-----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, EDv38qYpcDXvIn7tggayzWzDwNCdTR9qjPdpRS+41fGPLGzZcOAqb4s40YzM3BNK qSJgR+Y87qysjfAJqdK+Mg== 0000950144-97-010489.txt : 19970930 0000950144-97-010489.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950144-97-010489 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 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: SEC FILE NUMBER: 000-25596 FILM NUMBER: 97687640 BUSINESS ADDRESS: STREET 1: 5210 SCHUBERT RD STREET 2: P O BOX 12600 CITY: KNOXVILLE STATE: TN ZIP: 37912 BUSINESS PHONE: 6156880300 MAIL ADDRESS: STREET 1: 5210 SCHUBERT ROAD STREET 2: P O BOX 12600 CITY: KNOXVILLE STATE: TN ZIP: 37912 10-K 1 SHOP AT HOME FORM 10-K 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 For the fiscal year ended June 30, 1997 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission File number 0-25596 ------- SHOP AT HOME, INC. ------------------ (Exact name of registrant as specified in its charter)
TENNESSEE 62-1282758 - --------- ---------- (State 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 22,1997 was: $43,633,191 Number of shares of Common Stock outstanding as of October 1, 1997: 11,074,414 Documents Incorporated by Reference ----------------------------------- The Registrant's definitive Proxy Statement in connection with the 1997 Annual Meeting of Shareholders 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, 1997 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 and distribution of merchandise and retail products through televised programs broadcast to cable television system subscribers, television station viewers and owners of satellite dish receivers. The Company originates twenty-four hours of live programming each day and broadcasts that programming by satellite. It is viewable by up to 30 million households as of June 30, 1997 and recently as of mid-September, 1997, the Company has added an additional 11 million part-time households through its programming on the Inspirational Network. The Company's programming is currently viewable by a total of 41 million (estimated) households throughout North America during all or a portion of each day. 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 in Houston, and to an "ad hoc" network of over 70 independently owned television stations and cable systems throughout 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), maintains a corporate and investor relations office in Nashville, Tennessee, a cable affiliate development office in Denver, Colorado, and the offices of its subsidiary, Collector's Edge of Tennessee, Inc. in Denver, Colorado. The Company's programming features a variety of consumer products, including jewelry, sports collectibles, electronics, health and beauty, personal care, household and lifestyle, and other select merchandise and collectibles such as estate jewelry, knives, coins, dolls, and figurines, etc. The Company seeks to offer its products at competitive prices generally below the price for which the consumer could purchase the goods at a retail outlet or through a catalog. The Company's programming uses a show host approach whereby the Company's information is conveyed about the products with a demonstration of the use of the products to the television audience. The Company receives customer orders at its own call center and ships orders through its own fulfillment center or through its affiliated vendors. The viewer may purchase any product the Company offers at any time after the product is offered, subject to availability. The Company seeks to differentiate itself from the other televised home shopping programmers by utilizing a friendly, personal style of programming and by offering unique types of products and high quality goods such as rare coins, collectible sports items, jewelry and other limited-availability items with prices up to $40,000. The Company has also successfully developed and utilized proprietary products and brand names in its jewelry and cosmetic lines. 3 4 The Company intends to continue providing viewers with upscale alternatives to the products offered on other home shopping television programming including a large mix of sports related products. Many items in the Company's line are targeted to its predominantly male-oriented audience. BUSINESS STRATEGY - ----------------- The Company's primary mission is to achieve positive earnings per share by attaining accelerated revenue growth, controlling expenses and therefore increasing the 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 television 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 wider merchandising, and a continuation of the expansion into TV and cable carriage distribution. The Company also plans to continue to focus on major television markets in which its programming is not at present readily accessible through part-time coverage on its ad hoc network of independently owned television stations and cable systems. RECENT DEVELOPMENTS - ------------------- In August 1997, the Company submitted an offer to the bankruptcy court in New York to acquire the assets of Global Shopping Network. If successful, this could permanently retain the approximately 1.3 million full-time equivalent households (FTEs) on the Company's existing base of viewers and would be a significant step in adding to its owned and operated stations. The Company has escrowed $1,000,000 as a good faith deposit for its offer. If accepted, the Company will be required to raise additional capital to finance this transaction. On February 25, 1997, Collectors Edge of Tennessee, Inc. ("Collectors") was formed. Collectors is a trading card manufacturer whose principal assets are licenses from the National Football League Properties and the NFL Players, Inc. Collectors was initially funded through the purchase by the Company of $750,000 of Preferred Stock and a working capital loan of $400,000. In September 1996, the Company purchased the remaining 51% interest in Urban Broadcast Systems, Inc. (Urban), which it did not own, for the purchase price of $1,400,000. Urban's main asset is the license for Television Station KZJL, Houston, Texas. Houston is the nation's 11th largest television market with approximately 1.6 million television households and approximately 900,000 cable households. 4 5 The Company has successfully completed two agreements with TeleCommunications, Inc. (TCI), the first of which added approximately 4.5 million households with the potential to increase to 10 million cable households 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. To date, the Company has not signed any households under this second agreement. A priority for the Company over 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 Company to improve its gross margin percentage to 40.1% in fiscal 1997, from 38.7% and 36.1% in fiscal 1996, and 1995 respectively. The Company has recently created its first interactional Internet Website, under the URL of www.ishopathome.com. Given that a significant portion of the Company's revenues are derived from the sale of collectible merchandise, especially to male consumers (who are primary users of personal computers and the Internet), the Company sees this as an opportunity to extend and promote its products to a completely new audience who cannot currently view the Company's programming as well as an opportunity to cross-promote this site through its 40 million household network. Although the Company anticipates a modest revenue contribution by the Website during fiscal 1998, it does represent the first step in a natural market progression from the main mode of traditional TV. The Company expects to continue a rapid growth rate which is taxing the limits of its current facility in Knoxville, Tennessee. Accordingly, the Company is working with architects to advise on site location, facility requirements, and transition planning as the Company evaluates its physical facility needs for the next several years. Although no new site has as yet been selected, the Company anticipates that it will complete its move during the 1998 calendar year and that the first part of the move will be initiated during the 1998 fiscal year. "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 Communications Act of 1934, as amended ("the Act"). Generally, the "must carry" rules require most cable systems (with the exception of some small systems) to set aside up to one-third of their channels to carry the broadcast signals of local, full power television stations, including those which broadcast predominantly home shopping programming. 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. 5 6 In April 1997, the United States Supreme Court rendered a decision upholding these "must carry" provisions. This decision has had the effect of increasing the potential value of broadcast stations since they now have some assurance of coverage in the cable markets served in their broadcast area, referred to as the ADI (Area of Dominant Influence). Under the Act, however, the FCC is also directed to consider changes in ADI areas, including the exclusion of communities from a television station's market. These changes are considered on a case by case basis, acting on specific written requests for market modifications. The Act provides that the FCC will consider a number of factors in ruling on such requests, including whether or not the station in question provides coverage to the community and evidence of the viewing patterns in cable and noncable households in that community. In recent months, the FCC has ruled on several such requests and in many of these cases has ruled to exclude particular communities from an ADI. To its knowledge, there are no pending requests at the FCC seeking to exclude any station carrying the Company's programming from the designated ADI, which would, if negatively decided, have a material adverse effect on the Company. It is not expected, in any event, such request would negatively affect the Company's owned and operated stations. 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 2,105,110 television households, and 1,664,810 cable households, according to Nielsen Media Research (January 1997). Metropolitan Boston's 5,717,000 residents spend in excess of $53 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 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 11th largest Designated Marketing Area with 1,595,350 television households and 894,120 cable households, according to Nielson Media research (June 1997). Houston is ranked 8th in the United States Buying Power Index and has total retail sales of over $35 billion. The Company's programming runs exclusively on the station for the majority of each broadcast day. Total consideration for the entire interest in KZJL was $3,900,000 comprised of cash, long term debt and common stock. In addition, the cost to the Company to construct the station was approximately $2.2 million. 6 7 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 and the number of hours those homes receive the programming of the Company. In mid-1993, an aggressive strategy was launched to build cable distribution for the Company's programming. Since that time, the Company has been successful in continuously increasing its cable distribution and in building strong ties to major cable Multiple System Operators. The Company's programming is now viewed in more than 70 cable markets, including eight of the country's top ten Designated Market Areas. In fiscal 1997, the Company added over 25 new cable markets on either a full-time or part-time basis. In addition, the Company secured coverage on WWOR, New York, which gives the Company access to more than 7 million households for some portion of each day. On June 30, 1997, a time brokerage agreement with the licensee of KLDT (TV), which serves the Dallas, Texas market, under which the Company's programming was broadcast on substantially a full-time basis by that station, expired according to its terms. The licensee of the station elected not to enter into an agreement with the Company to extend the term of the agreement. The Company has also entered into two carriage agreements with TeleCommunications, Inc. (TCI), one of which added at least 4.5 million part-time households in November 1996, and which can grow to a total of 10 million households. The second agreement gives the Company the right to solicit and negotiate with the individual cable systems in TCI's system of over 12 million cable households. BROADCAST OPERATIONS - -------------------- The Company's programming is distributed to television stations, cable television systems and satellite dish owners, 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 which re-broadcast the Company's signal. Since December 1, 1995, the Company commenced broadcasting on transponder 4C of AT&T's state-of-the-art satellite 402R, and thereby terminating its use of the S3-18 transponder. It is the Company's intention to extend this agreement beyond its original three year term for at least an additional two years. 