates a commercial television station, WMFP, Channel 62, serving the Boston television market area. Under the agreement, the Company paid the shareholders of MFP, Inc., a total consideration of $7,000,000. 45 46 SHOP AT HOME, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total consideration of $7,000,000 was comprised of $1,000,000 cash and assumption of liabilities, $2,500,000 in notes payable, the issuance of 896,747 shares of common stock valued at $2,100,000 and $1,400,000 in preferred stock. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of MFP have been included in the consolidated operating results since the date of acquisition. The purchase price, including the acquisition costs, was allocated to the net assets acquired based on appraised fair values at the date of acquisition as follows: FCC License $ 8,960,813 Property & equipment 615,000 Deferred tax liability (2,376,000) ----------- $ 7,199,813 ===========
The unaudited consolidated pro forma operating data for the Company, assuming the acquisition of BCST and MFP, Inc. occurred on July 1, 1993, are set forth below. It should be noted that BCST had no revenues for the periods prior to the acquisition as the broadcast facility had not been constructed. Accordingly, the unaudited pro forma information does not include amortization of the intangible assets of BCST during the 1995 period.
UNAUDITED --------- June 30, 1995 June 30, 1994 ------------- ------------- Revenues $27,376,119 $22,567,430 Net loss 2,166,932 1,920,967 Net loss per share $ .21 $ .20
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above date, nor are they indicative of future operating results. NOTE 14 - SUBSEQUENT EVENT On September 5, 1996, the Company, through BCST, exercised its option to acquire the remaining 51% of KZJL-Houston. The exercise price was $1,400,000 payable with 6% interest over 11 years with interest only payable in year one (Note 12). 46 47 SHOP AT HOME, INC. AND SUBSIDIARIES ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information with respect to directors and executive officers of the Company in the Company's definitive Proxy Statement for the annual Meeting of Shareholders planned to be held December 6, 1996 (the "Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Remuneration of Directors and Officers" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information with respect to security ownership by management as set forth in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference. 47 48 SHOP AT HOME, INC. AND SUBSIDIARIES 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 Auditors Consolidated Balance Sheets as of June 30, 1996 and 1995 Consolidated Statements of Operations for the years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, 1995, and 1994 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994. Notes to the Consolidated Financial Statements 2. Financial Statement Schedule Page Independent Auditors' Report on Financial Statement Schedule 49 Schedule II Valuation and Qualifying Accounts 50 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 51. (b) Reports on Form 8-K None 48 49 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE Our report on the consolidated financial statements of Shop at Home, Inc. and Subsidiaries as of June 30, 1996 and 1995 and for each of the three years in the period ended June 30, 1996 is included on page 23 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 48 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Knoxville, Tennessee COOPERS & LYBRAND L.L.P. September 6, 1996 49 50 SHOP AT HOME, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1996, 1995 AND 1994
BALANCE AT CHARGED TO BALANCE BEGINNING RETURNS AND AT END OF YEAR ALLOWANCES DEDUCTIONS (1) OF YEAR ---------- ----------- -------------- ------- Year ended June 30, 1994 Estimated credits due to customers $509,956 $ 4,204,522 $4,242,600 $ 471,878 ======== =========== ========== ========== Year ended June 30, 1995 Estimated credits due to customers $471,878 $ 4,863,486 $4,717,460 $ 617,904 ======== =========== ========== ========== Year ended June 30, 1996 Estimated credits due to customers $617,904 $10,147,556 $9,665,340 $1,100,120 ======== =========== ========== ==========
(1) Merchandise returned 50 51 INDEX TO EXHIBITS
Exhibit Sequential No. Description Page 2.1 Agreement and Plan of Merger, dated May 17, 1994, among Shop at Home, Inc., SAH Merger Corp., and MFP, Inc., filed as Exhibit 2.1 to the Company's Registration Statement on Form S-4 filed with the Commission on October 26, 1994, and incorporated herein by this reference. 2.2 First Amendment to Agreement and Plan of Merger, dated November 11, 1994, among Shop at Home, Inc., SAH Merger Corp., and MFP, Inc., filed as Exhibit 2.2 to the Company's Registration Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 2.3 Articles of Merger of SAH Merger Corp. and MFP, Inc., recorded in Tennessee on February 24, 1995, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Commission on March 2, 1995, and incorporated herein by this reference. 3(i).1, 4.1 Charter of the Company, filed as Exhibit 3.1 to the Company's Annual Report Form 10-K for the fiscal year ended June 30, 1993, and incorporated herein by this reference. 3(i).2, 4.2 Charter amendment recorded February 17, 1995, filed as Exhibit 4.3 to the Company's Current report on Form 8-K filed with the Commission on March 2, 1995, and incorporated hereby by this reference. 3(ii), 4.3 Bylaws of the Company, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K filed with the Commission for the fiscal year ended June 30, 1993, and incorporated herein by this reference. 4.1 Form of Trust Indenture dated February 23, 1995, filed as Exhibit 4.5 to the Company's Current Report on Form 8-K filed with the Commission on March 2, 1995, and incorporated herein by this reference.
51 52 4.2 Form of Promissory Note of the Company issued to the indenture trustee under the Trust Indenture dated February 23, 1995, filed as Exhibit 4.6 to the Company's Current Report on Form 8-K filed with the Commission on March 2, 1995, and incorporated herein by this reference. 4.3 Specimen of Common Stock certificate, filed as Exhibit 4.8 to the Company's Registration Statement on Form S-4 filed with the Commission on December 28, 1994, 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. 4.5 Specimen of Note Certificate, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4 filed with the Commission on December 28, 1995, 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. 10.2 Lease dated April 1, 1993, between Shop at Home, Inc. and Book Ends Discount Bookstores, Inc., 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. 10.3 Lease dated July 1, 1994 between Shop at Home, Inc. and William & Warren, Inc., filed as Exhibit 10.3 to the Company's Registration Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 10.4 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 52 53 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. 10.6 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. 10.9 Agreement dated December 8, 1993, between Richard Howard, Inc. and Shop at Home, Inc., filed as Exhibit 10.10 to the Company's Registrant Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 10.10 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 53 54 herein by this reference. 10.13 Agreement dated June 30, 1994, between Combine International, Inc. and Shop at Home, Inc, filed as Exhibit 10.14 to the Company's Registrant Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 10.14 1994 $2.50 Common Stock Purchase Option dated June 30, 1994, issued to Combine International, Inc., filed as Exhibit 10.15 to the Company's Registrant Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 10.15 Description of agreement with MediaOne, Inc. for consulting services, filed as Exhibit 10.16 to the Company's Registrant Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 10.16 Stock Purchase Agreement dated December 6, 1994, by and between the Company and Television Media Resources, L.C., filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.17 Promissory Note dated December 6, 1994, in the original principal amount of $1,250,000, the maker of which is Registrant and the original payee of which is Television Media Resources, L.C., filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.18 Security Agreement and Pledge Agreement dated December 6, 1994, by and between Registrant and Television Media Resources, L.C., filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.19 Letter Agreement dated December 6, 1994, by and between Registrant and Charles E. Walker, filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the 54 55 Commission on December 20, 1994, and incorporated herein by this reference. 10.20 Majority Partnership Interest and Majority Stock Purchase Option by and among Charles E. Walker, Urban Broadcasting Systems and Broadcast, Cable and Satellite Technologies, Inc., filed as Exhibit 10.4 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.21 Form of Majority Partnership Interest and Majority Stock Purchase Agreement by and among Charles E. Walker, Urban Broadcasting Systems and Broadcast, Cable and Satellite Technologies, Inc., filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.22 Minority Partnership Interest and Minority Stock Purchase Agreement dated May 15, 1993, by and among Charles E. Walker, Urban Broadcasting Systems and Broadcast, Cable and Satellite Technologies, Inc., filed as Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.23 Modification, Ratification and Consent by and among Charles E. Walker, Urban Broadcasting Systems, Urban Broadcasting Systems, Inc., Television Media Resources, L.C., and Broadcast, Cable and Satellite Technologies, Inc., filed as Exhibit 10.7 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.24 Restated Majority Partnership Interest and Majority Stock Purchase Option by and among Charles E. Walker, Urban Broadcasting Systems and Broadcast, Cable and Satellite Technologies, Inc. dated as of May 15, 1993, filed as Exhibit 10.8 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.25 Restated Construction Agreement dated as of May 15, 1993, by and among Charles E. Walker, Urban 55 56 Broadcasting Systems, Broadcast, Cable and Satellite Technologies, Inc., and Spectrum Communications and Engineering, Inc., filed as Exhibit 10.9 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.26 Engineering Services Agreement dated as of December 14, 1993 by and between Broadcast, Cable and Satellite Technologies, Inc., and Spectrum Communications and Engineering, Inc., filed as Exhibit 10.10 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.27 Form of Employment Agreement by and between Urban Broadcasting Systems, Inc. and Charles E. Walker, filed as Exhibit 10.11 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.28 Form of Time Brokerage Agreement dated December 14, 1993, by and between Urban Broadcasting Systems and Broadcast, Cable and Satellite Technologies, Inc., filed as Exhibit 10.12 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.29 Form of Escrow Agreement by and between Registrant, Charles E. Walker and U.S. Trust Company of Texas, N.A., filed as Exhibit 10.13 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.30 Form of Promissory Note in the principal amount of $750,000.00, the maker of which is Broadcast, Cable and Satellite Technologies, Inc., payable to Charles E. Walker, filed as Exhibit 10.14 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 10.31 Form of Security Agreement by and between Charles E. Walker and Broadcast, Cable and Satellite Technologies, Inc., filed as Exhibit 10.15 to the Company's Current Report on Form 8-K filed with the Commission on December 20, 1994, and incorporated herein by this reference. 56 57 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. 10.35 Letter to Shop at Home, Inc., from the directors of MFP, Inc., dated November 11, 1994, filed as Exhibit 10.36 to the Company's Registration Statement on Form S-4 filed with the Commission on December 28, 1994, and incorporated herein by this reference. 10.36 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. 10.37** Variable Rate Convertible Secured Note Due 2000 of the _____ Company dated August 16, 1995 10.38** Security Agreement dated August 16, 1995, by and between _____ the Company, MFP, Inc., and Global Network Television, Inc. 10.39** Restated Agreement dated January 26, 1996, and the First _____ Amendment thereto dated March 7, 1996, by and between Richard Howard, Inc., and the Company 10.40** Majority Stock Purchase Agreement dated June 3, 1996, by _____ and between Charles E. Walker, Broadcast, Cable and 57 58 Satellite Technologies, Inc., and Urban Broadcasting Systems, Inc. 10.41** Promissory Note dated September 5, 1996, made by the _____ Company and Broadcast, Cable and Satellite Technologies, Inc., payable to Charles E. Walker. 10.42** Security Agreement dated September 5, 1996, by and between _____ Broadcast, Cable and Satellite Technologies, Inc., and Charles E. Walker. 21.1** Subsidiaries of the Company _____ _____ 27** Financial Data Schedule (for SEC use only) _____ **Filed herewith 58 59 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHOP AT HOME, INC. By: /s/ Date: 9/30/96 ------------------------------------- ------------------- Kent E. Lillie President and Chief Executive Officer (Principal Executive Officer) By: /s/ Date: 9/30/96 ------------------------------------- -------------------- Joseph Nawy (Vice President-Finance) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities on the dates indicated. Date: 9/30/96 /s/ --------------------- ----------------------------------- J.D. Clinton, Director Date: 9/30/96 /s/ --------------------- ----------------------------------- W. Paul Cowell, Director Date: 9/30/96 /s/ --------------------- ----------------------------------- Kent E. Lillie, Director Date: 9/30/96 /s/ --------------------- ----------------------------------- Joseph I. Overholt, Director Date: 9/30/96 /s/ --------------------- ----------------------------------- A.E. Jolley, Director Secretary / Treasurer Date: 9/30/96 /s/ --------------------- ----------------------------------- Frank A. Woods, Director 59 EX-10.37 2 VARIABLE RATE NOTE 1 EXHIBIT 10.37 SHOP AT HOME, INC. VARIABLE RATE CONVERTIBLE SECURED NOTE DUE 2000 August 16, 1995 Registered Owner: Global Network Television, Inc. Principal Amount: $2,000,000 KNOW ALL MEN BY THESE PRESENTS: That Shop at Home, Inc., a Tennessee corporation (the "Company"), hereby acknowledges itself to owe and for value received promises to pay to the Registered Owner hereinabove identified, or registered assigns as hereinafter provided, on the dates hereinafter set forth, the Principal Amount hereinabove identified and to pay interest on such principal amount from the date of this Note at the variable rate of interest per annum hereinafter set forth. Interest shall accrue on the unpaid principal balance of this Note at a rate of interest which is two percentage points (2.0%) in excess of the Prime Rate of interest as herein defined, as adjusted from time to time. Interest shall be computed on a 360 day year basis. The Prime Rate is defined to mean the Prime Rate of interest rate published from time to time by The Wall Street Journal as such rate and shall be computed on the daily outstanding principal balance of the indebtedness evidenced hereby. In the event more than one rate is published as the Prime Rate, the Prime Rate shall be the highest Prime Rate of interest published. If at any time or from time to time the Prime Rate increases or decreases, then the rate of interest hereunder shall be correspondingly increased or decreased, effective on the first day such increase or decrease of the Prime Rate is published. In the event that The Wall Street Journal, during the term hereof, shall abolish or abandon the practice of publishing a Prime Rate, or should the same become unascertainable, the Holder shall designate a comparable reference rate which shall be deemed to be the Prime Rate for purposes hereof. If for any reason the accrual of interest on this loan at the Prime Rate is voided by a court of competent jurisdiction or if for any reason such court finds that the interest rate is different from the rate designated by the Holder, then this Note shall be deemed to have accrued interest from the date of execution at the highest rate permitted by law. Principal and interest shall be paid in 60 monthly installments beginning October 1, 1995, and continuing on the 1st day of each succeeding month thereafter, with the last payment being due and payable on September 1, 2000. The required installments shall be sufficient to repay the unpaid principal balance of the indebtedness owed in full at the maturity date at the then current interest rate in substantially equal payments. Notwithstanding the 2 foregoing, there shall be added to