SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 2000 0-25596
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SHOP AT HOME, INC.
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-1282758
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-5249
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(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 263-8000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock $.0025 par value 39,503,122
- ------------------------------ -----------------------------------
(Title of class) (Shares outstanding at
January 25, 2001)
SHOP AT HOME, INC. AND SUBSIDIARIES
Index
Three and Six Months Ended December 31, 2000 and 1999
- --------------------------------------------------------------------------
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5-6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3 - Quantitative and Qualitative Disclosure About
Market Risk 17-19
Part II OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities 20
Item 3 - Defaults upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 6 - Exhibits and Reports on Form 8-K 20
Exhibit 27 Financial Data Schedule (For SEC use only)
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of Dollars)
December 31, 2000 June 30, 2000
--------------------- -------------------
(Unaudited)
Cash and cash equivalents $10,804 $27,515
Accounts receivable - net 8,389 15,892
Inventories - net 13,541 15,828
Prepaid expenses 902 1,214
Deferred tax assets 4,724 1,825
Discontinued operations 2,143 -
--------------------- -------------------
Total current assets 40,503 62,274
Related party - note receivable, net of discounts of $48 and
$64 at December 31, 2000 and June 30, 2000, respectively 719 703
Property and equipment - net 45,429 48,812
Deferred tax asset 15,627 8,128
Restricted cash - 5,058
FCC and NFL Licenses - net 95,849 96,615
Goodwill, net 535 2,202
Other assets 3,582 3,502
--------------------- -------------------
Total assets $202,244 $227,294
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 25,372 32,215
Current portion - capital leases and long term debt 20,916 12,775
Deferred revenue 478
4,040
--------------------- -------------------
Total current liabilities 50,328 45,468
Long-term debt 76,110 84,336
Redeemable preferred stock:
Series A - $10 par value, 1,000,000 shares
authorized; 92,732 shares issued and outstanding at
December 31, 2000 and June 30, 2000; redeemable at $10
per share plus unpaid dividends accrued 941 941
Series B - $10,000 stated value, 2,000 shares authorized; 2,000 issued
and 611 and 2,000 shares outstanding at December 31, 2000
and June 30, 2000, respectively; redeemable as
discussed in June 30, 2000 Annual Report on Form 10-K 3,318 11,563
Stockholders' equity:
Common stock - $.0025 par value,
100,000,000 shares authorized; 39,093,026 and
31,264,772 shares issued at December 31, 2000
and June 30, 2000, respectively 98 78
Additional paid in capital 109,989 106,482
Accumulated deficit (38,540) (21,574)
--------------------- -------------------
Total liabilities and stockholders' equity $202,244 $227,294
===================== ===================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Thousands of Dollars)
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net revenues $46,515 $54,208 $87,294 $100,031
Operating expenses:
Cost of goods sold (excluding items listed below) 29,690 34,403 57,541 64,058
Salaries and wages 4,603 2,906 9,243 5,453
Transponder and affiliate charges 8,156 8,604 16,619 16,497
Advertising 1,435 252 2,303 331
General and administrative 5,081 4,544 9,970 8,314
Depreciation and amortization 3,058 1,592 5,974 2,820
--------------- -------------- -------------- ---------------
Total operating expenses 52,023 52,301 101,650 97,473
--------------- -------------- -------------- ---------------
Income (loss) from operations (5,508) 1,907 (14,356) 2,558
Interest income 227 196 492 500
Interest expense (3,108) (2,259) (5,914) (4,527)
Other income - - 4 30
--------------- -------------- -------------- ---------------
Loss before income taxes (8,389) (156) (19,774) (1,439)
Income tax benefit (3,186) (53) (7,514) (547)
--------------- -------------- -------------- ---------------
Net loss from continuing operations (5,203) (103) (12,260) (892)
--------------- -------------- -------------- ---------------
Loss from discontinued operations of CET to December
29, 2000, plus applicable income tax benefit of 123,
129, 368 and 130, respectively (200) (211) (598) (212)
Loss on disposal of CET, plus applicable income tax
benefit of 1,684 (2,749) - (2,749) -
--------------- -------------- -------------- ---------------