7 8 PRODUCT ASSORTMENT - ------------------ The Company offers 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 are excellent. The Company believes certain products which it sells are 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. The Company believes these unique products help differentiate it from its competitors. 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 seeks 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. 8 9 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 number. The Company uses both customer sales representatives 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 developed and implemented a new in house training program in order for its operators to be more proficient and product knowledgeable and to further raise the service to its customers and productivity levels. 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 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 cable commercials. FEDERAL REGULATION AND LEGISLATION - ---------------------------------- Each of the Company's owned television stations operate pursuant to a license issued by the FCC. Television broadcast licenses are issued for a period of five (5) years. 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. 9 10 The television broadcast industry is subject to extensive and changing regulation. The Act and FCC rules require the FCC to approve assignments of FCC licenses or the transfer of control of FCC licensees. 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. 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 stations, 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 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 substantial value in its 11 year operating history and the fact that it is one of only four broadly distributed electronic retailers in the U.S. 10 11 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 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 were approximately 26% of total revenues for the year. EMPLOYEES - --------- The Company had approximately 280 paid employees as of June 30, 1997, most of whom are full-time. The Company believes its relationship with its employees is good. Presently no collective bargaining agreements exist between the Company and its employees. 11 12 ITEM 2. PROPERTIES Until August 1997, the Company leased office space in Atlanta, Georgia primarily to house its investor and affiliate relations departments. 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 may 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 which has been extended through March 1999. The Company also maintains a corporate and investor relations office in Nashville, Tennessee and an affiliate relations office in Denver, Colorado. In addition, the Company through its subsidiaries leases space to house the transmitters for WMFP in Boston and KZJL in Houston and the offices of Collector's Edge of Tennessee, Inc. in Denver, Colorado. ITEM 3. LEGAL PROCEEDINGS The Company is a party to litigation which arises in the normal course of its business. Except as may be indicated below, the Company is not currently a party to any litigation which, if adversely determined, would have a materially adverse effect on the Company, its liquidity or its operations. In February, 1995, the Company was named as a co-defendant in a case in United States District Court for the Southern District of California brought by Upper Deck Authenticated. That complaint, as amended, alleges that the Company violated the Plaintiff's rights by selling sports memorabilia featuring certain named athletes, who are alleged to be under exclusive contract with one of the Upper Deck entities. Upper Deck also alleges that the Company sold merchandise without compliance with the requirements of California law that requires a certificate of authenticity accompany each item. The Plaintiff also alleges that the autographs on two specific items are counterfeit. Upper Deck requests compensatory damages, restitution, punitive damages, reasonable attorney's fees, prejudgment interest and costs, all in an unspecified amount. The Company believes that the case can be successfully defended. As a result of recent negotiations, the terms of a settlement agreement resolving this matter has been agreed upon by the parties. The settlement agreement is subject to certain formalities prior to being fully effective which the Company anticipates will be accomplished in the next few weeks. In May, 1997, Signature Financial/Marketing, Inc. filed a Complaint for Declaratory Judgment in the U.S. District Court for the Northern District of Illinois seeking a judgment of its non-violation of the Lanham Act (the federal law governing trademerks) with respect to its use of the designation "SHOP AT HOME" in connection with the promotion and sale of goods. This case was precipitated by letters to Signature from Shop at Home, Inc., asserting that the use of this mark by Signature in connection with catalogue sales and sales on the Internet infringed on Shop at Home's right to that designation and was creating confusion in the marketplace. 12 13 In response to the filing of this action, the Company has filed an answer and counterclaim alleging that the use of the name "SHOP AT HOME" by Signature infringes on the trademark of the Company and requests compensatory and injunctive relief. Plaintiff has also filed an amendment to its original complaint alleging that the use of the name by the Company infringes on the trademark of Signature, and also requests compensatory and injunctive relief. Counsel to the Company has indicated that based upon its initial review of the matter, the likelihood of Signature preventing the Company from using the designation of "SHOP AT HOME" for its television programming is remote. In July, 1997, NBA Properties, Inc., the licensing affiliate of the National Basketball Association, filed a complaint in the U.S. District Court for the Southern District of Florida, alleging that a number of defendants, including the Company, have committed trademark infringement and counterfeiting, false designation of origin, dilution and unfair competition, alleging that the defendants fraudulently manufactured, promoted, distributed and sold unlicensed basketball trading cards depicting the plaintiff's trademarks. The plaintiff is seeking injunctive relief, an accounting of profits, compensatory damages, treble damages, punitive damages, statutory damages in the amount of $1,000,000 from each defendant, interest, costs and fees. This case relates to a particular series of basketball trading cards. At the present time, Shop at Home has voluntarily agreed to a temporary injunction with the plaintiff whereby it has agreed not to sell any additional cards of that series of trading cards pending the resolution of this case. If the trading cards are in fact counterfeit, it is probable that Shop at Home can assert a successful cross-claim against the other defendants who produced the cards or who sold them to Shop at Home. There may also be a possibility of recovery of a portion or all of any loss from the insurance carriers for Shop at Home, and Shop at Home has notified its carriers of this litigation. In August, 1997, KLDT-TV 55, Inc., the licensee of KLDT (TV), licensed to Lake Dallas, Texas, filed a demand for arbitration concerning its allegations that the Company defaulted in the payment of certain amounts due under the time brokerage agreement concerning that station, and that the Company breached the asset sale agreement with regard to the acquisition of the asset sale agreement with regard to the acquisition of the assets of KLDT, and committed fraud and tortious interference with contract in regard thereto. The request for arbitration requests a payment of $577,500 in actual damages and a payment of at least $3,750,000 for the alleged breach of the asset sale agreement, fraud and tortious interference. This arbitration claim arises out of a lawsuit filed in March, 1997, in the U.S. District Court for the Eastern District of Tennessee by the Company against Paxson Communications Corporation, Douglas Johnson, and others regarding certain events and circumstances arising out of the proposed sale of the assets of KLDT-TV 55, Inc., the licensee of KLDT (TV). In October, 1995, a subsidiary of the Company entered into an 13 14 agreement with the licensee of KLDT to purchase the assets of the station and for the licensee to assign the FCC license for the station to the Company. At the same time, the Company and the licensee entered into a time brokerage agreement under which the licensee agreed to make available to the Company substantially all of the broadcast time of the station for the Company to broadcast its Shop at Home programming. For this programming time, the Company agreed to make monthly payments to the licensee. After the execution of the asset sale agreement and the time brokerage agreement, the Company entered into an agreement with Paxson Communications Corporation, under which the Company agreed to assign the sale agreement and the time brokerage agreement to a Paxson related company. Under the agreement, Paxson agreed that the Company would acquire a 49% interest in the voting stock of the new licensee and that the Company would have certain other rights with regard to the operation of the new licensee, including the programming of the station. Acting under this agreement, the Company assigned the sale agreement and the brokerage agreement to the Paxson related entity. Under the terms of the sale agreement, the purchaser was obligated to order and to install a new antenna for KLDT. The Company alleges in the lawsuit that Paxson did not install such an antenna, and this fact caused material damages to the Company. Thereafter, the licensee of the station and Paxson entered into an agreement with Douglas Johnson under which Paxson agreed to dismiss its FCC application to acquire the license of the station and the licensee agreed to dismiss its pending application with the FCC to renew the license of the station, and each agreed that Johnson would be awarded the right to own the station. The Company initiated the litigation seeking to recover its damages for the failure of Paxson to install the new antenna, and for damages against Paxson, Johnson and their related parties for their actions in causing the Company to lose its opportunity to acquire a 49% interest in the station. The transactions contemplated by the agreement between the licensee, Paxson and Johnson have not closed at this time. Recently, the District Court in Tennessee ordered that the case be moved to the U.S. District Court in Dallas, Texas. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 15 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 reported by fiscal quarters during the two most recent years, as reported by NASDAQ's SmallCap Market is shown below.
High Bid Low Bid -------- ------- 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 07/01/96 - 09/30/96 $4.0625 $3.25 10/01/96 - 12/31/96 $3.75 $2.50 01/01/97 - 03/31/97 $3.375 $2.375 04/01/97 - 06/30/97 $3.5625 $2.25
The approximate number of shareholders of the Company's Common Stock of record on June 30, 1997 was 664. 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 ITEM 6. SELECTED FINANCIAL DATA The following selected financial information for the years ended June 30, 1997, 1996, 1995, 1994, and 1993 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.