the amount of the first monthly installment due on October 1, 1995, an amount equal to the interest accruing on this Note from its date through August 31, 1995. In the event the "Prime Rate" changes, the Holder shall adjust the monthly installment payment to reflect the changed rate. The last payment shall consist of all accrued unpaid interest and the entire remaining unpaid balance of principal. Interest rate changes may occur daily at any time there is a change in the Prime Rate during the term of this Note. The sum of the then current Prime Rate plus two percentage points (2.0%) shall be the new interest rate. In the event any installment of interest or of principal due under this Note is paid after the 15th day after the date when the same is due, then the Holder shall be entitled to collect, to the extent permitted by applicable law, a "late charge" in an amount equal to five percent (5%) of the amount of any such installment in order to defray part of the increased cost of collection occasioned by any such late payment as liquidated damages and not as a penalty. Both principal of and interest on this Note are payable in lawful money of the United States of America at the principal corporate office of the Registered Owner in Brownsville, Tennessee. Payment of each installment of principal and interest shall be made to the Registered Owner hereof who shall appear on the registration books of the Company maintained by the Company at the close of business on the 15th day next preceding each Payment Date, and shall be paid by check or draft of the Company mailed to such Registered Owner at its address as it appears on such registration books or at such other address as may be furnished in writing by such Registered Owner to the Company. Collateral The payment of this Note is secured by a prior perfected secured interest in certain property of the Company, including certain furniture, fixtures and equipment, inventory, accounts receivable, the stock of MFP, Inc., a Tennessee corporation, and the proceeds of any sale of the broadcast license of Television Station WMFP, Boston, Massachusetts, as described in the Note Purchase Agreement and Security Agreement, each dated as of August 16, 1995, under which the Note is issued. Prepayment of Note The Note is subject to prepayment, in whole or in part at any time at the option of the Company, without premium or penalty, provided any partial prepayment shall be applied to all accrued and unpaid interest and in the inverse order of maturity. Conversion of Note 3 This Note may, at the option of the holder thereof, at any time be converted in whole or in part to shares of Common Stock of the Company, on the basis of one (1) share of Common Stock for each $3.00 of the outstanding balance of this Note at the time of holder's written election to convert. The conversion may be accomplished by the holder delivering this Note, duly endorsed in blank, to the Secretary of the Corporation at its office, and at the same time notifying the Secretary in writing that it desires to convert the Note into Common Stock pursuant to these provisions, specifying therein whether the conversion is for all or a portion of this Note, and if for a portion, the amount thereof. The Secretary shall deliver to such holder a certificate in due form for the Common Stock so converted. If the conversion is for less than the entire balance remaining on the Note, the Secretary shall return to the holder a new Note for the remaining balance due thereunder, and specifying a repayment schedule computed by applying the amount of the Note converted to Common Stock as a partial prepayment of the Note as specified above. The conversion ratio will be adjusted upon the occurrence of any (i) dividend in respect to Common Stock that is paid in shares of Common Stock or securities convertible into shares of Common Stock, and (ii) any expansion or contraction of the number of outstanding common shares of Common Stock by means of any stock split, reverse stock split or similar transaction. Transfer of Note The Note shall be transferable only on the registration books maintained by the Company, upon surrender and cancellation thereof at the principal corporate office of the Company. Upon the cancellation of the Note, the Company shall, in exchange for the surrendered Note, execute and deliver in the name of the transferee a new Note, of the same aggregate principal amount and maturity and rate of interest as such surrendered Note, and the transferee shall take such new Note subject to all of the conditions contained in the Note Purchase Agreement and Security Agreement. NOTWITHSTANDING THE FOREGOING, THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE REGULATORY AGENCY. THIS SECURITY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR OTHERWISE HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SECURITY UNDER ANY APPLICABLE FEDERAL OR STATE SECURITIES LAW OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION IS EXEMPT UNDER THE APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR AS OTHERWISE IN COMPLIANCE WITH SUCH LAWS. The Company may deem and treat the Registered Owner as the absolute owner hereof for the purpose of receiving payment of principal hereof and interest due hereon and for all other purposes and the Company shall not be affected by any notice to the contrary. 4 IN WITNESS WHEREOF, Shop at Home, Inc., by its Board of Directors, has caused this Note to be executed with the duly authorized signature of its President and attested by the duly authorized signature of its Secretary, as of the 16th day of August, 1995. /s/ Joseph Nawy ----------------------- Vice President - Finance EX-10.38 3 SECURITY AGREEMENT 1 EXHIBIT 10.38 SECURITY AGREEMENT This SECURITY AGREEMENT, dated August 16, 1995, is by and between SHOP AT HOME, INC., a Tennessee corporation ("Shop at Home"), and MFP, INC., a Tennessee corporation ("MFP") (Shop at Home and MFP are collectively referred to as the "Debtor"), and GLOBAL NETWORK TELEVISION, INC., a Tennessee corporation ("Secured Party"). WITNESSETH: WHEREAS, Secured Party has agreed to acquire from the Debtor its $2,000,000 Variable Rate Convertible Secured Note Due 2000 (hereinafter referred to as the "Note"), pursuant to the provisions of that certain Note Purchase Agreement dated August 16, 1995; and WHEREAS, Debtor has agreed to give to Secured Party certain security for the repayment of the Note, and to secure the other indebtedness, liabilities and obligations set forth herein. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. SECURITY INTEREST. To secure the payment of the indebtedness and amounts hereinafter specified, Debtor hereby assigns, transfers, conveys and sets over to Secured Party a first priority security interest in and to the following property, and all additions, accessions, and substitutions thereto or therefor, and proceeds thereof, including any insurance proceeds, and each and every class thereof, to the extent the same are owned by Debtor and relate in any way to the Debtor's business or hereafter relate to said business, all of which are hereinafter referred to as the "Collateral:" (a) all present and future equipment, furniture, and fixtures located at the offices and facilities of Shop at Home located in Knoxville, Tennessee (the "Equipment"); and (b) all inventory of Shop at Home of every kind and description, whether now owned or hereafter acquired and wherever located (the "Inventory"); (c) all accounts and accounts receivable of Shop at Home of every kind and description, whether now owned or hereafter acquired and wherever located (the "Accounts"); and 2 (d) 1,000 shares of Common Stock of MFP, Inc., a Tennessee corporation, owned by Shop at Home (the "Securities"); and (e) all proceeds of the sale of the Federal Communications Commission licenses and authorizations of Television Station WMFP, Lawrence, Massachusetts, whether now held or hereafter acquired (the "License Proceeds"). 2. LIABILITIES SECURED. The security interest herein conveyed shall secure payment of the following: (a) the Note, and all interest thereon, and any and all renewals, extensions or modifications thereof, in whole or part; (b) all future loans, advances or extensions of credit, regardless of class and whether or not presently contemplated by the parties hereto, made by Secured Party to or for the account of Debtor, for the purpose of protecting the Collateral or Secured Party's right to receive payments under the Note, including, without limiting the foregoing, advances for insurance, repairs to and maintenance of the Collateral, taxes, and discharge of any other lien, security interest or encumbrance; and (c) all costs and expenses incurred in the collection of any of the foregoing, including reasonable attorneys' fees. 3. LOCATION OF COLLATERAL. The Collateral shall be used solely in connection with the ordinary course of Debtor's business and shall remain in Debtor's possession or control at all times, with the exception of the Securities, possession of which shall be held by Secured Party as described in Section 10 hereof. The Equipment shall be kept on or about the Knoxville, Tennessee, offices and facilities of the Debtor, except for repairs and maintenance in the normal course of business, unless Debtor notifies Secured Party in writing and Secured Party consents in writing in advance of its removal to another location. 4. DEBTOR'S COVENANTS AND WARRANTIES. Debtor hereby warrants and covenants as follows, all of which warranties and covenants shall continue throughout the term of this Agreement, and Debtor shall promptly notify Secured Party in writing of any change in any matter herein warranted: (a) Shop at Home's principal place of business is at 5210 Schubert Road, Knoxville, Tennessee 37912, and Debtor will immediately notify Secured Party of any change in the location of said place of business. (b) Shop at Home is a duly organized, validly existing corporation formed under the laws of the State of Tennessee. (c) MFP is a duly organized, validly existing corporation formed under the laws of the State of Tennessee. All of the capital stock of MFP consists of 1,000 shares of Common Stock, all of which is owned by Shop at Home. 3 (e) Each Debtor has full power and authority to (i) conduct business in the state of its incorporation and in every other state where qualification as a foreign corporation is required by law, (ii) own and operate its properties and conduct its business, and (iii) execute and deliver, and perform its obligations under this Security Agreement. (f) Each Debtor has by proper corporate action duly authorized (i) the execution and delivery of, and the due performance of its obligations under this Security Agreement, and (ii) the taking of any and all other actions as may be required on the part of each Debtor to carry out, give effect to and consummate the transactions contemplated by this Security Agreement. Each Debtor will take any and all actions necessary or appropriate to consummate the transactions contemplated by this Security Agreement. (g) This Security Agreement has been duly executed and delivered by each Debtor and is, and when executed and delivered will be, legal, valid and binding obligations of each Debtor enforceable in accordance with its terms (assuming due authorization, execution and delivery by any other parties thereto), subject as to enforcement of remedies to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws in effect from time to time affecting the rights of creditors generally and to the availability of equitable relief. (h) Except for the security interest granted hereby, Debtor is the owner of the Collateral free from any other lien, security interest or encumbrance and no security interest or interests and no financing statement or statements, other than those listed on EXHIBIT A attached hereto, covering the Collateral or proceeds thereof, exists. The parties acknowledge that Franklin Federal Savings Bank, Morristown, Tennessee, holds a security interest in a portion of the Collateral, but that such security interest will be released by the payment in full of the indebtedness owed such institution, from the proceeds of the sale of the Note. (i) Debtor will defend the Collateral against all claims and demands of all persons at any time claiming the same or any interest therein. (j) All financial statements and information made or supplied by Debtor calculated to induce this transaction are true and correct. (k) Debtor will pay all taxes, assessments, and other governmental charges of every character, levied and assessed against all or any part of the Collateral now or hereafter subject to this Agreement when the same shall become due and payable, and will comply with all laws, regulations and orders of any national, state or municipal government or administra- 4 tive agency exercising any power or regulation or supervision over Debtor or any of the Collateral, the non- compliance of which will impair the lien of this Agreement upon any of the Collateral subject hereto. (l) Debtor will keep accurate and complete records of all of its business and from time to time will permit Secured Party, upon reasonable notice to Debtor, to examine all its business records and to make copies thereof. Further, from time to time, Debtor will furnish Secured Party with such information regarding the Collateral as Secured Party may request. (m) Debtor will execute financing statements or other documents deemed necessary by Secured Party to perfect or preserve its security interest in the aforesaid Collateral and the proceeds thereof, and will pay the costs and fees of filing or recording such statements or documents pursuant to law. (n) Debtor will pay all of the indebtedness secured hereby to Secured Party as and when the same shall be due and payable, whether at maturity, by acceleration or otherwise, and will perform all terms of all notes, agreements or instruments evidencing or securing the said indebtedness and the terms of this and any other security agreement between Debtor and Secured Party. (o) The execution, delivery and performance of this Security Agreement are within Debtor's power and authority, have been duly authorized, and are not in contravention of any law or the terms of its charter, bylaws, or other incorporation papers or any indenture, agreement or undertaking to which it is a party or by which it is bound. (p) Provided the Debtor is not in default under the Note, the Debtor may collect its Accounts and retain the proceeds therefrom, provided the Debtor keeps accurate and complete records of the Accounts and from time to time will permit Secured Party to examine, upon reasonable notice to Debtor, all its business records and to make copies thereof. (q) The Collateral which constitutes tangible personal property (the "Tangible Collateral") will not be misused or abused, wasted or allowed to deteriorate, and will be kept in good repair and condition, except for ordinary wear and tear incurred in its intended use. The Tangible Collateral will be held by Debtor at its risk of loss. Debtor will maintain insurance on the Tangible Collateral for its full replacement cost against fire (including so-called extended coverage), theft, loss, injury and destruction and such other risks as Secured Party may require, under policies acceptable to Secured Party, with loss payable to Secured Party or its assigns, providing for fifteen (15) days' minimum cancellation 5 notice to Secured Party, and with duplicate policies or certificates deposited with Secured Party. Secured Party may act as attorney-in-fact for Debtor in obtaining, adjusting, selling and canceling such insurance and endorsing any drafts. 5. DEFAULT IN PAYMENT OF INSURANCE AND TAXES. Should Debtor fail to pay when due any tax, assessment or governmental charge levied or assessed against any of the Collateral, or in the payment of any premium for insurance required hereunder, and should Secured Party, in its sole discretion, pay any of the aforesaid obligations of Debtor, then the amount so paid shall be added to the indebtedness secured hereby and shall be due from Debtor to Secured Party upon demand with interest at the maximum rate allowed by law. 6. ALIENATION OF COLLATERAL BY DEBTOR. Debtor will not sell, offer to sell, transfer or dispose of the Collateral or any interest therein except in the ordinary course of business, and, after notice from Secured Party, or unless Secured Party consents in writing prior thereto with respect to the Tangible Collateral. The Debtor will keep the Collateral free from unpaid charges, including taxes, and from all liens, encumbrances and security interests, except the lien of this Agreement, suffered voluntarily or involuntarily by Debtor. 