Net loss before cumulative effect of accounting change (8,152) (314) (15,607) (1,104)
Cumulative effect of accounting change plus applicable
income tax benefit of 832 (see note 8) - - (1,359) -
--------------- -------------- -------------- ---------------
Net loss (8,152) (314) (16,966) (1,104)
--------------- -------------- -------------- ---------------
Preferred stock accretion and dividends (see note 5) (4,227) (3) (5,439) (6)
--------------- -------------- -------------- ---------------
Net loss available for common shareholders $(12,379) $(317) $(22,405) $(1,110)
=============== ============== ============== ===============
Basic loss per common share:
Loss from continuing operations $(0.27) - $(0.53) $(0.03)
Loss from discontinued operations $(0.08) $(0.01) $(0.10) $(0.01)
Cumulative effect of accounting change - - $(0.05) -
--------------- -------------- -------------- ---------------
Basic loss per share $(0.35) $(0.01) $(0.68) $(0.04)
=============== ============== ============== ===============
Diluted loss per common share:
Loss from continuing operations $(0.27) - $(0.53) $(0.06)
Loss from discontinued operations $(0.08) $(0.01) $(0.10) $(0.01)
Cumulative effect of accounting change - - $(0.05) -
--------------- -------------- -------------- ---------------
Diluted loss per share $(0.35) $(0.01) $(0.68) $(0.07)
=============== ============== ============== ===============
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 2000 and 1999
(Thousands of Dollars)
2000 1999
(Unaudited) (Unaudited)
------------------- -------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(16,966) $(1,104)
Non-cash expenses/(income) included in net loss:
Depreciation and amortization 5,974 3,187
Cumulative effect of accounting change 1,359 -
Discontinued operations 4,433 -
Deferred tax benefit (10,398) (677)
Deferred interest 520 (14)
Provision for bad debt 857 315
Provision for inventory obsolescence 202 290
Changes in current and non-current items
Accounts receivable 6,003 (6,748)
Inventories 787 (5,987)
Prepaid expenses and other assets 312 (91)
Accounts payable and accrued expenses (9,324) 1,924
Deferred revenue 3,562 133
------------------- -------------------
Net cash used by operations (12,679) (8,772)
=================== ===================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (949) (12,422)
Investment in marketable securities - (4,997)
Deposits (47) (135)
Licenses (525) (567)
Net change in restricted cash 2,427 498
Other assets - (22)
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Net cash provided (used) by investing activities 906 (17,645)
=================== ===================
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt - 10,000
Proceeds from stock offering - 44,293
Exercise of stock options and warrants 6 162
Payment of stock issuance costs - (757)
Debt acquisition costs - (222)
Preferred stock dividends (131) -
Preferred stock redemption (4,368) -
Repayments of debt and capitalized leases (445) (20,214)
------------------- -------------------
Net cash provided (used) by financing activities (4,938) 33,262
=================== ===================
NET INCREASE/(DECREASE) IN CASH (16,711) 6,845
Cash beginning of period 27,515 7,066
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Cash end of period $10,804 $13,911
=================== ===================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
Six Months Ended December 31, 2000 and 1999
(Thousands of Dollars)
- --------------------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------- ----------------------------
(Unaudited) (Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for taxes $ 337 $ 348
========================== ============================
Cash paid for interest $ 4,909 $ 4,219
========================== ============================
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Accrued preferred stock dividends $ 229 $ -
========================== ============================
Reversal of conversion of preferred stock into shares of
common stock $ - $ 318
========================== ============================
Income tax benefit from exercise of stock options $ - $ 159
========================== ============================
Property and equipment acquired through capital leases $ 360 $ 1,588
========================== ============================
Conversion of 973 shares of Series B preferred stock into
common stock $ 4,711 $ -
========================== ============================
Dividend on Series B preferred stock paid in common stock $ 264 $ -