6/30/97 6/30/96 6/30/95 6/30/94 6/30/93 ------- ------- ------- ------- ------- Current assets $13,436,339 $5,273,163 $2,750,656 $3,218,623 $1,541,712 Current liabilities 18,077,778 8,979,793 7,371,600 3,779,660 3,975,204 Total asset 34,410,310 20,286,670 18,157,431 4,770,262 3,130,104 Long-term liabilities 11,135,541 7,805,048 6,865,493 283,275 161,384 Redeemable preferred stock 1,393,430 1,393,430 1,405,000 - 0 - - 0 - Stockholders' equity 3,803,561 2,108,399 2,520,338 707,327 (1,006,484) Net revenues 67,817,460 40,016,114 26,787,013 21,717,344 19,878,478 Infomercial Income 1,014,888 659,461 189,000 - 0 - - 0 - Net income (loss) 1,556,046 (1,405,472) (1,281,989) (1,052,335) (2,440,638) Net income (loss) per share of common stock $ .12 ($.14) ($.14) ($.13) ($.33) Cash dividends per common share - 0 - - 0 - - 0 - - 0 - - 0 -
16 17 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 1997 1996 1995 --------------------------------------------- Net sales 100% 100% 100% Cost of goods sold 59.9 61.3 63.9 Gross profit 40.1 38.7 36.1 Other operating income 1.5 1.7 0.7 Promotion and advertising charges .7 .6 1.0 Salaries and wages 8.2 10.3 12.6 Transponder and cable charges 17.9 15.1 12.0 Other general operating and administrative expenses 9.8 14.1 13.6 Depreciation and amortization 1.5 2.2 2.0 Other expense (1.3) (1.9) (0.3) Income tax benefit .1 .3 .0 Net income (loss) 2.3 (3.5) (4.7)
RESULTS OF OPERATIONS - --------------------- FISCAL 1997 VS. FISCAL 1996 - --------------------------- The Company's total revenues, consisting of net sales, infomercial and miscellaneous revenues, for the year ended June 30, 1997, were $69,064,000, an increase of $28,332,000 or 70% over the prior year. The major component of this increase in revenues was net sales which increased to $67,817,000, an increase of $27,801,000 or 59% over the prior year. The increase was primarily attributable to the addition of approximately 3,200,000 full-time equivalent households (FTEs) resulting in a total of 8,600,000 full-time equivalent households (FTEs) at the end of June 1997. This increase in households is attributable mainly to the expanded coverage through greater market penetration of approximately 2,200,000 full power television station FTEs and approximately 600,000 FTEs through the agreement with TCI. The sales increase was principally the result of increased sales volume rather than an increase in price points. 17 18 The Company's product mix trended away from jewelry and more toward male related merchandise, including sports and collectibles in keeping with its predominately male audience. Gross profit increased by $11,692,000 or 75.4%, 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 40.1% from 38.7% 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 sports product lines. The Company generated $1,051,000 in informercial revenue from WMFP in Boston and KZJL in Houston. This represented a 59.5% increase over the infomercial revenue of the prior year. The Company continued improvement in this area although future increases should be smaller. 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 distribution expenses outpace future revenues. In these instances, the Company's profitability in a specific new market will be initially depressed until future revenue streams exceed expenses. Operating expenses for fiscal 1997 increased $8,953,000, or 52.9% over 1996. The major items resulting in the increase were: (a) additional cable carriage and signal distribution costs of approximately $6,094,000 or 101.1%; (b) an increase in salaries of approximately $756,000 or 22.5% primarily related to variable labor costs associated with the higher volume of customer calls and some additions to management; (c) an increase of $368,000 or 162.0% in legal expenses in connection with the Upper Deck lawsuit and other litigation; (d) an increase in depreciation, amortization, 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, and Collector's Edge; (e) an increase in telephone cost of $179,000 or 38.3%; and (f) credit card discounts of $354,000 or 53.5% related primarily to the higher business revenues in 1997. FISCAL 1996 VS. FISCAL 1995 - --------------------------- The Company's total revenues, consisting of net sales, infomercial, and miscellaneous revenues, for the year ended June 30, 1996, were $40,732,000, an increase of $13,667,000 or 50% over the prior year. The major component of this increase in revenues was net sales which increased to $40,016,000 an increase of $13,229,000 or 49% 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 (FTEs) resulting in a total of 18 19 5,400,000 FTE 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 to which the Company did not broadcast in the prior fiscal year (approximately 60%) and the additional part-time carriage on various full power 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 fiscal 1996, 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. The Company generated $659,000 in infomercial revenue from WMFP in Boston and KZJL in Houston. This represented a 248% increase over the infomercial revenue of the prior year and was the first full year of infomercial revenue. 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 distribution expenses outpace future revenues. In these instances, the Company's profitability in a specific new market will be initially depressed until future revenue streams exceed 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 unsuccessful 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; (f) an increase in telephone cost of $179,000 or 38.3%; and (g) credit card discounts of $354,000 or 53.5% related primarily to the higher business revenues in 1996. 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. 19 20 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Fiscal 1997 was a year of dramatic growth for the Company which was mostly achieved by a 59% increase in FTEs primarily through broadcast stations, cable system and carriage agreements. 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. The Company believes internally generated funds from operations, together with borrowings, 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 it will be successful in raising capital necessary to fund its bid to acquire the assets of Global Shopping Network. In January 1997, the Company completed the installation of an Aspect Callcenter telephone system, which increases the Company's ability to meet the higher sales volumes while reducing operator and telephone costs. This system integrates the Company's database with caller ID capability and will reduce the time necessary to process calls. In July 1996, the Company instituted a new credit card processing system, which provides instant credit card verification at the time of sale. These capital expenditures improve the Company's operating efficiency in terms of cash flow. They are consistent with management's goal to invest in current technology to improve the ratio of costs which support sales. At June 30, 1997 the Company had a negative net working capital position of ($4,641,439), a decrease of $934,809. This decrease was attributable primarily to the $1,100,000 invested in Collector's Edge of Tennessee, Inc. 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 the Company believes that its ability to meet future vendor obligations will be adequate. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In February 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which changes the calculations used for earnings per share (EPS) and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The effect of the change in the standard on the consolidated financial statements results in $0.15 and ($0.14) of basic EPS for the years ended June 30, 20 21 1997 and 1996. The standard would have no effect on the diluted EPS. The Statement is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure." The Statement establishes standards for disclosing information about an entity's capital structure. The Statement is effective for periods ending after December 15, 1997. Management has determined that the adoption of this Statement will not have a material impact on the financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Statement is effective for financial statements issued for periods beginning after December 15, 1997. Management has not yet determined the full effect of this Statement on its financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement establishes standards for reporting comprehensive income and its components in a full set of financial statements. The Statement is effective for fiscal years beginning after December 15, 1997. The Company currently has no items that would be classified as other comprehensive income. Thus, management has determined that the adoption of this Statement will not have a material impact on the financial statements. 21 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements ------------------------------------------
Page ---- Report of Independent Accountants 26 Consolidated Balance Sheets at June 30, 1997 and June 30, 1996 27-28 Consolidated Statements of Operations for the years ended June 30, 1997, June 30, 1996, and June 30, 1995 29 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, June 30, 1996, and June 30, 1995 30-31 Consolidated Statements of Cash Flows for the years ended June 30, 1997, June 30, 1996, and June 30, 1995 32-33 Notes to Consolidated Financial Statements 34-58
22 23 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Knoxville, Tennessee COOPERS & LYBRAND L.L.P. August 14, 1997 23 24 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30,
ASSETS 1997 1996 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 5,077,641 $ 1,914,759 Accounts receivable - trade 3,292,925 380,077 Accounts receivable - related parties 3,000 7,680 Inventories 3,262,080 2,611,142 Prepaid expenses 458,243 279,505 Deferred tax assets 1,342,450 80,000 ----------- ----------- Total current assets 13,436,339 5,273,163 PROPERTY & EQUIPMENT, NET 4,433,767 3,470,226 FCC LICENSES, NET 13,423,182 10,516,041 GOODWILL, NET 1,989,529 605,154 OTHER ASSETS 1,127,493 422,086 ----------- ----------- TOTAL ASSETS $34,410,310 $20,286,670 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 24 25 SHOP AT HOME, INC. AND SUBSIDIARIES LIABILITIES AND STOCKHOLDERS' EQUITY AS OF JUNE 30,
1997 1996 ------------ ------------ CURRENT LIABILITIES Current portion - capital leases $ 171,498 $ 109,444 Current portion of long-term debt 2,279,833 741,262 Accounts payable - trade 6,821,654 3,201,320 Accounts payable - related party 631,621 449,550 Credits due to customers 3,121,503 1,100,120 Other payables and accrued expenses 4,944,050 1,865,806 Deferred revenue 107,619 1,512,291 ------------ ------------ Total current liabilities 18,077,778 8,979,793 ------------ ------------ LONG-TERM LIABILITIES Capital leases, less current portion 305,666 53,649 Long term debt, less current portion 7,216,465 5,669,063 Deferred income taxes 3,613,410 2,082,336 REDEEMABLE PREFERRED STOCK $10 par value, 1,000,000 shares authorized, 137,943 issued and outstanding in 1997 and 1996 respectively 1,393,430 1,393,430 COMMITMENTS (NOTES 6,8,10, AND 14) STOCKHOLDERS' EQUITY Common stock - $.0025 par value, 30,000,000 shares authorized 10,714,414 and 10,575,255 shares issued in 1997 and 1996 respectively 26,786 26,438 Additional paid in capital 10,066,555 9,927,787 Accumulated deficit (6,289,780) (7,845,826) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,410,310 $ 20,286,670 ============ ============
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,