7. DIRECT PAYMENT TO SECURED PARTY. Secured Party shall have the right to notify the obligors of the Accounts to make payments owed to Debtor directly to Secured Party, and to take control of all proceeds thereof and enforce any and all obligations of said obligors, which rights Secured Party may exercise at any time, if Debtor is then in default hereunder. Until such time as Secured Party elects to exercise such rights by mailing to Debtor and said obligors written notice thereof, Debtor is authorized to collect payments and enforce all rights under the Accounts. The cost of such collection and enforcement, including attorneys' fees and out-of-pocket expenses, shall be borne solely by Debtor, whether the same are incurred by Secured Party or Debtor. In order to facilitate Secured Party's rights hereunder, Debtor does hereby irrevocably designate and appoint Secured Party (acting by and through its chairman, president or any vice president thereof), its successors and assigns, as their true and lawful attorney-in-fact, either in Debtor's own name, place and stead, or otherwise, at any time, before or after the occurrence of an Event of Default, to ask, demand, receive, receipt and give acquittance for any and all amounts which are now or may hereafter become due and payable to Debtor and which are part of the Accounts. 8. DEFAULT. At the option of Secured Party, Debtor shall be in default hereunder and the indebtedness secured hereby shall become immediately due and payable upon the happening of any of the following events or conditions ("Event of Default"): 6 (a) Any failure to pay, promptly as and when due, the principal and interest of the indebtedness secured hereby or any other monetary obligations or indebtedness of Debtor to Secured Party; (b) Any failure by Debtor to duly observe any material covenant, condition or agreement of this Security Agreement, the Note Purchase Agreement, or the Note; (c) The insolvency or bankruptcy of Shop at Home, the making by Shop at Home of an assignment for the benefit of creditors, or the consent of Shop at Home to the appointment of a trustee or receiver or other officer of the court or other tribunal; (e) The appointment of a trustee, receiver or other officer of the court for Shop at Home, or for a substantial part of their properties, without its consent, where no discharge is effected within sixty (60) days; (f) The institution of bankruptcy, reorganization, insolvency, or liquidation proceedings by or against Shop at Home, and if against it, where such proceeding is consented to by it or has not been dismissed within sixty (60) days; (g) The entry of any judgment against Shop at Home in excess of One Hundred Thousand Dollars ($100,000.00) or the issuance of entry of any attachment, replevin levy or lien against the Collateral, if not discharged, bonded or dismissed within sixty (60) days; (h) The giving of any statement, certificate or representations in or pursuant to this Security Agreement proving to be untrue in any material respect as of the time made; (i) The assertion of any claim or priority over this Security Agreement by title, lien or otherwise in any legal or equitable proceeding that is not dismissed or bonded; (j) Any material uninsured loss, theft, damage or destruction to the Collateral occurs; or (k) Debtor disposes of all or any part of the Collateral other than in the ordinary course of business, or divest themselves by sale or otherwise of the control over, or any goodwill of, its business, or fail to carry on their business for any reason whatsoever. Said events shall not constitute an Event of Default unless (i) with regard to any monetary default or failure to pay any amount of money when due, such event, default or failure continues for a period of five (5) days after such payment is due, and (ii) with regard to any other event stated above for which no time limit is specified, such event continues for a period of 7 twenty (20) days after written notice to Debtor pursuant to Section 18(e) hereof, provided, however, that said notice provisions and any other notice provisions contained in the Note or any other document shall run concurrently and not successively. 9. REMEDIES UPON DEFAULT. (a) General. In the event of the occurrence of an Event of Default under this Agreement, Secured Party shall have the rights and remedies contained herein, in all promissory notes or other agreements and instruments providing for, evidencing or securing any of Debtor's obligations to Secured Party secured hereby, and the rights and remedies provided in Article 9 of the Uniform Commercial Code of the State of Tennessee. (b) Assembly of Collateral. In the event of the occurrence of an Event of Default, Debtor shall, upon request of Secured Party, assemble the Collateral or evidence thereof and make it available to Secured Party at Debtor's place of business. (c) Entry of Debtor's Premises and Repossession. In the event of the occurrence of an Event of Default, Secured Party may enter Debtor's premises where any of the Collateral is located, and take possession of and remove all or any portion of the Collateral or evidence thereof therefrom for purposes of disposition pursuant to this Security Agreement. (d) Cash or Credit Sales. Debtor agrees that sales for cash or on credit to a wholesaler, retailer or user of property of the type as the Collateral or at public auction or private sale are all commercially reasonable methods of disposition of the Collateral. (e) Notice of Disposition. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party will give to Debtor notice of the time and place of any public sale of any of the Collateral, or of the time after which any private sale or any other intended disposition thereof is to be made by sending notice, pursuant to Section 18(e) hereof, at least ten (10) days before the time of the sale or other disposition, which provisions for notice Debtor agrees are reasonable. (f) Application of Proceeds. Any proceeds of any disposition of any of the Collateral may be first applied by Secured Party to the payment of expenses in connection with the exercise of its rights and remedies hereunder, including reasonable attorneys' fees and legal expenses, and any balance of such proceeds may be applied by Secured Party toward the payment of the indebtedness secured hereby, but in such order 8 of application as Secured Party may elect in its sole discretion. (g) Continuance of Remedies. Until all of the indebtedness secured hereby shall have been paid in full, Secured Party's rights and remedies regarding disposition of the Collateral, and all other rights, powers and remedies provided to Secured Party hereunder shall continue to exist, and may be exercised by Secured Party irrespective of the fact that portions of the liabilities may have been paid. 10. SPECIAL PROVISIONS RELATING TO THE SECURITIES. In addition to the other terms and provisions hereof, the parties agree to the following with regard to the Securities: (a) Secured Party's security interest in the Securities shall be perfected by Secured Party's possession thereof. Secured Party shall also be provided with stock powers covering the Pledged Securities executed in blank by Shop at Home. (b) Shop at Home warrants to Secured Party the following: (i) Shop at Home is the sole legal and equitable owner of the Securities, and Shop at Home's absolute title thereto is not the subject of any claim or challenge threatened or asserted by any third party. (ii) The Securities have been validly issued and are fully paid. (iii) The Securities are not and will not be subject to any restriction of transfer, "buy-sell" agreement, voting agreement, redemption agreements, option or other agreement, except for those restrictions and agreements, if any, that are noted on the certificates of the Securities. (iv) This Agreement provides Secured Party with a valid pledge of, and a valid first priority security interest in, the Securities. (c) Shop at Home covenants with Secured Party as follows: (i) Shop at Home shall deliver any stock received as a result of ownership of the Securities immediately to Secured Party upon receipt, and such additional stock shall become part of the Securities hereunder upon issuance. 9 (ii) Shop at Home shall not sell, transfer, or grant or suffer the attachment of any lien or encumbrance to the Securities. (d) As long as there is no default under this Security Agreement, Shop at Home shall be entitled to exercise all voting rights arising from ownership of the Securities, except that written approval of Secured Party shall be required for Shop at Home to vote said stock to authorize the issuer of the Securities to liquidate, reorganize, merge or engage in any other transactions for which shareholder approval is required by law or by the issuers' Charter or its By-Laws. (e) As long as there is no default under this Security Agreement, Debtor shall have the exclusive right to receive all reasonable distributions of cash and other property made with respect to the Securities. (f) Upon the occurrence of an event of default, Secured Party may exercise any of the following remedies: (i) Secured Party shall have the exclusive right to exercise all voting powers and give all consents, waivers and ratifications relating to the Securities. (ii) Secured Party shall have the exclusive right to receive all distributions made with respect to the Securities. Secured Party shall apply cash distributions to payment of the Secured Indebtedness and hold all other types of property distributed for sale, pursuant to the Uniform Commercial Code as adopted in Tennessee. (iii) Secured Party may, upon five (5) days' notice to Debtor, sell the Securities or any part thereof at public or private sale or at any appropriate broker's board or securities exchange, for cash, credit or for future delivery. (A) Secured Party may be the purchaser of any or all of the Securities sold at any public sale or, to the extent permitted by law, at any private sale. (B) At or prior to any sale of the Securities, Secured Party may, in its sole discretion, restrict prospective purchasers to persons who will represent that they will purchase for their own account for investment and not with view to the distribution or sale of any of the Securities and who will agree that the Securities so purchased may bear an appropriate restrictive legend. 10 (C) At or prior to any sale, Secured Party may, in its sole discretion, require that prospective purchasers establish, to Secured Party's satisfaction, that they are investors of sufficient financial means or business acumen to qualify as "accredited investors" under federal and state securities laws. (D) At any sale, Secured Party shall have the right to transfer to the purchaser thereof the Securities sold. Secured Party is hereby appointed Debtor's attorney-in-fact for the purpose of supplying any endorsements necessary to effect such transfer. Each purchaser at any such sale (including, without limitation, Secured Party) shall hold the property sold free from any claim or right of any kind, including any equity or rights or redemption of Debtor, which hereby specifically waives all rights of redemption, stay or appraisal which Debtor has or may have under any rule of law or statute now existing or hereafter adopted. (E) At any sale, the Securities may be sold in one lot as an entirety or in separate portions, as Secured Party may determine. (F) Prior to any sale, Secured Party may, but shall not be obligated to, have all or part of the Securities registered for public distribution pursuant to any applicable state or federal law or seek assurances from any state or federal authority that the intended disposition of Securities will qualify under an exception to laws that otherwise require registration for the sale of stock. All expenses incurred by Secured Party in addressing such matters, including reasonable attorney's fees, shall become part of the Secured Indebtedness and bear interest as elsewhere provided herein. (G) Secured Party shall not be obligated to make any sale pursuant to any notice given and may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such 11 sale may be resumed at any time and place to which the same may be so adjourned. (H) In the case of any sale of all or any part of the Securities on credit or for future delivery, payments made by the purchaser shall reduce the outstanding balance of the Secured Indebtedness as payments are received, and the out standing principal balance of the Secured Indebtedness shall continue to accrue interest over the time that such payments are made, until the principal and accrued interest constituting the Secured Indebtedness have been paid in full. Secured Party shall not incur any liability in case of the failure of such purchaser to completely pay for the Securities so sold and, in the case of any such failure, the Securities may again be sold pursuant to the provisions hereof. (g) Secured Party acknowledges and agrees that so long as MFP is the holder of a license to operate a commercial television station from the Federal Communications Commission, that Secured Party cannot exercise its right to vote the Securities and cannot sell the Securities pursuant to the above provisions without first obtaining the prior approval of the Federal Communications Commission. 11. COVENANT TO PAY DEFICIENCY. Upon the occurrence of an Event of Default, if the sale or other disposition of the Collateral fails to satisfy in full all of the indebtedness secured hereby, and the costs and expenses of retaking, holding, preparing for sale, selling and the like, including reasonable attorneys' fees and expenses incurred by Secured Party in connection with this Agreement or the indebtedness secured hereby, Debtor shall be liable to and agrees to pay any such deficiency, provided, however, that Secured Party shall not be required to proceed first against the collateral but may elect to proceed first or solely against the Debtor or other collateral for the Loan. 12. SECURED PARTY'S RIGHT TO WAIVE. Secured Party may correct any default without waiving its default remedy, and without waiving any other prior or subsequent default, may retract any waiver of default that remains uncured by giving Debtor reasonable notice that strict performance of Debtor's obligations under this Agreement will thereafter be required, and may incur reasonable attorneys' fees and expenses in exercising any of Secured Party's rights and remedies after default. A waiver of any default on one occasion shall not constitute either a waiver of such default on any future occasion or a waiver of any other default. Secured Party shall not be deemed to have waived any of its rights hereunder or under any other agreement, instrument or paper signed 12 by Debtor unless such waiver be in writing and signed by Secured Party. No delay or omission on the part of Secured Party in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All of Secured Party's rights and remedies, whether evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised separately or concurrently. 13. POWER OF SALE AND OTHER POWERS. The power of sale and all other powers herein granted by Debtor shall apply to all Collateral of any kind or description, including all monies, negotiable instruments, bonds, stocks, and commercial paper, credit, choses in action, claims or demands of every kind at any time during the existence of this Agreement. 14. SUBSTITUTION OR EXCHANGE OF COLLATERAL. If, with the consent of Secured Party, Debtor shall substitute or exchange other collateral, in place of the Collateral, then all of the rights and privileges of Secured Party and all obligations on the part of Debtor shall be forthwith applicable to the substituted or exchanged collateral, security or instrument, the same in all respects as with respect to the property originally pledged and held as Collateral hereunder. 15. INDEMNITY. Debtor will defend, indemnify and hold Secured Party harmless of and from any and all liability, loss or damage which Secured Party may incur by reason of this Agreement, and of and from any and all claims and demands whatsoever which may be asserted against Secured Party by reason of any alleged obligation or undertaking to be performed or discharged by Secured Party under this Agreement. Should Secured Party incur any liability, loss or damage by reason of this Agreement, or in the defense of any claims or demands with respect thereto, Debtor will immediately, upon the demand of Secured Party, reimburse Secured Party for the amount thereof, including all costs and expenses and reasonable attorneys' fees incurred by Secured Party in connection therewith; provided, however, that nothing contained in this section shall obligate Debtor to indemnify Secured Party against loss or damage occasioned by Secured Party's own gross negligence or willful misconduct. 16. TERMINATION. Upon payment in full of all of the principal and interest owing on the Note secured hereby together with any extensions and renewals thereof, and upon payment of all other indebtedness secured hereunder, this Agreement and the security interest granted hereby shall terminate. 