========================== ============================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 31, 2000 (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
All dollar values have been expressed in thousands (000s) unless otherwise noted
except for per share data. The financial information included herein is
unaudited for the quarter ended December 31, 2000 and 1999; however, such
information reflects all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of the Company, necessary for a fair
presentation of financial condition and results of operations of the interim
periods. The condensed consolidated balance sheet data for the fiscal year ended
June 30, 2000 was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The accounting policies followed by the Company are set forth in the Company's
financial statements in its Annual Report on Form 10-K for the fiscal year ended
June 30, 2000.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
NOTE 2 -- INVENTORY
The components of inventory at December 31, 2000 and June 30, 2000 are
as follows:
December 31, June 30,
2000 2000
---- ----
Products purchased for resale $ 14,063 $ 12,688
Finished goods (Collector's Edge) - 2,909
Work in progress (Collector's Edge) - 900
-------------------- ------------------
14,063 16,497
Valuation allowance (522) (669)
-------------------- ------------------
Total $ 13,541 $ 15,828
==================== ==================
NOTE 3 - REVOLVING CREDIT AGREEMENT
On October 30, 2000 the Company obtained a $20.0 million revolving line of
credit from a financial institution, of which $20.0 million was outstanding as
of December 31, 2000. The new facility matures on November 2, 2001. No principal
payments are due before then except as required as certain assets are sold. The
facility requires that interest be paid at least quarterly at a variable rate
(11.625% currently) based on LIBOR or prime rate. The facility contains
covenants restricting the sale of assets, mergers and investments and requiring
that cash on hand exceed $5.0 million at all times.
NOTE 4 - RELATED PARTY TRANSACTIONS
An entity affiliated with Frank A. Woods, a director of the Company, was paid a
finder's fee of $200,000 in connection with the new revolving credit facility.
The fee was approved by the Board of Directors of the Company (with Mr. Woods
abstaining) as fair and reasonable and comparable to fees paid to third persons
for such services.
NOTE 5 - NET LOSS PER SHARE
Basic and diluted loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Dilutive
securities are represented by options, warrants and convertible preferred stock
outstanding and are not included in the computation for loss periods because
they would be antidilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) from continuing operations per common share (in millions, except share
and per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
---------------- ---------------- --------------- ----------------
Numerator:
Net loss from continuing operations $ (5,203) $ (103) $ (12,260) $ (892)
Preferred stock accretion and dividends (4,227) (3) (5,439) (6)
---------------- ---------------- --------------- ----------------
Numerator for basic loss per share
available to common stockholders after
assumed conversions $ (9,430) $ (106) $ (17,699) $ (898)
================ ================ =============== ================
Denominator:
Denominator for basic earnings per share-
adjusted weighted-average shares and
assumed conversions 34,956 30,397 33,111 30,178
================ ================ =============== ================
Basic loss per share $ (0.27) $ - $ (0.53) $ (0.03)
================ ================ ================ ===============
Diluted loss per share $ (0.27) $ - $ (0.53) $ (0.03)
================ ================ =============== ================
Although these amounts are excluded from the computation in loss years because
their inclusion would be anti-dilutive, they are shown here for information and
comparative purposes only.
a) Employee stock options and warrants 7,503 5,233 7,503 5,233
b) Convertible preferred stock 5,507 113 5,507 113
Included in the preferred stock accretion and dividends above for the quarter
ending December 31, 2000 are $311 for dividends paid in cash, common stock or
accrued, $2,012 for the beneficial conversion feature accretion, and $1,904 loss
on repurchase of preferred stock treated as a dividend. Included in the six
months ending December 31, 2000 are $131 for dividends paid in cash, $264 for
dividends paid in common stock, $229 in accrued dividends not yet paid, $2,911
for the beneficial conversion feature accretion, and $1,904 loss on repurchase
of preferred stock treated as a dividend.