1997 1996 1995 ------------ ------------ ------------ NET SALES $ 67,817,460 $ 40,016,114 $ 26,787,013 COST OF SALES 40,626,134 24,516,348 17,120,791 ------------ ------------ ------------ Gross Profit 27,191,326 15,499,766 9,666,222 ------------ ------------ ------------ OTHER OPERATING INCOME 1,014,888 659,461 189,000 ------------ ------------ ------------ OPERATING EXPENSES Promotion and advertising costs 468,255 241,170 269,420 Salaries and wages 5,564,089 4,112,858 3,356,624 Transponder and cable charges 12,118,305 6,024,743 3,226,481 Other general operating and administrative expenses 6,675,322 5,673,540 3,639,749 Depreciation and amortization 1,056,492 877,861 517,523 ------------ ------------ ------------ Total operating expenses 25,882,463 16,930,172 11,009,797 ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 2,323,751 (770,945) (1,154,575) ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest, net (1,079,529) (794,558) (216,486) Miscellaneous 231,824 56,637 89,072 ------------ ------------ ------------ Total other income (expense) (847,705) (737,921) (127,414) ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 1,476,046 (1,508,866) (1,281,989) INCOME TAX BENEFIT 80,000 103,394 -- ------------ ------------ ------------ NET INCOME/ (LOSS) $ 1,556,046 ($ 1,405,472) ($ 1,281,989) ============ ============ ============ NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.12 ($ 0.14) ($ 0.14) ============ ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES 13,945,540 10,284,085 9,436,870 ============ ============ ============
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 1997, 1996 AND 1995
ADDITIONAL TREASURY COMMON PAID IN ACCUMULATED STOCK STOCK CAPITAL DEFICIT AT COST -------- ----------- ------------ -------- Balance - June 30, 1994 $ 22,260 $ 5,883,682 $(5,158,365) $(40,250) (8,904,118 shares) Issuances of common stock (389,215 shares) 973 999,027 -- -- Retirement of treasury stock (115) (40,135) -- 40,250 Issuances of common stock (896,747 shares) 2,242 2,097,758 -- -- Preferred stock dividend accrued (46,000 shares) -- (5,000) -- -- Net loss -- -- (1,281,989) -- -------- ----------- ----------- -------- Balance - June 30, 1995 (10,144,080 shares) 25,360 8,935,332 (6,440,354) - 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 315 127,125 -- -- Issuances 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 STOCKHOLDERS' EQUITY (CONTINUED)
ADDITIONAL TREASURY COMMON PAID IN ACCUMULATED STOCK STOCK CAPITAL DEFICIT AT COST ------ ---------- ----------- ------- Exercise of stock options (100,000 shares) 250 99,750 -- -- Exercise of employee stock options (20,000 shares) 50 19,950 -- -- Issuances of common stock in payment of payable obligations (19,159 shares) 48 33,068 -- -- Preferred stock dividend accrued -- (14,000) -- -- Net income -- -- 1,556,046 -- ------- ------------ ----------- -- Balance - June 30, 1997 (10,714,414 shares) $26,786 $ 10,066,555 $(6,289,780) $ 0 ======= ============ =========== =======
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
1997 1996 1995 ----------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 1,556,046 ($1,405,472) ($1,281,989) Non-cash expenses included in net loss Depreciation and amortization 1,056,492 877,861 517,523 Loss on sale of equipment 3,053 19,165 -- Deferred income taxes (80,000) (103,394) -- Change in provision for inventory obsolescence -- (88,122) -- Provision for bad debt 18,800 -- -- Changes in current and non-current items Accounts receivable (2,926,968) 119,409 (38,135) Inventories (650,938) (230,024) (110,577) Prepaid expenses and other assets (241,321) (197,019) 102,563 Accounts payable and accrued expenses 8,914,889 805,455 2,759,182 Deferred revenue (1,404,672) 1,016,954 (5,888) ----------- ----------- ----------- Net cash provided by operations 6,245,381 814,813 1,942,679 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash payments for acquisitions (1,838,360) -- (1,289,072) Purchase of equipment (1,056,581) (507,494) (2,370,582) Proceeds from sale of equipment -- 400,000 -- Other assets (1,856,744) -- -- FCC licenses -- (38,000) -- ----------- ----------- ----------- Net cash used by investing activities (4,751,685) (145,494) (3,659,654) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (13,742) -- -- Exercise of stock options 120,000 127,440 -- Repayments of debt (1,233,467) (985,851) (662,115) Additional long-term debt 2,919,440 2,056,380 1,620,488 Capital lease payments (123,045) (154,675) (114,278) ----------- ----------- ----------- Net cash provided by financing activities 1,669,186 1,043,294 844,095 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 3,162,882 1,712,613 (872,880) Cash beginning of period 1,914,759 202,146 1,075,026 ----------- ----------- ----------- Cash end of period $ 5,077,641 $ 1,914,759 $ 202,146 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 29 30 SHOP AT HOME, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996, AND 1995 (CONTINUED)
1997 1996 1995 ----------- -------- ----------- SCHEDULE OF NONCASH FINANCING ACTIVITIES Stock issued for inventory and reduction of accounts payable $ 33,116 $609,523 $ -- ---------- -------- ---------- Cost of equipment purchased through Capital lease obligation $ 437,116 $ 31,450 $ 290,561 ---------- -------- ---------- Notes payable issued for acquisitions of BCST and MFP, Inc. $1,400,000 $ -- $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 $ 997,671 $795,125 $ 139,097 ---------- -------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 30 31 SHOP AT HOME, INC. AND SUBSIDIARIES 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, MFP, Inc. ("MFP"), Broadcast Cable Satellite Technologies, Inc. ("BCST"), Urban Broadcasting Systems, Inc. ("UBS"), Collectors Edge of Tennessee, Inc. ("Collectors"), and RF Scientific Transportables, Inc. ("RFS"), (collectively the "Company"). All of the operating assets of RFS were sold in the latter part of fiscal 1995 and RFS subsequently ceased operations. RFS 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. BCST's, principal asset consists of ownership of the outstanding shares of capital stock of UBS. UBS holds the FCC license for television station KZJL, Channel 61, a full power television station licensed to Houston, TX. 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). Collector's Edge of Tennessee, Inc. ("Collectors") is a trading card manufacturer whose main assets are licenses from the National Football League Properties and the NFL Players, Inc. 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. INVENTORIES - ----------- Inventories, which consist primarily 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. Valuation allowances are provided for valuation adjustments related to carrying costs in excess of estimated market value. 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
31 32 SHOP AT HOME, INC. AND SUBSIDIARIES FCC LICENSES - ------------ During fiscal 1995 the Company acquired two subsidiaries who own licenses from the Federal Communications Commission under which they operate television stations. The value ascribed to these FCC licenses in connection with the acquisitions is being amortized over 40 years. Amortization of these licenses was $508,099 in 1997 and $268,562 in 1996. GOODWILL - -------- Management periodically evaluates the net realizability of the carrying amount of goodwill. Goodwill is amortized over 40 years, using the straight-line method. Goodwill recorded in connection with the acquisitions of WMFP and BCST represents the excess purchase price over the fair value of the net identifiable assets acquired. The goodwill amortization amounted to $60,803 for 1997 and $15,517 for 1996. SALES RETURNS - ------------- The Company allows customers to return merchandise for full credit or refund within 30 days from the date of receipt. Collectors sells to wholesalers and retailers, terms of sale and return privileges are negotiated on an individual basis. At June 30,1997 and 1996, the Company had recorded provisions of $3,122,000 and $1,100,000, 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 on its owned stations (infomercials), the sale of uplink truck services (fiscal 1995 and 1996), and miscellaneous income consisting of list rental, credit card fees, and commissions. Product sales are recognized upon shipment of the merchandise to the customer. Service revenue and air time revenue are recognized when the service has been provided or the air time has been utilized by the user. Deferred revenue consists of sales proceeds relative to unshipped merchandise. INCOME TAXES - ------------ The Company files a consolidated federal income tax return with its subsidiaries. The companies file separate state returns. The Company determines deferred tax assets and liabilities based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. INCOME (LOSS) PER SHARE - ----------------------- Income (loss) per share was computed by dividing the net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the respective periods. Common stock equivalents, including options, warrants, convertible debt and the convertible preferred stock have been excluded from the 1996 and 1995 computations because 32 33 SHOP AT HOME INC. AND SUBSIDIARIES their inclusion would be antidilutive in these years when the Company generated losses. The effect of these common stock equivalents on the 1997 per share computation is an increase of approximately 3.3 million shares, even though these shares were not issued. In February 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 128, "earnings per Share," which changes the calculations used for earnings per share (EPS) and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The effect of the change in the standard on consolidated financial statements results in $0.15 and ($0.14) of basic EPS for the years ended June 30, 1997 and 1996. The standard would have no effect on the diluted EPS. The Statement is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. USE OF ESTIMATES - ---------------- The preparation of the financial statements in conformity with generally accepted accounting principals 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. Actual results could differ from these estimates. 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 33 34 SHOP AT HOME, INC. AND SUBSIDIARIES 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 the Company had accounted for its stock options under the Statement 123 fair value method. Such disclosures are included in Footnote 10. SEGMENT INFORMATION - ------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Statement is effective for financial statements issued for periods beginning after December 15, 1997. Management has not yet determined the full effect of this Statement on its financial statements. CAPITAL STRUCTURE - ----------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure." The Statement establishes standards for disclosing information about an entity's capital structure. The Statement is effective for periods ending after December 15, 1997. Management has determined that the adoption of this Statement will not have a material impact on the financial statements. COMPREHENSIVE INCOME - -------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement establishes standards for reporting comprehensive income and its components in a full set of financial statements. The Statement is effective for fiscal years beginning after December 15, 1997. The Company currently has no items that would be classified as other comprehensive income. Thus, management has determined that the adoption of this Statement will not have a material impact on the financial statements. RECLASSIFICATIONS - ----------------- Certain amounts in the prior years' consolidated financial statements have been reclassified for comparative purposes to conform with the current year presentation. 34 35 SHOP AT HOME, INC. AND SUBSIDIARIES NOTE 2 - PROPERTY AND EQUIPMENT - ------------------------------- Property and equipment consists of the following major classifications at June 30, 1997 and 1996.