17. ASSIGNMENT. Debtor shall not assign its rights nor delegate the performance of their duties hereunder without Secured Party's prior written permission. Secured Party may assign its rights and delegate the performance of its duties hereunder, and if 13 Secured Party does so, the assignee upon notifying Debtor shall be entitled to the performance of all Debtor's duties and to all Secured Party's rights hereunder. Debtor shall not assert against any such assignee any claim or defense which Debtor may have against Secured Party. 18. MISCELLANEOUS. (a) Debtor agrees that it will, upon the request of Secured Party, from time to time, execute and deliver to Secured Party such further instruments and documents, including, without limitation, financing statements, as may by Secured Party be deemed proper or necessary for the more effectual vesting in Secured Party of its security interest in the Collateral. Debtor shall pay all costs of filing the same. (b) Debtor hereby waives all notices of presentment, demand, protest and notice of dishonor as to any instrument secured hereby. (c) Subject to the provisions of Section 17 hereof, all provisions herein shall inure to and become binding upon, the heirs, executors, administrators, successors, representatives, receivers, trustees and assigns of the parties hereto. (d) This Agreement and all amendments hereto, all supplements hereof, and all acts, transactions, agreements, certificates, assignments and transfers hereunder shall be governed by and construed in accordance with the laws of the State of Tennessee. (e) Any notices required or allowed hereunder shall be in writing and shall be deemed satisfactorily given (and any time period provided for giving such notice herein shall commence) when (i) deposited in the United States Mail, postage prepaid, certified or registered mail, return receipt requested, or forwarded by a nationally recognized overnight courier service, to the addresses of the respective parties specified above (or such other address as may be specified in a written notice forwarded to all parties hereto as herein specified) or, (ii) personally delivered. (f) This Agreement is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms herein stated. This Agreement may not be modified, amended or changed in any manner, nor shall any waiver of any provision hereof be effective, except by an instrument in writing signed by the party against whom enforcement of such modification, amendment, change or waiver is sought. (g) The section captions in this Agreement are for convenience only and are not to be construed in interpreting 14 this Agreement. The gender and number terms used in this Agreement are used as a reference only and shall apply with the same effect whether the parties are of the masculine or feminine gender, corporate or other form, and the singular shall likewise include the plural. If more than one person or party has executed this Agreement as Debtor, their obligations shall be joint and several. (h) If any term or provision of this Agreement, application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder hereof, or the application of such term or provision to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. (i) The requirements and remedies provided for herein shall be construed to be applicable to the various items of Collateral hereunder to the extent that said requirements and remedies are reasonably applicable thereto. EXECUTED on the day, month and year first above written. SHOP AT HOME, INC. By: /s/ Joseph Nawy --------------------- Title: VP Finance MFP, INC. By: /s/ Joseph Nawy --------------------- Title: Secretary GLOBAL NETWORK TELEVISION, INC. By: /s/ J.D. Clinton --------------------- Title: Chairman 15 EXHIBIT A EXISTING SECURITY INTERESTS SNET Credit, Inc., relating to specific studio equipment AT&T Corporation, relating to a telephone system Canon U.S.A., Inc., relating to all Canon photographic products sold to Shop at Home. Franklin Federal Savings Bank, covering furniture, fixtures, accounts receivable, inventory, and certain equipment. EX-10.39 4 RESTATED AGREEMENT DATED 01-26-96 1 EXHIBIT 10.39 RESTATED AGREEMENT THIS RESTATED AGREEMENT (the "Restated Agreement"), dated effective as of January 26, 1996, is made by and between RICHARD HOWARD, INC., an Ohio corporation, 128 East Main Street, Leipsic, Ohio 45856 ("SELLER"), and SHOP AT HOME, INC., a Tennessee corporation, 5210 Schubert Road, Box 12600, Knoxville, Tennessee 37912 ("BUYER"); and restates in its entirety the Agreement among the parties dated December 8, 1993 (the "Agreement"). WITNESSETH: WHEREAS, SELLER engages in the purchase and sale of baseball cards, related baseball and sports items and other collectibles; and WHEREAS, SELLER has obtained exclusive access to the rights to the 1993 Elite Dominator baseball card product line manufactured by Leaf, Inc., as more fully described on Exhibit A attached hereto and incorporated herein by reference; and WHEREAS, the parties entered into the Agreement whereby SELLER agreed to sell and BUYER agreed to purchase a specified number of 1993 Elite Dominator baseball cards and other baseball cards manufactured by Leaf, Inc., for resale through its retail television marketing and distribution system; and WHEREAS, certain disagreements have arisen between the parties concerning the provisions of the Agreement, and SELLER has filed a complaint against the BUYER in the Court of Common Pleas of Putnam County, Ohio, Case No. 95-CVH-199 (the "Lawsuit"), seeking the payment of certain monies from BUYER under the Agreement; and WHEREAS, the parties have reached an agreement to settle all claims arising out the facts and circumstances underlying the Lawsuit including the indebtedness of BUYER allegedly owed by SELLER under the terms of the Agreement; and WHEREAS, the settlement of such claims necessitates the parties amending the terms and conditions of the Agreement; and WHEREAS, it is the intention of the parties that this Restated Agreement shall incorporate all of the changes in the Agreement agreed upon by the parties, and that this Restated Agreement shall replace the Agreement in its entirety and shall govern the relationship between the parties as of its date set out above; and WHEREAS, upon execution of this Restated Agreement, SELLER will dismiss COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business) of the Lawsuit without prejudice. 2 NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. RIGHTS GRANTED BY SELLER TO BUYER. 1.1. During the term of this Restated Agreement and subject to the rights reserved by SELLER in Section 2 herein, SELLER hereby grants to BUYER the right, to the exclusion of SELLER and all claiming under or through SELLER, upon the terms and conditions hereinafter contained, to purchase from SELLER and to promote and sell through its retail television marketing and distribution system Twenty-Nine Thousand Seventy-Seven (29,077) ED Cards. For purposes of this Restated Agreement, an "ED Card" consists of one (1) 1993 Elite Dominator baseball card and one (1) box of 1993 Donruss box of baseball cards manufactured by Leaf, Inc. or a box of other baseball cards or other sports cards or other sports related products of comparable or greater value to one (1) 1993 Donruss box and a "gift box" of some assortment of baseball and/or other sports cards or products which has some comparable value attached to it in the baseball card market place. The "gift box" provided by SELLER will be of a composition consistent with the "gift box" provided by SELLER to BUYER during the re-launch of the ED Cards in June, 1995. SELLER and BUYER agree that some enhancement items may be billed to BUYER outside this Restated Agreement. SELLER will advise BUYER in writing or by fax of each such enhancement item and its associated cost. BUYER will provide SELLER with written or fax approval of each enhancement item prior to BUYER offering each such enhancement item for sale and prior to SELLER shipping any such enhancement items to BUYER's customers. In the event of any dispute arises between the parties regarding the composition of the "gift box" or the separate billing of enhancement items, J. D. Clinton and G. Richard Howard agree to meet and resolve the dispute. 1.2. During the term of this Restated Agreement, SELLER, subject to the provisions of Section 2 herein, hereby assigns and transfers to BUYER all of SELLER's rights, if any, in any tradenames, trademarks, servicemarks, logos, likenesses, names, signatures, and pictures, contained in the ED Cards. This assignment shall be limited to the rights necessary to permit BUYER to offer for sale, and sell, advertise, promote, ship and distribute the ED Cards as contemplated by this Restated Agreement. 2. RIGHTS RESERVED BY SELLER. 2.1. In the event BUYER commits an Event of Default uncured within the permitted time period, all rights, if any, assigned by SELLER to BUYER under Section 1 shall be forfeited and automatically be reassigned and transferred back to SELLER without the need for any independent action by SELLER. 3 2.2. During the term of this Restated Agreement and after its termination, SELLER reserves all the rights under Section 1 necessary for SELLER to maintain and continue its services of purchasing and selling in the after market through any marketing channels, except for the retail television distribution channel, any and all ED Cards and individual Elite Dominator baseball cards, alone or in conjunction with other sports related merchandise which are offered to SELLER by third parties for purchase and resale to other third party buyers, or for temporary or long term investment purposes, or ED Cards and individual Elite Dominator baseball cards currently owned by SELLER in its inventory, or the Four Thousand Five Hundred (4,500) ED Cards SELLER will receive from BUYER upon payment of the $315,000.00 receivable on the books of BUYER in the name of SELLER. Notwithstanding the foregoing, SELLER agrees that it will not intentionally make any sale of the Elite Dominator baseball cards to other third party buyers at a price or prices which would be detrimental to the BUYER's retail television market price of the Elite Dominator baseball cards and SELLER further agrees that it will only make any such sales with due regard to its obligation to deal with the BUYER in good faith so as not to engage in any sales activity or practice which might have the effect of devaluing the ED Cards being sold to BUYER hereunder or for which the BUYER holds a conditional option to purchase under Section 3.6 hereof. SELLER agrees not to compete in any way with BUYER through the sale of ED Cards in the retail television distribution channel as long as BUYER is making a good faith effort to market the ED Cards. In the event of any dispute about either parties' good faith efforts, J. D. Clinton and G. Richard Howard agree to meet and resolve the dispute. In the event BUYER defaults on the terms of the Restated Agreement and such default remains uncured within the period provided, SELLER shall then have the option to compete in any way with BUYER through the sale of ED Cards in the retail television distribution channel. 2.3. During the term of this Restated Agreement, BUYER agrees to use its best efforts to promote and advertise the sale of the ED Cards. 3. TERMS OF SALE AND PAYMENT. 3.1. The parties acknowledge and agree that there exists at the present time an outstanding account payable of the BUYER to the SELLER for shipped regular baseball card business of One Hundred Ninety-Five Thousand Two Hundred Eighty-Four and 40/100 Dollars ($195,284.40) on the books of the SELLER as of close of business on Thursday, January 25, 1996, which amount is adjusted daily as between the parties. BUYER agrees to make payment to SELLER of the amount, as adjusted from time to time, of this payable in the normal course of BUYER's business, and the amount, as adjusted, of such payable and its subsequent payment are not affected by the terms of this Restated Agreement. 3.2. BUYER agrees to purchase Nine Thousand (9,000) ED Cards at a cost of Three Hundred Fifteen Thousand Dollars 4 ($315,000) and shall issue a check to SELLER in that amount within ten (10) days of the filing of an entry dismissing COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business ) of the Lawsuit without prejudice. At the same time, SELLER agrees to pay to BUYER and to issue BUYER a check in the amount of Three Hundred Fifteen Thousand Dollars ($315,000), which shall be credited to an account receivable currently owed by SELLER to BUYER and shall be considered as payment in full of such account receivable. At the time BUYER forwards BUYER's check for Three Hundred Fifteen Thousand Dollars ($315,000) to SELLER, BUYER will also deliver to SELLER the Four Thousand Five Hundred (4,500) ED Cards due to SELLER from the purchase order which created the $315,000 account receivable on BUYER's books. To avoid the cost and expense of two (2) deliveries to both parties, BUYER and SELLER agree that the SELLER shall retain 4,500 ED Cards of the above referenced 9,000 ED Cards and shall only ship to BUYER, the net balance of 4,500 ED Cards. 3.3. The parties acknowledge that BUYER currently owns certain old sports card inventory which BUYER believes to have a current value of approximately Eighty Two Thousand Dollars ($82,000). SELLER agrees to accept this inventory from BUYER at an agreed upon value of Sixty-Five Thousand Dollars ($65,000). Within ten (10) days of the filing of the entry of the order dismissing COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business ) of the Lawsuit without prejudice, BUYER agrees to ship such old sports card inventory to SELLER and BUYER may then credit the $65,000 against the Seven Hundred Twenty Thousand Dollars ($720,000) Payment Obligation owed to SELLER by BUYER as referenced in Section 3.5 below. 3.4. Within ten (10) days of the filing of the entry of the order dismissing COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business) of the Lawsuit without prejudice, BUYER agrees to issue and deliver to the SELLER, Forty-Four Thousand (44,000) shares of BUYER's common shares (the "Shares"), which shall become the sole property of the SELLER. SELLER understands that these shares of Common Stock will not be registered under the Securities Act of 1933 or any applicable state securities laws, in reliance upon available exemptions from registration. As a result, the SELLER understands that the shares may not be transferred or resold by SELLER unless registered under such acts or unless an exemption from registration is available, and that the certificate representing the shares shall contained a legend evidence such restriction on transferability. SELLER further understands that in order to obtain such shares, the SELLER may be required to execute an acknowledgement that such shares are being acquired by it for investment purposes and not with a view to reselling the shares; and SELLER agrees that it will execute such statement, and that 5 such statement will be truthful when made. SELLER, and each shareholder of SELLER, is an "accredited investor" as that term is defined in the regulations promulgated pursuant to the Securities Act of 1933. In the event that any proposed shareholder is not an accredited investor, SELLER shall promptly notify BUYER of each fact. 3.5. Within ten (10) days after the filing of the entry of the order dismissing COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business) of the Lawsuit without prejudice, BUYER agrees to pay to SELLER the total amount of Seven Hundred Twenty Thousand Dollars ($720,000) (the "Payment Obligation") payable upon the terms and conditions contained herein. BUYER further agrees to pay to the SELLER a payment of One Hundred Twenty Thousand Dollars ($120,000) at the time of BUYER's delivery of the signed Restated Agreement to be credited to the outstanding balance on the Payment Obligation and will agree to make future payments to the SELLER upon the terms contain therein and in this Restated Agreement. a. In consideration of this cash payment and the agreement of BUYER to pay the Payment Obligation, SELLER agrees to deliver to BUYER, in addition to the 9,000 ED Cards referred to in Section 3.2, or to BUYER's designated customers, a total of Twenty Thousand Seventy-Seven (20,077) ED Cards (the "Remaining ED Cards" of the first 50,000 ED Cards, calculated by subtracting 9,000 referred to in Section 3.2 from the total referred to in Section 1.1). b. The parties agree that the Remaining ED Cards shall be the property of the BUYER and subject to the Security Agreement and UCC statement hereinafter referenced. While subject to the Security Agreement and UCC statement, the SELLER shall retain possession of the Remaining ED Cards until sold to customers of the BUYER, in which case and at such time, SELLER shall deliver