The Company adopted certain provisions of EITF 00-27, "Application of EITF Issue
No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios," to Certain Convertible
Securities", in the second quarter of fiscal 2001. EITF 00-27 changed the
approach of calculating the conversion price used in determining the value of
the beneficial conversion feature from using the conversion price stated in the
preferred stock certificate to using the accounting conversion price. The
adoption of this EITF increased the original value of the beneficial conversion
feature from $3,596 to $7,796. In accordance with EITF the adoption was treated
as a cumulative effect of an accounting change which resulted in a cumulative
adjustment to dividends of $499 which was recorded in the second quarter of
fiscal 2001.
NOTE 6 - DISCONTINUANCE OF COLLECTOR'S EDGE
The Company has discontinued the operations of its subsidiary and segment,
Collector's Edge of Tennessee (CET), which formerly manufactured and distributed
football trading cards. The Company is currently negotiating the sale of CET's
assets, which have been written down to reflect management's estimate of their
net realizable value. Revenues from CET are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2000 1999 2000 1999
---------------- ---------------- --------------- ----------------
$1,349 $2,431 $2,519 $4,491
NOTE 7 - SEGMENT DISCLOSURE
The Company operates principally in two segments: Network and
collectibles.comsm. The Network segment consists of home shopping, which
primarily includes the sale of merchandise on television. The collectibles.comsm
segment, which became operational November 12, 1999, consists of the Company's
website, which specializes in the sale of collectible merchandise over the
Internet. The Company operates almost exclusively in the United States.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
INDUSTRY SEGMENT DATA
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Network $ 41,766 $ 53,780 $ 78,706 $ 99,603
collectibles.comsm 5,402 428 9,865 428
Intersegment Sales (653) - (1,277) -
-------------------- --------------------- ----------------------- --------------------
$ 46,515 $ 54,208 $ 87,294 $ 100,031
==================== ===================== ======================= ====================
Income (loss) from operations:
Network $ (3,484) $ 2,375 $ (10,575) $ 3,353
collectibles.comsm (2,024) (468) (3,781) (795)
-------------------- --------------------- ----------------------- --------------------
$ (5,508) $ 1,907 $ (14,356) $ 2,558
==================== ===================== ======================= ====================
Depreciation and amortization:
Network $ 2,706 $ 1,573 $ 5,269 $ 2,784
collectibles.comsm 352 19 705 36
-------------------- --------------------- ----------------------- --------------------
$ 3,058 $ 1,592 $ 5,974 $ 2,820
==================== ===================== ======================= ====================
Income (loss) before taxes:
Network $ (6,364) $ 311 $ (15,992) $ (644)
collectibles.comsm (2,025) (467) (3,782) (795)
-------------------- --------------------- ----------------------- --------------------
$ (8,389) $ (156) $ (19,774) $ (1,439)
==================== ===================== ======================= ====================
December 31, 2000 June 30, 2000
----------------------- --------------------
Assets:
Network $ 191,688 $ 211,433
Collectibles.comsm 9,563 8,830
Discontinued Operations 2,143 8,331
Intersegment eliminations (1,150) (1,300)
----------------------- --------------------
$ 202,244 $ 227,294
======================= ====================
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
Pursuant to Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements ("SAB101")" the Company changed its method of recognizing revenue on
products it ships to its customers. Prior to the adoption of SAB101 the Company
recognized revenue when the products were shipped to the customers, as the
products were shipped FOB shipping point. Pursuant to the new guidance in SAB101
the Company now recognizes the revenue from shipments once the product is
received by the customer. This change was necessitated since the Company
routinely maintains risk of loss while the products are in transit, via its
insurance coverage. In accordance with SAB101, the Company has reduced revenue
for the products which were shipped at the end of the period but not received by
the customer by recording a cumulative effect of an accounting change of $1,359
(net of a tax benefit of $832) for the effects through June 30, 2000 and
restating the first two quarters of fiscal 2001. The restatement for the first
quarter and the adoption of SAB 101 in the second quarter had the following
effect on the Company's financial statements:
Three Months Ended Three Months Ended Six Months Ended
------------------- -------------------- ------------------