1997 1996 ----------- ----------- Leasehold improvements $ 318,416 $ 285,074 Operating equipment 5,819,654 4,736,119 Furniture and fixtures 190,656 194,651 ----------- ----------- 6,328,726 5,215,844 Accumulated depreciation (1,894,959) (1,745,618) ----------- ----------- Property and equipment, net $ 4,433,767 $ 3,470,226 =========== ===========
Depreciation expense totaled $527,103, $463,496, and $527,103 for the fiscal years ended June 30, 1997, 1996 and 1995 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:
1997 1996 -------- --------- Operating equipment $660,032 $ 660,032 Less accumulated depreciation (551,074) (396,267) -------- --------- $108,958 $263,765 ======== =========
35 36 SHOP AT HOME, INC. AND SUBSIDIARIES Future minimum lease payments under capitalized leases are as follows at June 30,1997: 1998 229,002 1999 158,286 2000 154,686 2001 43,712 --------- Total minimum lease payments 585,686 Less amount representing interest (108,522) --------- Present value of minimum lease payments 477,164 Less current portion (171,498) --------- Long term portion $ 305,666 =========
NOTE 4 - LONG-TERM DEBT - -----------------------
Long term debt consist of the following at June 30: 1997 1996 ---- ---- 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 $ 750,000 $ 1,000,000 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 2,310,763 2,399,858 Note payable to related party bearing interest at 15% due in monthly installments of $9,700, collateralized by certain equipment 380,302 435,101 Note payable to related party bearing interest at 10.75% due in monthly installments of principal and interest totaling $43,494 through September 1, 2000 1,425,077 1,775,366 Note payable to related party bearing interest at 6% The first twelve payments consist of interest only while the remainder of the payments consist of
36 37 SHOP AT HOME, INC. AND SUBSIDIARIES principal and interest totaling $15,543. The final payment is scheduled for September 2007 1,400,000 -- Assumption note payable to Norwest Credit bearing interest at 1.75% plus prime (8.5% at 6/30/97) due in equal monthly installments of principal of $75,047 plus interest through March 1999 1,575,992 -- Term note payable to Norwest Credit Bearing interest at 10% due in equal monthly installments of principal of $41,667 (with the exception of 1st and last payment) plus interest through February 1999 854,164 -- ----------- ----------- Total long term debt 9,496,298 6,410,325 Less current maturities (2,279,833) (741,262) ----------- ----------- Long term debt less current portion $ 7,216,465 $ 5,669,063 =========== ===========
The aggregate future required principal payments at June 30, 1997 for the above liabilities are as follows: 1998 $2,279,833 1999 2,001,973 2000 1,050,519 2001 1,281,964 2002 2,882,009 ---------- $9,496,298 ==========
NOTE 5 - REDEEMABLE PREFERRED STOCK - ----------------------------------- The following is a brief summary of the terms and conditions of the Series A Preferred Stock of the Company issued in connection with the acquisition of MFP, Inc. This summary is qualified in its entirety by reference to the Company's charter provisions with respect to the preferred stock. 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. 37 38 SHOP AT HOME, INC. AND SUBSIDIARIES Holders of shares of Series A preferred stock are entitled to receive, but only when and if declared by the Board of Directors of the Company out of funds legally available, cash dividends at the rate of 1% per annum (i.e., $.10 per share per annum) of par value per share. Dividends on each share of Series A preferred stock accrue and are cumulative from (but not including) the date of its original issuance on the basis of an annual dividend period. For any dividend period, no dividends may be paid or declared and set apart for payment on any common stock, or any other series of preferred stock at the time outstanding, unless dividends properly accumulated in respect to the Series A stock and all other series of preferred stock senior to or on a parity therewith for all prior dividend periods shall have been paid or declared and set apart for payment. In the event of a liquidation, dissolution and winding up of the Company, whether voluntary or involuntary, the registered holders of shares of Series A preferred stock then outstanding shall be entitled to receive out of the assets of the Company, before any distributions to the holders of common stock or any other junior stock, an amount equal to the "Liquidation Preference" with respect to such shares of Series A preferred stock. The Liquidation Preference for the Series A preferred stock is $10.00 per share, plus an amount equal to all dividends thereon (whether or not declared) accrued and unpaid through the date of final distribution. For those purposes, a sale of substantially all of the assets of the Company to a third party, or the consummation 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, 1997 and 1996, the Company was $14,000 in arrears of its dividend payments due. These dividend payments are payable only when declared by the Board of Directors NOTE 6 - COMMON STOCK - --------------------- In August 1996, the Company issued 100,000 shares of common stock valued at $250,000 in connection with the securing of $2,000,000 of long term debt (Note 4); 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, the Company issued a total of 203,175 shares of common stock, of which 44,000 shares of common 38 39 SHOP AT HOME, INC. AND SUBSIDIARIES stock were issued as payment of payable obligations and 159,175 shares of common stock 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 $477,525. The Company has 19,519 additional shares remaining to be issued under this agreement. On June 30, 1994, the Company sold for $240,000 an option to purchase up to 600,000 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. Effective June 9, 1993, an agreement was entered into between the Company, SAH Holdings, L.P. and Global Network Television, Inc., whereby the Company 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 the Company for a purchase price of $1.00 per share. The warrant expires on June 30, 2001. 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 also expires on June 30, 2001. 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 13 and 14. 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, 1997 and 1996, are as follows:
1997 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 389,126 $ 2,324,269 Accruals 1,342,450 384,495 Valuation allowance -- (1,263,991) ----------- ----------- Total deferred tax assets 1,731,576 1,444,773 ----------- ----------- Deferred tax liabilities: Licenses 3,726,985 3,331,736 Depreciation 275,551 115,373 ----------- ----------- Total deferred tax liabilities 4,002,536 3,447,109 ----------- ----------- Net deferred tax liabilities $ 2,270,960 $ 2,002,336 =========== =========== Current deferred tax asset $ 1,342,450 $ 80,000 Long-term deferred tax liabilities (3,613,410) (2,082,336) ----------- ----------- Net deferred tax liabilities $(2,270,960) $(2,002,336) =========== ===========
39 40 SHOP AT HOME, INC. AND SUBSIDIARIES At June 30, 1997 the Company had net operating loss carry forwards which expire as follows: June 30, 2010 409,954 June 30, 2011 614,062 ---------- $1,024,016 ==========
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:
1997 1996 ----------- ---------- Computed "expected" income tax expense (benefit) $ 501,855 $(499,732) Increase (decrease) in income tax benefit resulting from: State income tax expense (benefit), net of federal effect 74,102 (58,792) Change in valuation allowance (1,042,816) 362,411 Nondeductible portion of meals and entertainment 16,529 8,480 Other 370,330 84,239 ----------- --------- Actual income tax benefit $ (80,000) $(103,394) =========== =========
In connection with the acquisitions of BCST and MFP, Inc. in 1994, 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. In connection with the remaining acquisition of BCST in 1997, the Company reduced the valuation allowance for deferred tax assets by $221,175, 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 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 years two and three respectively. Transponder expense was $1,330,000 in 1997, $1,379,000 in 1996, and $1,281,000 in 1995. PURCHASE COMMITMENTS - -------------------- In 1994, the Company entered into an agreement to purchase, over a period of 18 months, $1,750,000 of inventory, of which 50% could be paid for with the Company's common stock. The Company also had 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 could be satisfied through the issuance of Company common stock on terms as set forth in the contract. In January 1996, the Company entered into a "Restated Agreement" whereby it was obligated to purchase the remaining balance of merchandise it had not yet acquired approximating $720,000. The payment of which was made part in cash and part in stock. (Note 6). As of July 31, 1996, the remaining obligation under this restated agreement had been satisfied. Collector's Edge of Tennessee, Inc. has minimum contractual committments to NFL Players Association and NFL Properties of $2.2 million, which includes $1.2 million in fiscal year 1998 and $1.0 million in fiscal year 1999. 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 $139,763, $143,325, and $132,592, in fiscal years ended June 30, 1997, 1996, and 1995, 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 $10,789,000 in 1997, $4,646,000 in 1996, and $1,945,000 in 1995. Rental expense for the office and studio and miscellaneous equipment inclusive of the Knoxville office and studio expense referred to above, was $529,484, $483,059, and $184,434, for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. 41 42 SHOP AT HOME, INC. AND SUBSIDIARIES NOTE 9- RELATED PARTY TRANSACTIONS - ---------------------------------- During the fiscal years ended June 30, 1997, 1996, and 1995, 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:
1997 1996 1995 ---------- ---------- -------- PURCHASES - MERCHANDISE V.J.M. (Victor Mueller) $1,077,925 $ 795,689 $989,272 Howards Sports Collectibles 3,136,470 2,116,088 553,462 Combine International, Inc. 706,674 452,348 98,843 OTHER OPERATING EXPENSES Lakeway Container 5,559 63,978 81,827 Airbank 22,213 37,604 27,673 MediaOne -- 157,567 224,359
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. 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, 1997, a net of stock options for 588,500 shares of common stock have been granted under the plan. No SAR's have been issued under the plan. 42 43 SHOP AT HOME, INC. AND SUBSIDIARIES No option or SAR's 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, 1,650,000 common shares (680,000 vested at June 30, 1997) were reserved for options granted to certain executive officers, directors, employees and others as of June 30, 1997. 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. As permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for options granted under the plan. Had compensation cost for the Company's plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below.