the Remaining ED Cards according to the BUYER's instructions; or, until the balance remaining on the Payment Obligation is reduced to zero, in which case the unsold Remaining ED Cards shall be delivered to the BUYER upon BUYER's request. c. After the payments by BUYER are made to SELLER pursuant to the terms and provisions herein, BUYER shall pay to the SELLER one-third (1/3) of the gross proceeds of any ED Card sales occurring on or after the effective date of this Restated Agreement, less returns, in the form of common shares of the BUYER, rounded to the nearest whole share at the time of issuance and valued at Three and no/100 Dollars Per Share ($3/Sh), as payments on the balance remaining on the Payment Obligation with such payments in the form of issued common shares to be delivered to the SELLER monthly and within ten (10) days of the close of the month in which the calculation was made. Notwithstanding the foregoing, the parties agree that no payments shall be calculated or due in the form of issuance of BUYER's common shares under this Section 6 5.6 for the one-third of the retail sale proceeds from the first One Thousand (1,000) ED Cards sold by BUYER to its retail television customers after the effective date of this Restated Agreement. d. The remaining balance on the Payment Obligation shall be paid on June 30, 1996; provided, however, if the transaction announced on October 10, 1995, by the BUYER, whereby Paxson Communications Corporation would acquire a controlling position in BUYER, is not consummated on or before March 31, 1996, the date of final payment on the remaining balance on the Payment Obligation shall be extended to March 31, 1997. To insure the remaining balance of the Payment Obligation is paid in a timely manner, SELLER shall retain possession of the unsold Remaining ED Cards until the same is paid and in the event the remaining balance of the Payment Obligation is not paid in a timely manner, SELLER shall have right to begin selling any of the undelivered Remaining ED Cards through any marketing channel whatsoever. e. SELLER understands that these shares of Common Stock will not be registered under the Securities Act of 1933 or any applicable state securities laws, in reliance upon available exemptions from registration. As a result, the SELLER understands that the shares may not be transferred or resold by SELLER unless registered under such acts or unless an exemption from registration is available, and that the certificate representing the shares shall contained a legend evidence such restriction on transferability. SELLER further understands that in order to obtain such shares, the SELLER may be required to execute an acknowledgement that such shares are being acquired by it for investment purposes and not with a view to reselling the shares; and SELLER agrees that it will execute such statement, and that such statement will be truthful when made. SELLER, and each shareholder of SELLER, is an "accredited investor" as that term is defined in the regulations promulgated pursuant to the Securities Act of 1933. In the event that any proposed shareholder is not an accredited investor, SELLER shall promptly notify BUYER of each fact. f. After credit for this $535,000.00 payment in common shares of the BUYER by BUYER to SELLER, BUYER and SELLER agree that the remaining balance on the Payment Obligation shall then be $0.00 and the Payment Obligation shall be considered paid in full by the BUYER. 3.6. BUYER shall have the option to purchase all or a portion of the additional 50,000 1993 Elite Dominator baseball cards only from SELLER at a price of Thirty-Five Dollars ($35.00) for each 1993 Elite Dominator baseball card, payable in cash, and Seller shall not sell, transfer or encumber, except to its lender, any of such 1993 Elite Dominator baseball cards without the written consent of BUYER as long as BUYER is making a good faith effort to market the ED Cards. In the event of any dispute about either parties' good faith efforts, J. D. Clinton and G. Richard Howard agree to meet and resolve the dispute. In the event BUYER defaults 7 on the terms of the Restated Agreement and such default remains uncured within the period provided, SELLER shall then have the option to compete in any way with BUYER through the sale of ED Cards in the retail television distribution channel. a. In the event SELLER utilizes any portion of the Elite Dominator baseball cards as partial or sole collateral to secure any loan to SELLER from any lender, SELLER agrees that any Security Agreement pertaining thereto will permit the sale of the collateral pursuant to the terms and conditions of this Restated Agreement free of lender's lien. SELLER agrees to provide BUYER a written statement from any lender confirming permission of the sale of the Elite Dominator baseball cards under this Restated Agreement. 4. DELIVERY AND RISK OF LOSS. 4.01. BUYER shall, within three (3) non-holiday business day of the date of sale of an ED Card, provide SELLER with detailed shipping instructions and fully completed shipping labels. All such shipments of ED Cards will be tendered F.O.B. point of origin unless otherwise agreed in writing by both the BUYER and the SELLER. BUYER acknowledges and understands BUYER will be responsible for all shipping expenses and risk of loss during shipping. BUYER acknowledges and understands that BUYER will be responsible for all losses and claims for damages attributable to shipping instructions and labels. Each shipment shall be packed in accordance with SELLER's standard shipment practices, unless BUYER notifies SELLER in writing of any special packing instructions. Any additional expense incurred by SELLER as a result of BUYER's special packing instructions shall be borne and paid by BUYER. SELLER shall use its best efforts to ship within three (3) non-holiday business days of receipt of shipping instructions and labels with the first business day to begin with the non-holiday business day following such receipt. The parties acknowledge that BUYER may request that SELLER ship cards directly to BUYER for BUYER to fulfill any or all of its sales orders; provided, BUYER is not in breach of any terms of this Restated Agreement and the merchandise is shipped C.O.D. to BUYER. 5. SELLER'S REPRESENTATIONS, INDEMNIFICATIONS AND RELEASES. 5.1. SELLER shall indemnify and hold BUYER harmless from and against any loss, claim, or damage, including reasonable attorneys' fees, resulting from any breach of the above-stated representations by SELLER in connection with the ED Cards; provided, however, that BUYER shall be entitled to the benefits of this indemnification only to the extent that prompt notice is given to SELLER of any action, suit, or proceeding, including any investiga- tion, concerning which BUYER expects that SELLER to indemnify BUYER. 8 5.2. SELLER agrees that upon the execution of this Restated Agreement that SELLER will cause to be prepared and immediately file the necessary papers to cause the filing of an entry dismissing COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business) of the Lawsuit without prejudice. 5.3. BUYER and SELLER agree that any future litigation, which might arise out of this Restated Agreement, must be filed by either party in the Court of Common Pleas of Putnam County in the State of Ohio, and BUYER consents to the personal jurisdiction of such court in the State of Ohio for that litigation, although BUYER does not waive in any respect its right to remove any such action to a Federal District Court, provided such Federal District Court is located in the Western District, Northern Division of the State of Ohio, or to file a motion challenging the venue of the court. 5.4. By their execution of this Restated Agreement and the filing of an entry dismissing COUNTS TWO and THREE (relating to the Agreement dated December 08, 1993) of the Lawsuit with prejudice and COUNTS ONE and FOUR (relating to ongoing regular baseball card business) of the Lawsuit without prejudice, both parties agree that all disputes between them as to the Agreement and the sale of the therein defined ED Cards shall be considered settled, and neither party shall have claim against the other for any breach of the 1993 Agreement which occurred prior to the date of the Restated Agreement. 6. TERMINATION. 6.1. SELLER may terminate this Restated Agreement at any time upon the occurrence of any of the following events: a. Filing by BUYER, or having filed against it, a voluntary or involuntary petition for bankruptcy, insolvency proceeding, liquidation, assignment for the benefit of creditors; or placement in the hand of a receiver, liquidator or trustee, which is not dismissed within sixty (60) days; provided, SELLER shall have no obligation to make any additional sales to BUYER during the pendency of such proceeding, absent such security determined to be sufficient by SELLER's attorney's in his sole discretion; or, b. BUYER's breach of any of the terms, conditions, covenants, obligations or duties of performance under this Restated Agreement; provided, however, that BUYER shall have thirty (30) days from receipt of notice of breach to cure any outstanding breaches under this provision. 6.2. Any notices and other communications required under this Restated Agreement shall be in writing and shall be deemed given when delivered in person or sent by ordinary or certified 9 mail, return receipt requested, with proper postage affixed to the parties in the following manner. a. If to SELLER: 1. G. Richard Howard, President Richard Howard, Inc. 128 East Main Street Leipsic, OH 45856 With a copy to: 2. Robert F. Sprague, Esq. Firmin, Sprague & Huffman Co., L.P.A. 220 West Sandusky Street Findlay, OH 45840 b. If to BUYER: 1. Kent E. Lillie, President Shop At Home, Inc. 5210 Schubert Road Box 12600 Knoxville, TN 37912; With a copy to: 2. J. D. Clinton, Chairman of the Board Shop At Home, Inc. Brighton 1604 8231 Bay Colony Drive Naples, FL 33963; With a copy to: 3. Charles W. Bone, Esq. Wyatt, Tarrant & Combs 1500 Nashville City Center 511 Union Street Nashville, TN 37219 7. RELATIONSHIP OF PARTIES. 7.1. The parties agree that all methods of marketing the ED Cards by BUYER will be jointly agreed upon among the parties until the Payment Obligation has been paid in full. SELLER agrees to provide marketing and packaging enhancements in coordination with the total marketing efforts of BUYER. 7.2. BUYER agrees that BUYER, its employees, agents and representatives shall be acting as an independent contractor and shall not be considered or deemed to be an agent, employee, joint venturer, or partner of SELLER and shall, under no circumstances, be deemed agents or representatives of SELLER. Neither BUYER nor 10 SELLER shall have any right to enter into any contract or commitment in the name of, or on behalf of the other, or to bind the other in any respect whatsoever. 8. FORCE MAJEURE. 8.01. Neither party shall be liable in any manner whatsoever to the other party hereto, its customers, distributors or any other third parties in its privily for failure to perform its obligations under this Restated Agreement or fulfill any accepted order, or for delay in delivery of SELLER's products in the event that such performance or the fulfillment of any such order, or timely delivery thereof is prevented by or pursuant to any law, or governmental regulation or restriction, by any strike, lock-out or other labor dispute or casualty, or any cause beyond the control of the party, including, but not limited to, any "act of God", fire, flood, earthquake, storm, epidemic, quarantine restriction, war, insurrection or riot, civil unrest, freight embargo, delay, or extraordinary hardship in transportation, unusually severe weather, or inability to obtain necessary materials, labor, fuel, energy or manufacturing facilities due to any such causes. 9. ASSIGNMENT. 9.01. Except as hereafter provided, no right, interest, obligation or duty of BUYER under this Restated Agreement may be assigned, delegated or transferred without the prior written consent of SELLER. 10. CONFIDENTIALITY. 10.1. Neither BUYER nor SELLER nor any of their respective employees, agents and representatives shall disclose to any third party, at any time during the term of this Restated Agreement, any extension thereof, or any time after the termination of this Restated Agreement, any trade secrets, supply sources, prices, price policies, or any other information of the other party which is or are learned or supplied in confidence by the other party in relation to SELLER's products, affairs, business or methods of carrying on business. 11. FUTURE DEALINGS. 11.1. In the event SELLER is in a position to offer any other Elite Dominator set product and assuming BUYER is in full compliance with all the terms and conditions of this Restated Agreement, SELLER hereby grants to BUYER the first right to purchase said Elite Dominator set product or similar type exclusive baseball card set product. If and when SELLER is in a position to offer such new set product, SELLER shall notify BUYER in writing of the terms and conditions of such proposed sale. BUYER shall have thirty (30) calendar days in which to notify SELLER, in writing, of its desire to purchase such new set product upon the terms and 11 conditions set forth in SELLER's written notice. In the event BUYER does not so notify SELLER within thirty (30) calendar days, BUYER's first right to purchase the new set product shall terminate and become null and void. Provided BUYER is in full compliance with all the terms and conditions of this Restated Agreement; and, further provided, that BUYER is in full compliance with all the terms and conditions of any Agreement relating to any other Diamond Dominator set product or a similar type exclusive baseball card set product for which BUYER has exercised BUYER's first right to purchase granted by SELLER to BUYER under this Paragraph 11., this first right of purchase shall continue in existence until December 31, 2000; or, until BUYER is no longer in full and complete compliance with all the conditions precedent contained in both of the foregoing provisos, whichever first occurs. 12. DEFAULT. 12.1. The occurrence of any of the following events shall, at the option of the other party, be considered an Event of Default subject to the following terms and conditions: a. Any failure by a party to duly observe any materials covenant, condition or agreement of this Restated Agreement; b. The granting of a final judgment or the issuance of an order for a preliminary injunction which precludes a party from complying with the terms and conditions of this Restated Agreement. c. The occurrence of any event of default under any license agreement with Donruss, Leaf or any other party with respect to the ED Cards or any other rights granted with respect to those sets which precludes SELLER from shipping pursuant to the terms and conditions of this Restated Agreement. d. The insolvency or bankruptcy of a party, the making by a party of an assignment for the benefit of creditors, or the consent of a party to the appointment of a trustee or receiver or other office of the court or other tribunal. e. The appointment of a trustee, receiver or other officer of the court for a party, or for a substantial part of the properties of the party, without such party's consent, where no discharge is effected within sixty (60) days. f. The institution of bankruptcy, reorganization, insolvency, or liquidation proceedings by or against a party, and if against said party, where such proceeding is consented to by it. g. The issuance or entry of any attachment, replevin levy or lien against the ED Cards which precludes a party from 12 complying with the terms and conditions of this Restated Agreement, if not discharged, bonded or dismissed within thirty (30) days. 12.2. Said events shall not constitute an Event of Default unless, for any event for which a time period is not specified above, that event continues for a period of thirty (30) days after written notice to the defaulting party, provided, however, that said notice provisions and any other notice provisions contained in this agreement or any other document shall run concurrently and not successively. 13. RIGHT OF CANCELLATION. 13.1. In the Event of Default by a party, the other party shall have the right, at its sole option, in addition to such other rights and remedies as it may be accorded by law or elsewhere in this Restated Agreement, to terminate this Restated Agreement and all of its obligations hereunder, by written notice to the defaulting party, and non-defaulting party shall thereupon be relieved of and released from all further obligations thereafter to accrue hereunder; but in the event of termination of this Restated Agreement by an Event of Default, the defaulting party nevertheless shall remain liable to the non-defaulting party hereunder, for any and all damages which non-defaulting party may sustain by reason of defaulting party's failure to comply with any and all of the provisions of this Restated Agreement. 