September 30, 2000 December 31, 2000 December 31, 2000
------------------- -------------------- ------------------
Increase (decrease) to line item identified
Net Revenue 382 1,201 1,582
Cost of Goods 576 655 1,232
Operating loss 194 (546) (350)
Net loss from continuing operations 120 (339) (219)
Net loss before cumulative
effect of accounting change 120 (339) (219)
Cumulative effect of
accounting change 1,359 - 1,359
Net loss available to common
shareholders 1,479 (339) 1,142
September 30, 2000 September 30, 2000
------------------ ------------------
Previous Restated
-------- --------
Accounts receivable 10,477 8,469
Inventory 10,120 11,205
Deferred tax 14,450 15,282
Deferred revenue 483 4,476
Retained earnings (28,911) (30,388)
Pursuant to Emerging Issues Task Force (EITF) Issue 00-10, "Accounting for
Shipping and Handling Fees and Costs", the Company changed its classification of
shipping and handling costs in the second quarter of fiscal 2001. Prior to the
issuance of EITF 00-10, the Company netted shipping and handling costs against
shipping and handling revenue and included the net amount in net revenues. In
accordance with EITF 00-10 the Company has reclassified all shipping and
handling costs to cost of goods sold which increased net revenue and cost of
goods as follows:
Three Months Ended Three Months Ended Six Months Ended
September 30, December 31, December 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Net revenues $1,910 2,602 2,063 2,558 3,973 5,160
Cost of goods sold $1,910 2,602 2,063 2,558 3,973 5,160
The adoption of EITF 00-10 had no effect on operating loss or net loss.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" and the Company's consolidated financial
statements and related notes included elsewhere herein.
General
The Company, founded in 1986, sells specialty consumer products through
interactive electronic media, including broadcast, cable and satellite
television and, increasingly, the Internet. It offers a variety of products such
as sports cards and memorabilia, coins, currency and jewelry, many of which it
sells on an exclusive basis.
The Company receives revenues primarily from the sale of merchandise
marketed through its programming carried by:
o television stations from which the Company has purchased broadcast time;
o the Company's owned television stations, with its programming being carried
on cable television systems under the "must carry" or the retransmission
consent provisions of federal law;
o direct carriage on cable television systems under agreements with cable
system operators;
o direct broadcast satellite services (DBS), such as Echostar;
o direct reception of the Company's transmission by individuals who own
"backyard" satellite downlink equipment; and
o the Company's website, collectibles.com.
Approximately 88.4% of the Company's revenues for the quarter ended
December 31, 2000 were derived from the sale of products on the television
network and 11.6% were from collectibles.com. The Company's products include
sports collectibles and sports related products, memorabilia and other signed
and autographed merchandise, electronic equipment, coins and currency, cutlery
and knives, jewelry and gemstones. The Company launched its website,
collectibles.com, on November 12, 1999. Since its launch, collectibles.com has
generated $14.2 million in net revenues through December 31, 2000.
As of December 31, 2000, the Company's programming was
viewable during all or part of each day by approximately 60.4 million cable and
DBS households, of which approximately 14.6 million households received the
programming on essentially a full-time basis (20 or more hours per day) and the
remaining 45.8 million households received it on a part-time basis. To measure
performance in a manner that reflects both the growth of the Company and the
nature of its access to part-time households, the Company uses a household
full-time equivalent method to measure the reach of its programming which
accounts for both the quantity and quality of time available to it. To derive
this full-time equivalent household base ("FTE Household"), the Company has
developed a methodology to assign a relative value of each hour of the day to
its overall sales, which is based on sales in markets where the programming is
carried on a full-time basis. Each hour of the day throughout the week has a
value based on historical sales. FTE Households have grown to 26.1 million at
December 31, 2000 from 22.1 million at December 31, 1999. The Company believes
that the change in the number of FTE Households provides a consistent measure of
its growth and applies this methodology to all affiliates. Accordingly, the
Company uses the revenue per average FTE Household as a measure of pricing new
affiliate contracts and estimating their anticipated revenue performance.