1997 1996 1995 ----------------------- ------------------------- ------------------------- As As As Reported Pro Forma Reported Pro Forma Reported Pro Forma ---------- ---------- ----------- ------------ ------------ ------------ Net Income (Loss) $1,556,046 $1,466,058 $(1,405,472) $(1,431,467) $(1,281,989) $(1,292,259) Net Income (Loss) Per Share $ 0.12 $ 0.11 $ (0.14) $ (0.14) $ (0.14) $ (0.14)
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grant in 1997: dividend yield of 0%; expected volatility of 65%; risk-free interest rate of 6%; and expected life of 7.5 years. A summary of the status of the Company's plan as of June 30, 1997, 1996, and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 ---------------------------- ---------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- -------------- --------- -------------- --------- -------------- Outstanding at beginning of year 1,785,000 $2.01 1,630,000 $1.77 1,460,000 $1.69 Granted 639,500 2.88 325,000 2.84 170,000 2.44 Exercised (200,000) 1.00 (126,000) 1.00 -- -- Forfeited (212,000) 2.81 (44,000) 2.44 -- -- --------- --------- ---------
43 44 SHOP AT HOME, INC. AND SUBSIDIARIES Outstanding at end of year 2,192,500 2.20 1,785,000 2.01 1,630,000 1.77 ========== ========= ========== Options exercisable at year-end 1,493,500 1,012,000 943,000 Weighted-average fair value of $2.04 $2.02 $1.72 options granted during the year
The following table summarizes information about the plan's stock options at June 30, 1997;
Options Outstanding Options Exercisable ---------------------------------------------------- --------------------------------- Number Weighted-Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price - --------------- ----------- ----------------- -------------- ----------- -------------- $1.00 - $1.99 630,000 8 years $1.00 620,000 $1.00 $2.00 - $2.99 1,557,500 7 years 2.68 873,500 2.56 $3.00 - $3.99 5,000 10 years 3.00 - --------- --------- 2,192,500 1,493,500 ========= =========
NOTE 11 - CONCENTRATIONS OF CREDIT RISK - --------------------------------------- Concentrations of credit risk include cash on deposit in financial institutions and accounts receivables. Receivables are primarily due from credit card companies. The Company maintains reserves which management believes are adequate to provide for credit losses. Management believes the financial institutions holding the cash to be 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. (BCST), 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 44 45 SHOP AT HOME, INC. AND SUBSIDIARIES 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: 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. In September 1996, the Company, through its subsidiary, Broadcast, Cable and Satellite Technologies, Inc. (BCST), entered into a $1,400,000 Promissory Note payable to Charles E. Walker for the acquisition of the remaining 51% interest in Urban Broadcast Systems, Inc. The note bears interest at 6% interest only in the first year, principal and interest payable thereafter; and is payable in 132 monthly installments. The note is collateralized by a pledge of the capital stock of Urban Broadcast Systems, Inc. NOTE 13 - ACQUISTION 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 the Company 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. 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. 45 46 SHOP AT HOME, INC. AND SUBSIDIARIES 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 - ACQUISITION OF COLLECTOR'S EDGE OF TENNESSEE, INC. - ------------------------------------------------------------ On February 25, 1997, Collectors Edge of Tennessee, Inc. ("Collectors") was formed to acquire the assets of a former trading card manufacturer. Collectors is a trading card manufacturer whose principal assets are licenses from the National Football League Properties and NFL Players, Inc. Collectors was initially funded through the purchase by the Company of $750,000 of Preferred Stock and a working capital loan of $400,000. The Preferred Stock is convertible into common stock of Collectors at the option of the Company. As of June 30, 1997, Collectors has repaid none of the working capital loan. In addition, Collectors assumed a term note with Norwest Bank at $1.9 million, and borrowed an additional $1.0 million with Norwest Bank. The note is guaranteed by the Company and collateralized by BCST. The acquisition of Collectors has been accounted for under the purchase method because of its economic dependence on the Company, the Company bears the economic risk of losses of Collectors , and the Company has the ability to effectively gain equity control of Collectors. Accordingly, the operating results of Collectors have been included in the consolidated operating 46 47 SHOP AT HOME, INC. AND SUBSIDIARIES results since the date of acquisition. The purchase price of $1,150,000 has been allocated to the net assets acquired based on appraised fair values at the date of acquisition as follows: Current assets $ 3,324,000 Licensing costs 1,455,000 Property and equipment 340,000 Goodwill 1,185,000 Accounts payable and accrued liabilities (2,235,000) Notes Payable (2,919,000) ----------- $ 1,150,000 ===========
The unaudited consolidated pro forma operating data for the Company, assuming the acquisition of the former trading card manufacturer by Collectors, occurred on the first day of each year presented are set forth below.
UNAUDITED June 30, 1997 June 30, 1996 ------------- ------------- Revenues $74,987,000 $50,666,000 Net income (loss) 1,178,000 (1,432,000) Net income (loss) per share $ .09 $ (.14)
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 15 - SUBSEQUENT EVENT - -------------------------- In August 1997, the Company made an offer to the bankruptcy court to acquire the assets of Global Shopping Network. If successful, this would retain approximately 1,300,000 FTEs on the Company's existing base and would be a significant step in adding to its owned and operated stations. The Company has paid $1,000,000 as a good faith deposit for its bid. If accepted, the Company will be required to raise additional capital to finance this transaction. NOTE 16 - CONTINGENCIES - ----------------------- The Company is subject to claims in the ordinary course of business. Management does not believe the resolution of any such claims will result in a material adverse effect on the future financial condition, results of operations, or cash flows of the Company. 47 48 SHOP AT HOME, INC. AND SUBSIDIARIES ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 49 SHOP AT HOME, INC. AND SUBSIDIARIES 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 1997 annual Meeting of Shareholders (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. 49 50 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 Accountants Consolidated Balance Sheets as of June 30, 1997 and 1996 Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996, and 1995. Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995. Notes to the Consolidated Financial Statements 2. Financial Statement Schedule Page ---------------------------- Independent Accountants' Report on Financial Statement Schedule 57 Schedule II Valuation and Qualifying Accounts 58 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 59. (b) Reports on Form 8-K None
50 51 SHOP AT HOME, INC. AND SUBSIDIARIES 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, 1997 and 1996 and for each of the three years ended June 30, 1997 is included on page 26 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 53 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. August 14, 1997 51 52 SHOP AT HOME, INC. AND SUBSIDIARIES ----------------------------------- SCHEDULE II ----------- VALUATION AND QUALIFYING ACCOUNTS --------------------------------- YEARS ENDED JUNE 30, 1997, 1996 AND 1995 ----------------------------------------
BALANCE AT CHARGED TO BALANCE BEGINNING RETURNS AND AT END OF YEAR ALLOWANCES DEDUCTIONS (1) OF YEAR ---------- ---------- ---------- -------- 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 ========== =========== =========== ========== Year ended June 30, 1997 Estimated credits due to customers $1,100,120 $19,503,181 $17,481,798 $3,121,503 ========== =========== =========== ==========
(1) Merchandise returned 52 53 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.
53 54 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 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.
54 55 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 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.
55 56 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 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.
56 57 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 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.
57 58 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. 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.