14. MISCELLANEOUS. 14.1. This Restated Agreement constitutes the complete agreement between the parties with respect to the subject matter and may not be changed, modified, amended, or revoked except by a writing signed by the party against which enforcement is sought to be charged. 14.2. Section headings in this Restated Agreement are for convenience or reference only and are not intended to qualify the meaning of any provision hereof. 14.3. Except as stated in this Restated Agreement, BUYER and SELLER acknowledge that no representation or statement, and no understanding or agreement, had been made, or exists, and that in entering into this Restated Agreement it has not relied upon anything done or said or upon any presumption in fact or in law, (i) with respect to this Restated Agreement or to the duration, termination, or renewal of this Restated Agreement, or with respect to the relationship between the parties, other than as expressly set forth in this Restated Agreement; or (ii) that in any way tends to change or modify the terms, or any of them, of this Restated Agreement or to prevent this Restated Agreement becoming effective; or (iii) that in any way affects or relates to the subject matter of this Restated Agreement. 13 14.4. Except as expressly provided in this Restated Agreement, waiver by either party, or failure by either party to claim a breach of any provision of this Restated Agreement shall not be, or held to be, a waiver of any breach or subsequent breach, or as affecting in any way the effectiveness of such provision. 14.5. Any notices required or permitted by this Restated Agreement, or given in connection herewith, shall be in writing and may be given by personal delivery or by first class registered mail, postage prepaid to the respective parties at their addresses first above listed. 14.6. If any part of this Restated Agreement shall be determined to be illegal or unenforceable, then such offending part or portion shall be deemed deleted from this Restated Agreement without affecting or impairing any other part of this Restated Agreement. 15. INSURANCE. 15.1. SELLER shall, throughout the term of this Restated Agreement, obtain and maintain at its own expense from a qualified insurance company licensed to do business in its place of business, standard fire, casualty loss and business interruption insurance, the form of which must be acceptable to BUYER, naming BUYER and SELLER as co-loss payee. Such policy shall provide protection against any and all claims, demands and causes of action arising out of any loss by fire, water, theft or otherwise in the ED product or any material used in connection therewith or any use thereof. The amount of coverage shall be a minimum of Two Million Dollars ($2,000,000.00) combined single limit, with no deductible amount, for each single occurrence for bodily injury and/or property damage. The policy shall provide for ten (10) days' notice to BUYER from the insurer by registered or certified mail, return receipt requested, in the event of any modification, cancellation or termination. SELLER agrees to furnish BUYER a certificate of insurance evidencing same within a reasonable time after execution of this Restated Agreement. 16. SECURITY AGREEMENT AND UCC STATEMENT. 16.1. BUYER and SELLER agree to execute a Security Agreement in favor of SELLER and UCC Statements for filing with the appropriate Ohio and county agencies within Ten (10) days of the filing of agreed upon dismissal entries of the Lawsuit. The unsold balance of the first 50,000 1993 Elite Dominator baseball cards shall secure the fulfillment of BUYER's obligations under the Restated agreement. BUYER shall release the UCC statements of record upon the entire payment of Payment Obligation or the delivery of the BUYER's common shares to SELLER in payment of the Payment Obligation, whichever shall last occur. 14 IN WITNESS WHEREOF, BUYER and SELLER have caused this Restated Agreement to be executed by their duly authorized officers effective as of the day and year first above written. SELLER: WITNESSES: RICHARD HOWARD, INC. /s/ Douglas W. Huffman By: /s/ G. Richard Howard - ---------------------------- ------------------------- G. RICHARD HOWARD /s/ Robert F. Sprague PRESIDENT - ---------------------------- BUYER: WITNESSES: SHOP AT HOME, INC. /s/ C. Michael Norton By: /s/ Kent E. Lillie - ---------------------------- ------------------------ KENT E. LILLIE /s/ Charles W. Bone PRESIDENT - ---------------------------- 15 FIRST AMENDMENT TO RESTATED AGREEMENT This FIRST AMENDMENT TO RESTATED AGREEMENT, dated March 7, 1996, is by and between RICHARD HOWARD, INC., an Ohio corporation ("Seller"), and SHOP AT HOME, INC., a Tennessee corporation ("Buyer"), and amends that certain Restated Agreement by and between the parties dated as of January 26, 1996 (the "Restated Agreement"). WITNESSETH; WHEREAS, the parties entered into the Restated Agreement for the purpose of describing the terms and conditions of their continuing business relationship under which Seller is selling to Buyer certain baseball card products referred to as the 1993 Elite Dominators; and WHEREAS, the Restated Agreement is premised on the assumption that each ED Card (consisting of one 1993 Elite Dominator baseball card and one box of 1993 Donruss baseball cards or other sports related product of comparable value) will be sold by the Seller to the Buyer at a basic price of $35 per ED Card (the "Basic Price"); and WHEREAS, the Seller and Buyer have, since agreeing upon the terms and conditions of the Restated Agreement, agreed that Seller will sell to the Buyer product consisting of one 1993 Elite Dominator baseball card along with other baseball cards with less value than a box of 1993 Donruss baseball cards at a price of $30 (as used herein the purchase of one 1993 Elite Dominator along with any assortment of other baseball cards or sports related material is referred to as "ED Card Product"); and WHEREAS, the parties wish to enter into this First Amendment for the purpose of describing the terms and conditions of the purchase of ED Card Product at a price at variance with the Basic Price. NOW, THEREFORE, the parties agree as follows: 1. The parties acknowledge that under the Restated Agreement, the Buyer has an obligation to pay to the Seller a total amount of $720,000 (the "Payment Obligation"), which under the terms of the Restated Agreement is partially payable in cash and partially payable in common stock of the Buyer. 2. The parties agree that if the Seller and Buyer reach an agreement for the purchase of ED Card Product in some form or in some manner at an agreed price (the "Changed Price") which is less or more than the Basic Price, the difference in price (the "Price Variance") will be reflected in the amount of the Payment Obligation. Accordingly, if the Changed Price is less than the Basic Price, the Price Variance multiplied by the number of ED Card Product purchased at the Changed Price shall be applied as a credit 16 to the Payment Obligation. In the event the parties agree to a Changed Price which is more that the Basic Price, the Price Variance multiplied by the number of ED Cards purchased at the Changed Price shall be added to the Payment Obligation. 3. The parties agree that the obligation of the Buyer to purchase 29,077 ED Cards from Seller, as described in Section 1.1 of the Restated Agreement, shall be satisfied by the purchase of 29,077 1993 Elite Dominator cards together with any assortment of baseball cards or sports related products agreed upon by the parties, regardless of the price. 4. Any change from the Basic Price described in the Restated Agreement shall be set forth in writing between the parties. 5. Except as specifically stated herein, no other terms or provisions of the Restated Agreement are changed or altered by this First Amendment. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the day and year first above written. [S] RICHARD HOWARD, INC. By: /s/ G. Richard Howard ------------------------ Title: Pres. SHOP AT HOME, INC. By: /s/ Kent E. Lillie ------------------------ Title: Pres. EX-10.40 5 MAJORITY STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.40 MAJORITY STOCK PURCHASE AGREEMENT THIS AGREEMENT, made and entered into this 3rd day of June, 1996, is by and between CHARLES E. WALKER (hereinafter "Seller"); URBAN BROADCAST SYSTEMS, INC., a Texas corporation (hereinafter "Corporation"); and BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., a Texas corporation (hereinafter "Buyer"). WITNESSETH WHEREAS, Seller is the holder of a fifty-one percent (51%) interest in the issued and outstanding stock of the Corporation; and WHEREAS, Buyer is the holder of a forty-nine percent (49%) interest in the issued and outstanding stock of the Corporation; and WHEREAS, the Corporation is the Licensee of Television Station KZJL, Channel 61, Houston, Texas (hereinafter "Station") pursuant to authorizations issued by the Federal Communications Commission (hereinafter "FCC"); and WHEREAS, Buyer has exercised its option, granted pursuant to the Majority Partnership Interests and Majority Stock Purchase Option dated the _____ day of May, 1993, by and between Seller and Buyer, and amended and restated by the Restated Majority Partnership Interests and Majority Stock Purchase Option between Buyer and Seller, executed on December 14, 1993, but made effective May 15, 1993; and as further amended by the letter agreement between Buyer and Seller dated December 6, 1994; and 2 WHEREAS, Seller and Buyer are unable to consummate Buyer's exercise of said option without the prior written approval of the FCC. NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. Partnership Interests and Stock Purchase. Seller agrees to sell to Buyer, at Closing, as herein defined, all of the issued and outstanding stock of the Corporation owned by Seller, representing fifty-one percent (51%) of the outstanding stock of the Corporation, free and clear of all liens or encumbrances. Said stock is and will be fully paid and non-assessable upon the performance by the Buyer of all of its obligations contained herein. 2. Purchase Price. For Seller's common stock in the Corporation, Buyer agrees to deliver to Seller, at Closing, a Promissory Note in the form of that attached hereto as Annex I for the principal amount of One Million Four Hundred Thousand Dollars ($1,400,000.00) with interest at six percent (6%) per annum and payable as follows: A. Beginning thirty (30) days following Closing, twelve (12) equal monthly payments of Seven Thousand Dollars ($7,000.00) each, representing interest only at six percent (6%) per annum on the principal of One Million Four Hundred Thousand Dollars ($1,400,000.00); and B. Followed by one hundred twenty (120) monthly payments of Fifteen Thousand Five Hundred Forty-two and 87/100 3 Dollars ($15,542.87) which shall include principal and interest at six percent (6%) per annum; and. C. The Note shall provide that the outstanding balance under the Note shall become due and payable upon (1) the assignment of the Station License; or (2) the sale of a majority of the stock of Corporation owned by Buyer such that FCC consent to a transfer of control is required; however, should the monies received at Closing upon such assignment or transfer of control be less than twice the amount then owed to Seller, proceeds shall be divided equally, with any future payments to be received also divided equally between Buyer and Seller, until the Seller's Note is fully paid; except that, Seller shall at no time receive any amount which will be less than would be received under the payment schedule as outlined in 2.(a) and 2.(b) above. 3. FCC Application and Approval. A. The parties agree to proceed as expeditiously as practicable, but in any event not later than fifteen (15) days after execution of this Agreement, to file or cause to be filed, an application requesting FCC consent to the transaction contemplated herein. Seller and Buyer shall prosecute said transfer application in good faith with due diligence, and shall cooperate fully with each other and with the FCC in the prosecution of the application. Seller and Buyer shall each bear its own legal fees and any and all costs and expenses with respect to the sale and purchase of the stock covered by this Agreement, but shall share equally the FCC filing fee of Six Hundred Fifty Dollars ($650.00). 4 B. If the FCC has failed to grant its written consent to the transaction contemplated herein within nine (9) months after the date the application is accepted for filing by the FCC, or if the FCC shall designate the application for hearing, either Seller or Buyer may terminate this Agreement upon ten (10) days written notice to the other. In the event of such termination, Seller and Buyer agree to use their best efforts to pursue sale of all of the stock of Corporation or all of the assets of Corporation to a third party, in accordance with the provisions of paragraph 7 hereof. Termination pursuant to this paragraph is without prejudice to the rights of the parties, as against each other, for actions or inaction causing the FCC to fail to grant its consent. 4. Operation Until Closing. Until the Closing pursuant to this Agreement or until consummation of the sale of the common stock or assets of Corporation to a third party, Corporation shall remain in control of the Station and shall operate Station in accordance with the provisions of paragraph 3 of the Minority Partnership Interests and Minority Stock Purchase Agreement dated the _______ day of May, 1993. 5. Closing. A. Closing shall take place within ten (10) days after the grant by the FCC of its consent to the transaction contemplated herein has become a final order, not subject to administrative or judicial review, reconsideration or appeal, but may take place earlier upon mutual agreement of the parties. The exact date, time and place of Closing shall be specified by Seller upon five (5) days advance written notice to Buyer. 5 B. At Closing, Seller shall deliver to Buyer properly endorsed certificates evidencing its fifty-one percent (51%) interest in Corporation, and the resignation of its nominees as members of the Board of Directors and as officers of the Corporation. C. At Closing, Buyer shall execute and deliver the Promissory Note attached hereto as Annex I along with the Security Agreement to Seller as set forth in paragraph 2 herein. 6. Sale to Third Party. A. In the event of termination of this Agreement pursuant to the provisions of paragraph 3(b) hereof, Seller and Buyer may, upon ten (10) days written notice to each other, mutually require one another's cooperation for the sale, upon the most favorable terms reasonably obtainable, of all of the stock of Corporation or of all of the assets of the Corporation to a third party. Such sale shall be subject to the prior written consent of FCC. B. Within fifteen (15) days after the notice given pursuant to paragraph 6(a) hereof, Seller and Buyer shall deliver, each to the other, a detailed itemization of all out-of-pocket disbursements and expenses incurred by Seller or Buyer, in connection with the following: [1] Seller's obtaining any subsequent modifications to the Construction Permit; [2] Seller's and the Corporation's obtaining FCC's consent to the assignment of the Station from Seller to Buyer, and the assignment of the Station; 6 [3] Negotiating the Minority Partnership Interests and Minority Stock Purchase Agreement dated May _____, 1993, and Majority Partnership Interests and Majority Stock Option Agreement dated May ______, 1993 and this Majority Stock Purchase Agreement; and [4] The execution and performance of those documents set forth in paragraph 6(b)(iii) hereof. It is expressly agreed that none of the aforesaid expenses shall include amounts incurred by Buyer or the Corporation in connection with the construction, activation, and operation of Station. C. All proceeds from the sale of the common stock or the assets of the Corporation to the third party, as provided herein, shall be applied in the following manner: [1] All outstanding indebtedness of the Corporation, including indebtedness to Seller and Buyer, shall be paid in full, and a sufficient allocation shall be set aside in a reserve fund to satisfy any additional obligations of the Corporation, including any additional obligations to Seller and to Buyer; [2] The documented out-of-pocket disbursements and expenses provided for in paragraph 7(b) hereof shall be reimbursed in full, without interest; [3] The remainder of the proceeds shall be divided fifty-one percent (51%) to Seller and forty-nine percent (49%) to Buyer. 