Principal elements in the Company's cost structure are (a) cost of
goods sold, (b) transponder and affiliate costs and (c) salaries and wages. The
Company's cost of goods sold is a direct result of both the product mix and its
ability to negotiate favorable prices from its vendors. Transponder and
affiliate costs include expenses related to carriage under affiliation and
transponder agreements. With regard to salaries and wages, the Company seeks to
hire and retain those employees who contribute the most to profitability in
relationship to their compensation.
Business Strategy
Because of disappointing results reported for the fiscal year ended
June 30, 2000, the Company implemented a comprehensive turnaround plan which was
outlined in the Annual Report on Form 10-K filed for that period. The ongoing
plan included cost reductions as well as revenue improvement initiatives in
comparison to the quarter ended June 30, 2000. Cost reductions have been
achieved in salaries through headcount reductions, in affiliate charges by
canceling or lowering the payments related to unprofitable carriage agreements,
in shipping costs by eliminating handling fees paid to the Company's merchandise
vendors and in other operating expenses by renegotiating major contracts such as
long-distance telephone service and computer software maintenance. Revenue
improvements have been achieved by reducing credit card fraud, returning to
predictable product scheduling by daypart and successfully launching a database
marketing program. Subsequent to the end of the December 31, 2000 quarter, the
Company introduced a private label credit card program which has been well
received by customers. The Company also made progress in the quarter ended
December 31, 2000 with regard to reducing returns and cost of goods sold as a
percentage of revenues in comparison to the quarter ended September 30, 2000.
The average price point of merchandise shipped declined as a desired part of an
overall strategy to appeal to a larger customer base.
The primary current challenge for the Company is to increase sales
volume through a wider variety of new product offerings, a deeper pool of
suppliers, and better customer service. The Company is striving to achieve sales
increases even in the face of an uncertain retail environment nationally.
Overview of Results of Operations
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain items included in the Company's Condensed
Consolidated Statements of Operations:
Three Months Ended December 31, Six Months Ended December 31,
2000 1999 2000 1999
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold (excluding items listed
below) 63.8 63.5 65.9 64.0
Salaries and wages 9.9 5.4 10.6 5.5
Transponder and affiliate charges 17.5 15.9 19.0 16.5
Advertising 3.1 0.4 2.6 0.3
General and administrative expenses 10.9 8.4 11.4 8.3
Depreciation and amortization 6.6 2.9 6.9 2.8
Total operating expenses 111.8 96.5 116.4 97.4
Interest income .5 0.4 0.6 0.5
Interest expense (6.7) (4.2) (6.8) (4.5)
Other income - - - -
Net loss before income taxes (18.0) (0.3) (22.6) (1.4)
Income tax benefit (6.8) (0.1) (8.6) (0.5)
Net loss before discontinued operations (11.2) (0.2) (14.0) (0.9)
Discontinued operations (10.2) (0.6) (6.2) (0.3)
Income tax benefit from discontinued
operations (3.9) (0.2) (2.3) (0.1)
Net loss before cumulative effect of
accounting change (17.5) (0.6) (17.9) (1.1)
Cumulative effect of accounting change - - (1.5) -
Net loss (17.5) (0.6) (19.4) (1.1)
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended December 31, 2000 vs. three months ended December 31, 1999
Net Revenues. The Company's net revenues for the quarter ended December
31, 2000, were $46.5 million, a decrease of 14.2% from $54.2 million for the
same quarter in 1999. The decrease in net revenues is primarily due to reduced
shipments of certain key merchandise categories, including electronics and
jewelry. The Company believes that the general retail market for jewelry and
electronics slowed during the quarter. Also contributing to the reduction in net
revenues were increased sales returns and chargebacks. Returns increased from
$12.6 million or 19.8% of sales for the quarter ending December 31, 1999 to
$16.5 million or 27.1% of sales this quarter. Chargebacks increased from $0.4
million or 0.7% of sales for the quarter ending December 31,1999 to $0.7 million
or 1.2% of sales this quarter. The Network accounted for 88.4% of total net
revenues. collectibles.com represented 11.6% of the Company's total net revenues
or $5.4 million.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and related shipping charges. For the quarter ended December 31,
2000, the cost of goods sold rose as a percentage of net revenues to 63.8% from
63.5% in the comparable 1999 period. The cost of goods were $29.7 million for
the quarter ended December 31, 2000 compared to $34.4 million for the quarter
ended December 31, 1999. The cost of goods for the Network was 62.1% or $26.0
million for the quarter ended December 31, 2000 compared to 64.1% or $34.8
million for the quarter ended December 31, 1999. The cost of goods for
collectibles.com was 69.2% or $3.7 million. Margins for the Network and
collectibles.com were negatively impacted by an increase in credit card
chargebacks from $0.4 million in the quarter ended December 31, 1999 to $0.7
million for the quarter ended December 31, 2000.