58 59 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 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. 10.43** Employment Agreement between Kent E. Lillie and Shop at Home, Inc. dated July 1, 1997. _____ 11 Schedule of Computation of Net Income Per Share _____ 21.1** Subsidiaries of the Company _____ 27** Financial Data Schedule _____ **Filed herewith
59 60 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/ Kent E. Lillie Date: 9/29/97 ------------------------------------- ------------- Kent E. Lillie President and Chief Executive Officer (Principal Executive Officer) By: /s/ Joseph Nawy Date: 9/29/97 ------------------------------------ ------------ 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: 9/29/97 /s/ J. D. Clinton --------------- ------------------------------------ J. D. Clinton, Director Date: 9/29/97 /s/ W. Paul Cowell --------------- ------------------------------------ W. Paul Cowell, Director Date: 9/29/97 /s/ Kent E. Lillie --------------- ------------------------------------ Kent E. Lillie, Director Date: 9/29/97 /s/ Joseph I. Overholt --------------- ------------------------------------ Joseph I. Overholt, Director Date: 9/29/97 /s/ A.E. Jolley --------------- ------------------------------------ A.E. Jolley, Director Secretary / Treasurer Date: 9/29/97 /s/ Frank A. Woods --------------- ------------------------------------ Frank A. Woods, Director
60 EX-10.43 2 EMPLOYMENT AGREEMENT 1 Exhibit 10.43 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into as of the 1st day of July, 1997, by and between SHOP AT HOME, INC. (the "Corporation"), a Tennessee corporation, and KENT E. LILLIE ("Employee"), an individual residing in the State of Georgia; W I T N E S S E T H: WHEREAS, the Corporation engages in the business of the retail sale of merchandise by sales presentations broadcast directly to potential customers by cable, broadcast and satellite television transmissions commonly known as the "shop at home business," and in the business of the ownership and operation of television stations; WHEREAS, Employee is currently the President and Chief Executive Officer of the Corporation, pursuant to the Employment Agreement dated September 20, 1993, as amended; WHEREAS, the Corporation recognizes that the Employee is a valuable employee of the Corporation who is directly responsible for the Corporation's growth and financial success; and WHEREAS, the parties hereto desire to enter into a newly negotiated agreement for the Corporation's employment of Employee on the terms and conditions hereinafter stated, with the intention to replace all previous employment agreements in their entirety. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment and Term. The Corporation hereby employs Employee as its President and Chief Executive Officer to perform such services and duties as the Board of Directors of the Corporation may from time to time designate during the term hereof, and Employee accepts such employment, all subject to the terms and conditions of this Agreement. Employee's employment shall commence on the date hereof and shall be for a term of five (5) years (the "Term"). Employee's employment under this Agreement shall be extended automatically for successive additional two (2) year terms after the initial term unless either party gives written notice to the contrary to the other at least ninety (90) days prior to commencement of any such renewal term. 2. Termination. The Corporation may terminate Employee's employment under this Agreement at any time during the Term (a) for Cause (as hereinafter defined) or (b) if Employee becomes Completely Disabled (as hereinafter defined). This Agreement shall terminate automatically upon the death of the Employee. Upon proper termination of the Employee, except as provided in subsections 4(c)-(d), Employee shall not be entitled to receive any further compensation or benefits from the Corporation, and except in the case of the death of the Employee, the Corporation shall continue to pay to the Employee's estate or personal representative his Base Salary for a period of six (6) months. 3. Duties. Employee, during the term of this Agreement, will devote his full-time attention and energies to the diligent performance of his duties as an employee of the 2 Corporation. During the term of this Agreement, Employee will not accept employment with any other Person, or engage in any venture for profit which the Corporation may consider to be in conflict with its best interest or to be in competition with its business or which may interfere with Employee's performance of his duties hereunder. 4. Compensation.[1] The Corporation will pay to Employee as compensation for the services to be performed by him hereunder an annual salary of $190,000.00 (the "Base Salary"), payable in equal installments, subject to increase from time to time by the mutual agreement of the parties hereto. [2] As additional compensation, the Corporation will pay to Employee an annual bonus paid on a quarter basis within sixty (60) days of the end of each fiscal quarter, and provided that his employment has not been terminated by Employee or by Employer in accordance with Section 2 hereof prior to the last day of the fiscal quarter. Each quarterly bonus shall be equal to the greater of (i) ten percent (10%) of the increase of the Corporation's net operating profit, after taxes, over the same quarter of the previous fiscal year, or (ii) five percent (5%) of the Total Cash Flow (as defined below) for such quarter. For these purposes, Total Cash Flow shall be the net operating profit, after taxes, plus the depreciation accrued by the Corporation for its broadcast station properties. The parties agree that the Corporation's quarterly financial statements as filed on Form 10-Q with the Securities and Exchange Commission shall be used as the basis upon which to determine the amount of any additional compensation under this subsection. In the event that the Corporation later elects or is required to revise its quarterly financial statements, the parties agree to cooperate to make any necessary adjustments in the additional compensation, with the intention being to finally balance such additional compensation against the annual financial statements prepared by the Corporation's accountants in accordance with generally accepted accounting practices. Such annual financial statements shall be conclusive as to the total amount, if any, of such quarterly bonuses due. [3] If, within 12 months after the occurrence of a Change of Control, the Corporation elects to terminate Employee's employment hereunder for any reason, or if the Employee elects to terminate this Agreement by resignation, the Corporation shall continue to pay Employee an amount equal to the total amount of cash compensation paid to Employee during the 12 month period immediately prior to the date of termination. This payment shall be paid in a lump sum payment within thirty (30) days after the date of the Employee's termination. [4] In the event the Corporation terminates for Cause as defined in Section 8.2(c), the Corporation shall continue to pay Employee's Base Salary and car allowance in the amount and manner herein provided for a period of 12 months from the date of termination. 5. Other Benefits. [1] In the event the Employee relocates his primary residence from the Atlanta area in connection with his duties with the Corporation, the Corporation shall pay or reimburse the Employee for his reasonable moving and related expenses. In the event it is determined that the payment or reimbursement of these expenses will result in taxable income to the Employee, the Corporation shall pay an additional amount to Employee necessary to reimburse him for the federal taxes incurred on such income. [2] The duties to be performed by Employee under this Agreement will require the regular use of an automobile, and the parties agree that Employer shall, in lieu of furnishing 2 3 Employee with a company car or reimbursing Employee for expenses incurred for use of his personal automobile, pay Employee a monthly automobile allowance of $1,000.00. Neither the payments to Employee nor any other terms of this Agreement are intended or shall make Employee the owner, bailee, or lessee of any automobile utilized by Employee. [3] The Corporation will reimburse Employee for all expenses incurred (other than for automobile use) in the course and scope of the Corporation's business, upon the presentation by Employee, from time to time, of an account of such expenditures, setting forth the purposes for which incurred, and the amounts thereof, together with such receipts showing payments as Employee has reasonably been able to retain. [4] The Corporation shall provide Employee with health, life and disability insurance pursuant to its group insurance plan as now or hereafter in effect. In addition, Employee shall receive vacation and holiday benefits in accordance with the Corporation's policies as now or hereafter in effect. [5] The Corporation will pay the reasonable cost of a country club membership and the recurring periodic fees for the Employee. 6. Stock Options. The Corporation will grant to Employee a non-qualified (as defined by the Internal Revenue Code) option to purchase up to 50,000 shares of the Corporation's Common Stock, $.0025 par value, at an exercise price of $2.875 per share. These options will vest on June 30, 2001, and shall expire on June 30, 2006, if not exercised on or prior to that date. The form of such options shall be in accordance with the typical form of such options previously granted by the Corporation to Employee. In the event Employee resigns, or the Corporation terminates Employee for Cause, Complete Disability, or death, all of Employee's rights with respect to such options not yet vested shall terminate. In the event the Employee resigns within twelve (12) months of the occurrence of a Change of Control, or the Corporation terminates Employee at any time for any reason other than for Cause, Complete Disability, or death, all of Employee's rights with respect to options not yet vested, shall vest as of the date of termination. 7. Employee Loan. In the event that the Employee relocates his primary residence, the Corporation agrees to extend a loan to the Employee in the amount of $800,000. Of this amount, $300,000 shall be advanced upon Employee's execution of a contract to purchase the residence, and the remaining $500,000 shall be advanced at the closing of such purchase. This loan shall be evidenced by a promissory note with a final maturity date (the "Maturity Date") of the earlier of (i) the date of the termination of the employment of the Employee, or (ii) June 30, 2002. The note shall not bear interest. Employee shall repay the loan by paying to the Corporation an amount equal to 10% of any amounts paid to the Employee as additional compensation under Section 4(b) hereof, with the entire amount of the remaining balance being due and payable on the Maturity Date. The note shall be secured by a second mortgage deed of trust on the residence, which deed of trust shall be subordinate to a first mortgage deed of trust securing a loan to the Employee, from a lender and in an amount determined by the Employee, the proceeds of which are also used to acquire the residence. 8. Definitions. For purposes of this Agreement the following terms shall have the meanings specified below: 3 4 A. "Accounts" - All Persons to whom any employee or agent of the Corporation (including Employee) has heretofore offered or sold or hereafter offers or sells any of the Corporation's products or services, or with whom any such employee or agent has developed a relationship relating to the Corporation Business at any time during the two-year period preceding termination or expiration of Employee's employment. For purposes of this Agreement, an Account shall be deemed to be located at the address of the Account with which the Corporation regularly deals. B. "Cause" shall mean any one of the following: [1] The Employee commits an act of dishonesty, embezzlement or fraud against the Corporation. [2] The Employee competes, in a manner prohibited by this Agreement, with the Corporation. [3] The Employee fails to use his best efforts on behalf of the Corporation, or conducts himself in a manner substantially detrimental to the Corporation, including without limitation, if the Employee breaches any of his obligations under this Agreement and fails or refuses to comply with the provisions of this Agreement within five (5) days after receipt of written notice from the Corporation by Employee detailing such failure or refusal and the steps necessary to remedy that failure. [4] Employee is convicted of a misdemeanor involving dishonesty, breach of trust or moral turpitude, or is convicted of any felony. [5] Employee engages in the illegal use of any drug. [6] Any state or federal regulatory agency or court of competent jurisdiction issues an order requiring the Employee's removal from any duties or responsibilities for the Corporation. C. A "Change of Control" shall be an event (i) that results in any person, including its affiliates, owning or otherwise having voting control with respect to directors of the Corporation, of more of the issued and outstanding stock of the Corporation or any successor entity than SAH Holdings, L.P. and its affiliates (Global Network Television, Inc. or J.D. Clinton) or (ii) J.D. Clinton or his designee is not elected to, or is removed from, the Board of Directors of the Corporation (other than by the mutual decision of J.D. Clinton and Employee). D. "Corporation Business" - shall mean the business of retail sales of merchandise by sales presentations broadcast directly to potential customers over broadcast stations, by cable and by satellite television transmissions commonly known as the "shop at home business," and shall also include the ownership or operation of one or more television broadcast stations. E. The "Corporation's Territory" shall be deemed to be North America. 