7. Brokers. Buyer and Seller hereby acknowledge that the services of The Proctor Group, Inc., Communications Broker, of Woodville, Texas, has been engaged as a broker or finder in 7 connection with this transaction, and Buyer expressly agrees to pay said broker's fee on the date of Closing. Buyer shall hold the Seller harmless against any claim for broker's fees, finder's fee, or commissions arising in connection with this transaction. 8. Complete Agreement. This Agreement, the Minority Partnership Interests and Minority Stock Purchase Agreement, the Majority Partnership Interests and Majority Stock Purchase Option, as restated and amended, and the Construction Agreement, as amended, and the letter agreement between Buyer and Seller dated December 6, 1994, represent the complete understanding of the parties with respect to the subject matter hereof, and are binding upon the parties, their heirs, successors and assigns. 9. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of Texas. 10. Headings. Headings of the sections of the Agreement are for convenience only and do not affect the construction of this Agreement. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ Charles E. Walker --------------------------------- Charles E. Walker, An individual residing in the State of Texas URBAN BROADCASTING SYSTEMS, INC., A Texas corporation 8 By: /s/ Charles E. Walker -------------------------------- Charles E. Walker, President BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., A Texas corporation By: /s/ Kent E. Lillie -------------------------------- Kent E. Lillie, President STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on the third day of June, 1996 by Charles E. Walker. /s/ Rise M. Pointer -------------------------------- Notary Public in and for the State of Texas Rise M. Pointer -------------------------------- Printed Name 7/31/99 -------------------------------- My Commission Expires 9 STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on the third day of June, 1996 by Charles E. Walker, President, Urban Broadcasting Systems, Inc., a Texas corporation. /s/ Rise M. Pointer ---------------------------- Notary Public in and for the State of Texas Rise M. Pointer ---------------------------- Printed Name 7/31/99 ---------------------------- My Commission Expires STATE OF TEXAS ) ) COUNTY OF HARRIS ) This instrument was acknowledged before me on the third day of June, 1996 by Kent E. Lillie, President, Broadcast, Cable and Satellite Technologies, Inc., a Texas corporation. /s/ Rise M. Pointer ---------------------------- Notary Public in and for the State of Texas Rise M. Pointer ---------------------------- Printed Name 7/31/99 ---------------------------- My Commission Expires 10 ANNEX I PROMISSORY NOTE DATE OF NOTE: ______________________________________, 1996 AMOUNT OF NOTE: ONE MILLION FOUR HUNDRED THOUSAND DOLLARS AND NO/100 ($1,400,000.00) MATURITY DATE: 132 months from the date hereof INTEREST RATE: Six Percent (6%) per annum until the Maturity Date PREPAYMENT: The Makers hereof reserve the right to repay this Note in whole or in part any time hereafter without penalty. FOR VALUE RECEIVED, the undersigned BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., a Texas corporation (hereinafter referred to as "Maker"), promises to pay to the order of CHARLES E. WALKER, a Texas resident, or his heirs, successors, or assigns (hereinafter referred to as "Holder"), located at 1800 West Loop South, Suite 1850, Houston, Texas 77027, or at such other place as the Holder may designate to the Maker in writing from time to time, in legal tender of the United States, the Amount of the Note in the following manner: Beginning thirty (30) days from the date of this Note, twelve (12) monthly payments of $7,000.00 each, representing interest only, with the first such payment due on ________________, 1996, and subsequent payments due on the same date of each month for the following eleven (11) months; and Followed by one hundred twenty (120) monthly payments of $15,542.87, which shall include principal and interest, with the first such payment due on ______________, 1997, and subsequent payments due on the same date of each month for the following 119 months; provided, however, that the outstanding balance hereon shall become due and payable upon (i) the sale of all or substantially all of the assets of the Station (as defined in that certain Majority Stock Purchase Agreement (the "Agreement") dated June 3, 1996, by and between Holder and Maker) and the assignment of the Station's license, or (ii) the sale of stock issued by the Licensee of the Station or by the corporation(s) controlling the Station's license such that FCC consent to a transfer of control is required; provided further, however, that should the monies received at the 11 closing upon such assignment or transfer of control be less than twice the amount then owed to Holder, proceeds shall be divided equally, with any future payments to be received also divided equally, until this Note has been fully paid, except that, Holder shall at no time receive any amount which will be less than that which would be received as provided above in this Note. All prepayments shall be applied first to interest and then any remaining balance shall be applied to principal. AFTER MATURITY OF THIS NOTE, WHETHER BY THE TERMS HEREOF OR BY THE HOLDER EXERCISING ITS RIGHTS TO ACCELERATE THIS NOTE, INTEREST SHALL ACCRUE ON THE PRINCIPAL BALANCE AT THE HIGHEST LAWFUL RATE OF INTEREST ALLOWABLE UNDER THE LAWS OF THE STATE OF TEXAS OR, IF NO MAXIMUM RATE IS PRESCRIBED BY LAW, AT TWENTY PERCENT (20%) PER ANNUM. This Note may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity, or in bankruptcy, receivership or any other court proceeding (whether at the trial or appellate level), or should this Note be placed in the hand of attorneys for collection upon default, the Maker agrees to pay, in addition to the principal, premium and interest due and payable thereon, all costs of collecting or attempting to collect this Note, including attorneys' fees. All parties to this Note, whether Maker, principal, surety, guarantor or endorser, hereby waive presentment for payment, demand, notice, protest, notice of protest and notice of dishonor. Anything herein to the contrary notwithstanding, the obligations of the Maker under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Holder would be contrary to provisions of law applicable to the Holder limiting the maximum rate of interest which may be charged or collected by the Holder. The term "Maker" as used herein, in every instance shall include the Maker's successors and assigns. The term "Business Day" as used herein shall mean every day of the year, with the exception of each Saturday, each Sunday, and each holiday on which national banks are normally closed for business. In the event any monthly payment date hereunder falls on a day other than a Business Day, the payment shall be considered to be due and payable on the next succeeding Business Day. 12 In the event the Maker fails to make a payment hereunder on the payment due date, this Note shall not be considered to be in default unless (i) the Holder shall give the Maker written notice of such failure to pay on or before 10:00 a.m., Eastern time, and the Maker shall thereafter fail to deliver such payment to the Holder before 5:00 p.m., Houston, Texas time, on the first Business Day after such notice is given to the Maker, or (ii) the Holder shall give the Maker written notice of such failure to pay after 10:00 a.m., Eastern time, and the Maker shall thereafter fail to deliver such payment to the Holder before 5:00 p.m., Houston, Texas time, on the second Business Day after such notice is given to the Maker. Notice shall be given by facsimile transmission to the Chief Executive Officer and the Chief Financial Officer of the Maker at the numbers specified on the signature page of this Note, provided such officers may change the numbers by written notice to the Holder. This Note is made pursuant to, and is entitled to the benefits of the Security Agreement of even date herewith and is subject to the provisions thereof, and is to be construed and enforced in accordance with the laws of the State of Texas. The Security Agreement specifies various defaults upon the happening of which all sums owing on this Note may be declared immediately due and payable. BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC. A Texas corporation By: ----------------------------- Kent E. Lillie President The Maker's obligations under this Note are guaranteed by Shop at Home, Inc., the sole shareholder of Maker. SHOP AT HOME, INC. A Tennessee corporation By: ---------------------------- Kent E. Lillie President Notices sent to: Kent E. Lillie, President and CEO Shop at Home, Inc. 13 Facsimile (404) 848-7795 Joseph Nawy, Vice President of Finance Shop at Home, inc. Facsimile (423) 687-7165 14 SECURITY AGREEMENT THIS AGREEMENT, made this ________ day of ___________________________, 1996, by and between BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., a Texas corporation (hereinafter referred to as "Debtor") and CHARLES E. WALKER, a Texas resident, or his heirs, successors, or assigns (hereinafter referred to as "Secured Party"), located at ____________________________, Houston, Texas ________. W I T N E S S E T H: WHEREAS, Debtor is indebted to the Secured party in the amount of $1,400,000.00 plus accrued and unpaid interest as evidenced by that certain Promissory Note of even date herewith (the "Note"); WHEREAS, Debtor acquired on the date herewith from Secured Party the property described in Exhibit "A" attached hereto and by this reference incorporated herein; and WHEREAS, the Secured Party has requested and the Debtor has agreed to grant to the Secured Party a security interest in the property purchased by Debtor from Secured Party as hereinafter described. NOW, THEREFORE, in consideration of the premises which shall be deemed a part of this Agreement and not merely as recitals thereto, the parties hereto, intending to be legally bound thereby, agree as follows: ARTICLE 12. GRANT OF SECURITY INTEREST Debtor, to secure prompt payment of the indebtedness evidenced by the Note and for other valuable consideration, receipt whereof is hereby acknowledged, hereby pledges and assigns to Secured Party a continuing first lien in and to all equipment, machinery, furniture, furnishings and other personal property purchased by Debtor from Secured Party, including but not limited to, those items listed on Exhibit "A" attached hereto and by this reference incorporated herein and any proceeds or substitutions thereof ("Collateral"). ARTICLE 13. COVENANTS OF THE DEBTOR A. To further secure the payment of the indebtedness evidenced by the Note, the Debtor agrees as follows: [1] To pay the Notes secured by this Agreement according to their terms; [2] To pay prior to delinquency all taxes assessed against the Collateral; 15 [3] To execute any instrument or statement required by law or otherwise necessary to effectuate the purposes and provisions of this Agreement, and necessary in order to perfect, or continue the security interest of Secured Party in the Collateral; [4] Not to sell, transfer, assign or otherwise dispose of any of the Collateral without the prior written consent of Secured Party; [5] To take any and all steps required to protect the Collateral; [6] To take all steps necessary to protect the priority of the security interest granted by the Debtor to the Secured Party herein; [7] Not to cause anything to be done which may materially impair the value of the Collateral, except for wear and tear in the normal course of business, or the security interest intended to be granted to the Secured Party by this Security Agreement; [8] To promptly notify the Secured Party of any claim, action or proceeding affecting title to the Collateral or any material part thereof, or the security interest created under this Agreement, of which the Debtor has knowledge or reasonably should have knowledge; and [9] To keep the Collateral insured against fire (including extended coverage) and other normally insurable hazards, to the extent of the full insurable value thereof, by responsible insurance companies authorized to do business in the State of Texas, which insurance shall be reasonably acceptable to Secured Party. B. Failure to Perform Covenants. Should any covenant, duty or agreement of the Debtor fail to be performed in accordance with its terms hereunder, the Secured Party may, but shall not be obligated to, perform or attempt to perform such covenant, duty or agreement on behalf of the Debtor and any amount expended by the Secured Party in performance or attempted performance shall be paid by the Debtor of the Secured Party, payment of which amount shall be secured by the Collateral as if such amounts were part of the amount due and owing under the Note. ARTICLE 14. DEFAULT A. Events of Default. The following shall constitute an Event of Default under this Security Agreement. [1] Any default under the terms and conditions of the Note; 16 [2] Failure by the Debtor to comply with and perform any of their covenants under this Agreement within thirty (30) days of receipt of written notice of such failure by the Secured Party to the Debtor; [3] Commencement of any insolvency proceedings by or against the Debtor under the Federal Bankruptcy Code or the commencement of any proceedings by or against the Debtor under any law relating to the bankruptcy, insolvency, reorganization or relief of or the commencement of any proceedings for composition, extension, arrangement or adjustment of any of the debts or obligations of the Debtor if any of such proceedings are not dismissed within ninety (90) days of commencement; [4] Subjection of the Collateral, or any part hereof, to levy under a writ of execution, or a writ of replevin, or other like judicial process; and [5] Debtor makes an assignment for the benefit of creditors of all or substantially all of its assets. ARTICLE 15. RIGHTS AND REMEDIES IN DEFAULT A. Rights and Remedies. Upon the occurrence of any of the above Events of Default and at any time thereafter (such default not having been previously cured), the Secured Party in addition to all rights and remedies available to it as secured party under the Uniform Commercial Code of the State of Texas, which rights and remedies shall be exercisable immediately, the Secured Party may, at its option, declare the Note secured hereby to be immedi- ately due and payable without demand or notice of any kind whatsoever. Notwithstanding the foregoing, in that the Collateral consists of the pledge of stock of the licensee of Television Station KZJL, Houston, Texas, the voting rights to such stock will remain with the Debtor, even in the event of default hereunder or under the Note, and in the event of such a default there is a private or public sale of such stock, prior to the exercise of any stockholder rights by the purchaser at such a sale, the prior consent of the Federal Communications Commission, pursuant to the requirements of 47 U.S.C. Section 310 (d) will be obtained. B. Expenses. Upon the occurrence of any of the above Events of Default, and upon the exercise by the Secured Party of the remedies of a secured party under the Uniform Commercial Code of the State of Texas, the Secured Party's reasonable attorneys' fees and the legal and other expenses for pursuing, searching for, receiving, taking, keeping, storing, advertising, and selling the Collateral shall be chargeable to the Debtor. ARTICLE 16. REPRESENTATIONS AND WARRANTIES OF DEBTOR AND COMPANIES A. The Debtor represents and warrants as follows: 17 [1] The Debtor has authority to execute and deliver this Security Agreement; [2] No security interest, other than the security interests created herein, has attached or been perfected in the Collateral or any part thereof in favor of any party other than the Secured Party and no other security agreement covering the Collateral has been made and no financing statement covering the Collateral has been filed with any filing officer. The security interest of the Secured Party in the Collateral, when perfected, will be superior to the security interest of any other party. ARTICLE 17. OTHER AGREEMENTS A. The parties further agree as follows: [1] This Agreement shall be terminated, and it shall no longer be of any force or effect, as soon as the indebtedness evidenced by the Note is paid in full; and thereupon, Secured Party shall promptly file the necessary documentation to reflect a termination of its security interest in the Collateral; [2] No delay in the enforcement of the rights of Secured Party under this Agreement or the Note shall constitute a waiver or prejudice the rights of Secured Party with respect to the Collateral; [3] This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, and legal representatives; [4] Neither this Agreement nor any term or provision hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom or which the enforcement or the change, waiver, discharge or termination is sought; and [5] This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Debtor and the Secured Party have respectively signed this Agreement as of the date first above written. DEBTOR: BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., a Texas corporation 18 By: ---------------------------- Kent E. Lillie President SECURED PARTY: ------------------------------- Charles E. Walker, Individually 19 EXHIBIT "A" TO SECURITY AGREEMENT 100% of the issued and outstanding shares of common stock in Urban Broadcasting Systems, Inc., a Texas corporation. EX-10.41 6 PROMISSORY NOTE 1 EXHIBIT 10.41 PROMISSORY NOTE DATE OF NOTE: September 5, 1996 AMOUNT OF NOTE: ONE MILLION FOUR HUNDRED THOUSAND DOLLARS AND NO/100 ($1,400,000.00) MATURITY DATE: 132 months from the date hereof INTEREST RATE: Six Percent (6%) per annum until the Maturity Date PREPAYMENT: The Makers hereof reserve the right to repay this Note in whole or in part any time hereafter without penalty. FOR VALUE RECEIVED, the undersigned BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., a Texas corporation, and SHOP AT HOME, INC., a Tennessee corporation (hereinafter collectively referred to as "Maker"), jointly and severally promise to pay to the order of CHARLES E. WALKER, a Texas resident, or his heirs, successors, or assigns (hereinafter referred to as "Holder"), located at 1800 West Loop South, Suite 1850, Houston, Texas 77027, or at such other place as the Holder may designate to the Maker in writing from time to time, in legal tender of the United States, the Amount of the Note in the following manner: Beginning thirty (30) days from the date of this Note, twelve (12) monthly payments of $7,000.00 each, representing interest only, with the first such payment due on October 5, 1996, and subsequent payments due on the same date of each month for the following eleven (11) months; and Followed by one hundred twenty (120) monthly payments of $15,542.87, which shall include principal and interest, with the first such payment due on October 5, 1997, and subsequent payments due on the same date of each month for the following 119 months; provided, however, that the outstanding balance hereon shall become due and payable upon (i) the sale of all or substantially all of the assets of the Station (as defined in that certain Majority Stock Purchase Agreement (the "Agreement") dated June 3, 1996, by and between Holder and Maker) and the assignment of the Station's license, or (ii) the sale of stock issued by the Licensee of the Station or by the corporation(s) controlling the Station's license such that FCC consent to a transfer of control is required; 2 provided further, however, that should the cash monies received at the closing upon such assignment or transfer of control be less than twice the amount then owed to Holder, cash proceeds shall be divided equally, with any future cash payments to be received also divided equally, until this Note has been fully paid, except that, Holder shall at no time receive any amount which will be less than that which would be received as provided above in this Note. All such cash payments shall be considered prepayments of this Note. All prepayments shall be applied first to interest and then any remaining balance shall be applied to principal in inverse order of maturity. AFTER MATURITY OF THIS NOTE, WHETHER BY THE TERMS HEREOF OR BY THE HOLDER EXERCISING ITS RIGHTS TO ACCELERATE THIS NOTE, INTEREST SHALL ACCRUE ON THE PRINCIPAL BALANCE AT THE HIGHEST LAWFUL RATE OF INTEREST ALLOWABLE UNDER THE LAWS OF THE STATE OF TEXAS OR, IF NO MAXIMUM RATE IS PRESCRIBED BY LAW, AT TWENTY PERCENT (20%) PER ANNUM. This Note may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity, or in bankruptcy, receivership or any other court proceeding (whether at the trial or appellate level), or should this Note be placed in the hand of attorneys for collection upon default, the Maker agrees to pay, in addition to the principal, premium and interest due and payable thereon, all costs of collecting or attempting to collect this Note, including attorneys' fees. All parties to this Note, whether Maker, principal, surety, guarantor or endorser, hereby waive presentment for payment, demand, notice, protest, notice of protest and notice of dishonor. Anything herein to the contrary notwithstanding, the obligations of the Maker under this Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt of any such payment by the Holder would be contrary to provisions of law applicable to the Holder limiting the maximum rate of interest which may be charged or collected by the Holder. The term "Maker" as used herein, in every instance shall include the Maker's successors and assigns. The term "Business Day" as used herein shall mean every day of the year, with the exception of each Saturday, each Sunday, and each holiday on which national banks are normally closed for business. 3 In the event any monthly payment date hereunder falls on a day other than a Business Day, the payment shall be considered to be due and payable on the next succeeding Business Day. In the event the Maker fails to make a payment hereunder on the payment due date, this Note shall not be considered to be in default unless (i) the Holder shall give the Maker written notice of such failure to pay on or before 10:00 a.m., Eastern time, and the Maker shall thereafter fail to deliver such payment to the Holder before 5:00 p.m., Houston, Texas time, on the first Business Day after such notice is given to the Maker, or (ii) the Holder shall give the Maker written notice of such failure to pay after 10:00 a.m., Eastern time, and the Maker shall thereafter fail to deliver such payment to the Holder before 5:00 p.m., Houston, Texas time, on the second Business Day after such notice is given to the Maker. Notice shall be given by facsimile transmission to the Chief Executive Officer and the Chief Financial Officer of the Maker at the numbers specified on the signature page of this Note, provided such officers may change the numbers by written notice to the Holder. The provisions of the preceding paragraph shall not be applicable following a sale of all or substantially all of the assets of the Station or a transfer of control of the Station detailed on page one of this Note. This Note is made pursuant to, and is entitled to the benefits of the Security Agreement of even date herewith and is subject to the provisions thereof, and is to be construed and enforced in accordance with the laws of the State of Texas. The Security Agreement specifies various defaults upon the happening of which all sums owing on this Note may be declared immediately due and payable. BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC. A Texas corporation By: /s/ Kent E. Lillie --------------------------------- Kent E. Lillie President FAX: 404 848-7795 SHOP AT HOME, INC. A Tennessee corporation By: /s/ Kent E. Lillie --------------------------------- Kent E. Lillie President 4 Joseph Nawy, V.P./Finance (CFO) FAX: 404 687-7165 EX-10.42 7 SECURITY AGREEMENT 1 EXHIBIT 10.42 SECURITY AGREEMENT THIS AGREEMENT, made this 5th day of September, 1996, by and between BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., a Texas corporation (hereinafter referred to as "Debtor") and CHARLES E. WALKER, a Texas resident, or his heirs, successors, or assigns (hereinafter referred to as "Secured Party"), located at 1800 West Loop South, Houston, Texas 77027. W I T N E S S E T H: WHEREAS, Debtor is indebted to the Secured party in the amount of $1,400,000.00 plus accrued and unpaid interest as evidenced by that certain Promissory Note of even date herewith (the "Note"); WHEREAS, Debtor acquired on the date herewith from Secured Party the property described in Exhibit "A" attached hereto and by this reference incorporated herein; and WHEREAS, the Secured Party has requested and the Debtor has agreed to grant to the Secured Party a security interest in the property purchased by Debtor from Secured Party as hereinafter described. NOW, THEREFORE, in consideration of the premises which shall be deemed a part of this Agreement and not merely as recitals thereto, the parties hereto, intending to be legally bound thereby, agree as follows: ARTICLE 18. GRANT OF SECURITY INTEREST Debtor, to secure prompt payment of the indebtedness evidenced by the Note and for other valuable consideration, receipt whereof is hereby acknowledged, hereby pledges and assigns to Secured Party a continuing first lien in and to all equipment, machinery, furniture, furnishings and other personal property purchased by Debtor from Secured Party, including but not limited to, those items listed on Exhibit "A" attached hereto and by this reference incorporated herein and any proceeds or substitutions thereof ("Collateral"). ARTICLE 19. COVENANTS OF THE DEBTOR A. To further secure the payment of the indebtedness evidenced by the Note, the Debtor agrees as follows: [1] To pay the Notes secured by this Agreement according to their terms; 2 [2] To pay prior to delinquency all taxes assessed against the Collateral; [3] To execute any instrument or statement required by law or otherwise necessary to effectuate the purposes and provisions of this Agreement, and necessary in order to perfect, or continue the security interest of Secured Party in the Collateral; [4] Not to sell, transfer, assign or otherwise dispose of any of the Collateral without the prior written consent of Secured Party; [5] To take any and all steps required to protect the Collateral; [6] To take all steps necessary to protect the priority of the security interest granted by the Debtor to the Secured Party herein; [7] Not to cause anything to be done which may materially impair the value of the Collateral, except for wear and tear in the normal course of business, or the security interest intended to be granted to the Secured Party by this Security Agreement; [8] To promptly notify the Secured Party of any claim, action or proceeding affecting title to the Collateral or any material part thereof, or the security interest created under this Agreement, of which the Debtor has knowledge or reasonably should have knowledge; and [9] To keep the Collateral insured against fire (including extended coverage) and other normally insurable hazards, to the extent of the full insurable value thereof, by responsible insurance companies authorized to do business in the State of Texas, which insurance shall be reasonably acceptable to Secured Party. B. Failure to Perform Covenants. Should any covenant, duty or agreement of the Debtor fail to be performed in accordance with its terms hereunder, the Secured Party may, but shall not be obligated to, perform or attempt to perform such covenant, duty or agreement on behalf of the Debtor and any amount expended by the Secured Party in performance or attempted performance shall be paid by the Debtor of the Secured Party, payment of which amount shall be secured by the Collateral as if such amounts were part of the amount due and owing under the Note. ARTICLE 20. DEFAULT A. Events of Default. The following shall constitute an Event of Default under this Security Agreement. 3 [1] Any default under the terms and conditions of the Note; [2] Failure by the Debtor to comply with and perform any of their covenants under this Agreement within thirty (30) days of receipt of written notice of such failure by the Secured Party to the Debtor; [3] Commencement of any insolvency proceedings by or against the Debtor under the Federal Bankruptcy Code or the commencement of any proceedings by or against the Debtor under any law relating to the bankruptcy, insolvency, reorganization or relief of or the commencement of any proceedings for composition, extension, arrangement or adjustment of any of the debts or obligations of the Debtor if any of such proceedings are not dismissed within ninety (90) days of commencement; [4] Subjection of the Collateral, or any part hereof, to levy under a writ of execution, or a writ of replevin, or other like judicial process; and [5] Debtor makes an assignment for the benefit of creditors of all or substantially all of its assets. ARTICLE 21. RIGHTS AND REMEDIES IN DEFAULT A. Rights and Remedies. Upon the occurrence of any of the above Events of Default and at any time thereafter (such default not having been previously cured), the Secured Party in addition to all rights and remedies available to it as secured party under the Uniform Commercial Code of the State of Texas, which rights and remedies shall be exercisable immediately, the Secured Party may, at its option, declare the Note secured hereby to be immedi- ately due and payable without demand or notice of any kind whatsoever. Notwithstanding the foregoing, in that the Collateral consists of the pledge of stock of the licensee of Television Station KZJL, Houston, Texas, the voting rights to such stock will remain with the Debtor, even in the event of default hereunder or under the Note, and in the event of such a default there is a private or public sale of such stock, prior to the exercise of any stockholder rights by the purchaser at such a sale, the prior consent of the Federal Communications Commission, pursuant to the requirements of 47 U.S.C. Section 310 (d) will be obtained. B. Expenses. Upon the occurrence of any of the above Events of Default, and upon the exercise by the Secured Party of the remedies of a secured party under the Uniform Commercial Code of the State of Texas, the Secured Party's reasonable attorneys' fees and the legal and other expenses for pursuing, searching for, receiving, taking, keeping, storing, advertising, and selling the Collateral shall be chargeable to the Debtor. ARTICLE 22. 4 REPRESENTATIONS AND WARRANTIES OF DEBTOR AND COMPANIES A. The Debtor represents and warrants as follows: [1] The Debtor has authority to execute and deliver this Security Agreement; [2] No security interest, other than the security interests created herein, has attached or been perfected in the Collateral or any part thereof in favor of any party other than the Secured Party and no other security agreement covering the Collateral has been made and no financing statement covering the Collateral has been filed with any filing officer. The security interest of the Secured Party in the Collateral, when perfected, will be superior to the security interest of any other party. ARTICLE 23. OTHER AGREEMENTS A. The parties further agree as follows: [1] This Agreement shall be terminated, and it shall no longer be of any force or effect, as soon as the indebtedness evidenced by the Note is paid in full; and thereupon, Secured Party shall promptly file the necessary documentation to reflect a termination of its security interest in the Collateral; [2] No delay in the enforcement of the rights of Secured Party under this Agreement or the Note shall constitute a waiver or prejudice the rights of Secured Party with respect to the Collateral; [3] This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, and legal representatives; [4] Neither this Agreement nor any term or provision hereof may be changed, waived, discharged or terminated orally or in any manner other than by an instrument in writing signed by the party against whom or which the enforcement or the change, waiver, discharge or termination is sought; and [5] This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Debtor and the Secured Party have respectively signed this Agreement as of the date first above written. DEBTOR: BROADCAST, CABLE AND SATELLITE TECHNOLOGIES, INC., 5 a Texas corporation By: /s/ Kent E. Lillie --------------------------- Kent E. Lillie President SECURED PARTY: /s/ Charles E. Walker ------------------------------ Charles E. Walker, Individually 6 EXHIBIT "A" TO SECURITY AGREEMENT 100% of the issued and outstanding shares of common stock in Urban Broadcasting Systems, Inc., a Texas corporation, consisting of the following: Stock Certificate No. 3 for 490 shares registered to Broadcast, Cable and Satellite Technologies, Inc. Stock Certificate No. 4 for 510 shares registered to Broadcast, Cable and Satellite Technologies, Inc. EX-21.1 8 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 Subsidiaries of the Company: Name State of Incorporation - ---- ---------------------- MFP, Inc. Tennessee RF Scientific Transportables, Inc. Alabama SAH Acquisition Corporation Tennessee Broadcast, Cable and Satellite Technologies, Inc. Texas The following corporation is a subsidiary of Broadcast, Cable and Satellite Technologies, Inc.: Urban Broadcasting Systems, Inc. Texas EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SHOP AT HOME, INC. FOR THE YEAR ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1,914,759 0 380,077 0 2,611,142 5,273,163 5,215,844 1,745,618 20,286,670 8,979,793 0 0 1,393,430 26,438 2,081,961 20,286,670 40,016,114 40,732,212 24,516,348 41,446,520 0 0 794,558 (1,508,866) (103,394) 0 0 0 0 (1,405,472) (0.14) (0.14)
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