4 5 F. "Complete Disability" - Employee's inability, due to illness, accident or any other physical or mental incapacity, to perform the duties provided for herein for an aggregate of 90 days within any period of 240 consecutive days. G. "Confidential Information" - Names, addresses, telephone numbers, contact persons and other identifying information relating to Accounts and information with respect to the needs and requirements of Accounts for the Corporation's products and services; rate and price information on products and services provided by the Corporation to its Accounts; all business records and personnel data relating to the Corporation's employees, including compensation arrangements of such employees; any trade secrets or other confidential information licensed to, obtained, developed or purchased or otherwise possessed by the Corporation or licensed by the Corporation to others; any other trade secrets or confidential information used or obtained by Employee in the course of his employment hereunder from any officer, employee, agent or representative of the Corporation or any division, subsidiary or affiliate of the Corporation or otherwise, information contained in any confidential documents prepared by or for the Corporation and its employees or agents at the Corporation's expense, on Corporation time or otherwise in furtherance of the Corporation Business, and other confidential information used or obtained by Employee in the course of his employment with the Corporation; financial information with respect to the Corporation Business; and information with respect to the Corporation's suppliers, and the source and availability of the supplies, equipment and materials used in the Corporation Business; provided, however, that Confidential Information shall not include: (i) any information that shall become generally known to the industry through no fault of Employee; (ii) any information that shall be disclosed to Employee by a third party (other than an officer, employee, agent or representative of the Corporation or any division, subsidiary or affiliate of the Corporation) having legitimate and unrestricted possession thereof and the unrestricted right to make such disclosure; or (iii) any information that Employee can demonstrate was within his legitimate and unrestricted possession prior to the time of his employment by the Corporation. All Confidential Information shall be contractually subject to protection under this Agreement whether such information would otherwise be regarded or legally considered "confidential" and without regard to whether such information constitutes a trade secret under applicable law or is separately protectable at law or in equity as a trade secret. H. "Person" - Any individual, corporation, bank, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, governmental authority or other entity. 9. Covenants Against Unfair Post-Termination Competition. A. Covenant Against Disclosure or Use of Confidential Information. In consideration of his employment hereunder, Employee agrees that, for a period of two (2) years immediately after the termination or expiration of his employment hereunder, he will not: [a] disclose to any Person, [b] use in soliciting the patronage of any Person for the purpose of providing products or services of the kind provided in the Corporation Business, or 5 6 [c] otherwise use for his own purposes, any Confidential Information obtained by Employee while employed by the Corporation; provided, however, that Employee may make disclosures required by a valid order or subpoena issued by a court or administrative agency of competent jurisdiction. In such event, Employee will promptly notify the Corporation of such order or subpoena to provide the Corporation an opportunity to protect its interest. Employee shall not be bound by this Section if the payments and benefits described in Section 4(c) or (d) to which Employee shall be entitled are not current; the Employee has notified the Corporation of that default, and the Corporation has not cured that default within thirty (30) days from the date of notice. B. Covenant Against Post-Termination Competition. In consideration of Employee's employment by the Corporation, Employee agrees that, for a period of two (2) years immediately after the termination or expiration of his employment hereunder, he will not, directly or indirectly, individually or on behalf of any Person: [a] solicit any Account for the purpose of selling or providing to the Account products or services of the same kind as provided by the Corporation during Employee's employment by the Corporation; or [b] provide services of the type provided by Employee to the Corporation to any Person which is then engaged in the Corporation Business; or (iii) enter into the employ of or render any service to or act in concert with any person, partnership, corporation or other entity engaged in the Corporation Business within the Corporation's Territory; or (iv) become interested in the Corporation Business, as a proprietor, partner, shareholder, director, officer, principal, agent, employee, consultant or in any other relationship or capacity; provided, that Employee may own up to 5% of the outstanding shares of any company which is a reporting company with the U.S. Securities and Exchange Commission. This Section shall survive the expiration or termination of this Agreement for any reason. Notwithstanding any of the preceding provisions, the agreement of the Employee not to compete with the Corporation after his termination shall be void and unenforceable after the occurrence of a Change of Control. 10. Inventions, Discoveries and Improvements. A. Disclosure to Corporation. Employee will promptly disclose in writing to the Corporation any and all inventions, discoveries and improvements, directly or indirectly related to the Corporation Business, whether conceived or made solely by Employee or jointly 6 7 with others during the period of Employee's employment hereunder. All of Employee's right, title and interest n and to all such inventions, discoveries and improvements developed or conceived by Employee during the period of his employment shall be the sole property of the Corporation. B. Documents of Assignment. At the Corporation's request and expense, both during and subsequent to Employee's employment hereunder, Employee will promptly execute a specific assignment of title to the Corporation of each invention, discovery or improvement belonging to the Corporation and will perform all other acts reasonably necessary to enable the Corporation to secure a patent therefor in the United States and in foreign countries, and to maintain, defend and assert such patents. This Section shall survive the expiration or termination of this Agreement. C. Prior Inventions. Any inventions, discoveries or improvements, patented or unpatented, that Employee can demonstrate were conceived or made by him prior to the date hereof shall be excluded from the provisions of this Section. 11. Return of Client Lists, Other Documents and Equipment. Upon the termination or expiration of his employment hereunder, Employee shall deliver promptly to the Corporation all Corporation files, customer lists, memoranda, research, drawings, blueprints, Corporation forms and other documents supplied to or created by him in connection with his employment hereunder (including all copies of the foregoing) in his possession or control and all of the Corporation equipment and other materials in his possession or control. Employee acknowledges that all items described in this Section are and will remain at all times the sole and exclusive property of the Corporation. 12. Survival of Restrictions. Notwithstanding the breach of any of the provisions of this Agreement by either party hereto, all of the provisions of Sections 9, 10 and 11 of this Agreement shall survive the termination or expiration of Employee's employment with the Corporation and shall continue in full force and effect in the same manner and to the same extent as if they were set forth in a separate agreement between the Corporation and Employee, and all of such provisions shall be binding on the heirs, legatees and legal representative(s) of Employee. 13. Hold Harmless. Employee and the Corporation covenant and agree that they will indemnify and hold harmless the other from (i) any and all losses, damages, liabilities, expenses of claims resulting from or arising out of any nonfulfillment by the defaulting party of any material provision of this Agreement, and (ii) any and all losses or damages resulting from the defaulting party's malfeasance or gross negligence. 14. Contract Nonassignable. The parties acknowledge that this Agreement has been entered into due to, among other things, the special skills of Employee, and agree that this Agreement may not be assigned or transferred by Employee, in whole or in part, without the prior written consent of the Corporation. This Agreement shall be binding and shall inure to the benefit of the Corporation and its successors and assigns. 15. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed, first class, certified mail, postage prepaid: 7 8 To Corporation: Shop At Home, Inc. 5210 Schubert Road Knoxville, Tennessee 37912 To Employee: Mr. Kent Lillie 1133 Tennyson Place Atlanta, Georgia 30319 16. Cumulative and Severable Nature of Rights and Agreements. Employee acknowledges and agrees that the Corporation's various rights and remedies in this Agreement are cumulative and nonexclusive of one another and that Employee's several undertakings and agreements contained herein, including, without limitation, those contained in Sections 9.1, 9.2, 10 and 11 of this Agreement, are severable covenants independent of one another and of any other provision or covenant of this Agreement. Employee agrees that the existence of any claim by him against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to enforcement by the Corporation of any or all of such provisions or covenants. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. 17. Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. 18. Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto. 19. Execution to Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. 20. Headings. The headings set out in this Agreement are for convenience of reference and shall not be deemed a part of this Agreement and shall not affect the meaning or construction of any of the provisions her 21. Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements, or representations by or among the parties, written or oral, to the extent they related in any way to the subject matter hereof. 8 9 22. Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Tennessee without giving effect to any choice or conflict of law provision or rule (whether of the State of Tennessee or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Tennessee. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. EMPLOYER: SHOP AT HOME, INC. By: /s/ J.D. Clinton --------------------------- J.D. CLINTON, Chairman EMPLOYEE: /s/ Kent E. Lillie -------------------------- KENT E. LILLIE 9 EX-11 3 SCHEDULE OF COMPUTATION OF NET INCOME 1 EXHIBIT 11 SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE Years Ended June 30,
1997 1996 1995 ---- ---- ---- Net income (loss) $1,556,046 $(1,405,472) $(1,281,989) Interest expense saved from conversion of debt 107,408 - Preferred stock dividend (14,000) (14,000) (5,000) ------------ ------------- -------------- Adjusted net income (loss) $1,649,454 $(1,419,472) $(1,286,989) ------------ ------------- -------------- Common shares outstanding 10,651,472 10,284,085 9,436,870 Common equivalent shares issuable upon exercise of stock options and warrants (1) 2,681,100 Common equivalent shares issuable upon conversion of debt 475,026 Common equivalent shares issuable upon conversion of preferred stock 137,943 ------------ ------------ ------------ Total weighted average shares 13,945,540 10,284,085 9,436,870 ============ ============ ============ Primary and fully diluted net earnings per common and equivalent share $0.12 $(0.14) $(0.14) ============ ============ ============
Notes: (1) Amount calculated using the modified treasury stock method and fair market values. EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1
Subsidiaries of the Company: Name State of Incorporation - ---- ---------------------- MFP, Inc. Tennessee SAH Acquisition Corporation Tennessee Broadcast, Cable and Satellite Technologies, Inc. Texas SAH Acquisition Corporation II Tennessee UBS Texas Collector's Edge of Tennessee, Inc. Tennessee
EX-27 5 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 1 5,077,641 0 3,292,925 0 3,262,080 13,436,339 6,328,726 1,894,959 34,410,310 18,077,778 7,522,131 1,393,430 0 26,786 3,776,775 34,410,310 67,817,460 69,064,172 40,626,134 40,626,134 26,881,992 0 1,079,529 1,476,046 (80,000) 1,556,046 0 0 0 1,556,046 0.12 0.12
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