Salaries and Wages. Salaries and wages for the quarter ended December
31, 2000 were $4.6 million, an increase of $1.7 million or 58.4% over the
comparable 1999 quarter. After adding back $0.6 million in salaries capitalized
in the quarter last year as part of the development of the enterprise wide
computer system, this increase would be reduced to $1.1 million. Salaries and
wages, as a percent of revenues, increased to 9.9% in the 2000 period compared
to 5.4% in the 1999 period (6.5% after adding back capitalized salaries). The
increase in salaries is due to the addition of information systems and customer
service staff required to support the Company's new enterprise wide computer
system and website.
Transponder and Affiliate Charges; Advertising. Transponder and
affiliate charges for the quarter ended December 31, 2000 were $8.2 million, a
decrease of $0.4 million or 5.2% from the comparable 1999 quarter. During the
same period advertising, which is primarily paid to affiliates as part of
carriage agreements, rose to $1.4 million from $0.3 million for the quarter
ended December 31, 1999. Total transponder, affiliate and advertising expenses
rose $0.7 million or 8.3%. During the same period, average FTE Cable Households
grew 18.3%, from 21.8 million to 25.8 million.
General and Administrative. General and administrative expenses for the
quarter ended December 31, 2000 were $5.1 million, an increase of $0.5 million
or 11.8% over the comparable 1999 quarter. This increase was comprised primarily
of expenses associated with employee benefits, payroll taxes and maintenance
agreements due to the installation of the enterprise wide information system,
costs associated with database marketing and an increase in the allowance for
bad debt.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended December 31, 2000 was $3.1 million, an increase of $1.5 million or
92.1% over the comparable 1999 quarter, due to the installation of the
enterprise wide information system and the launch of collectibles.com.
Interest. Interest expense of $3.1 million increased by $0.8 or 37.6%
over the comparable period in 1999. The increase is primarily due to interest
associated with a higher level of bank debt.
Six months ended December 31, 2000 vs. six months ended December 31, 1999
Net Revenues. The Company's net revenues for the period ended December
31, 2000, were $87.3 million, a decrease of 12.7% from $100.0 million for the
same period in 1999. The decrease in net revenues is primarily due to reduced
shipments of certain key merchandise categories, including electronics and
jewelry. The Company believes that the general retail market for jewelry and
electronics slowed during the period. Also, contributing to the reduction in net
revenues were increased sales returns and chargebacks. Returns increased from
$22.5 million or 19.4% of sales last year to $31.7 million or 27.3% of sales
this year. Chargebacks increased from $0.8 million or 0.7% of sales last year to
$2.0 million or 1.8% of sales this year. The Network accounted for 88.7% of
total net revenues. collectibles.com represented 11.3% of the Company's total
net revenues or $9.9 million.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and related shipping charges. For the period ended December 31,
2000, the cost of goods sold rose as a percentage of net revenues to 65.9% from
64.0% in the comparable 1999 period. The cost of goods were $57.5 million for
the period ended December 31, 2000 compared to $64.1 million for the period
ended December 31, 1999. The cost of goods for the Network was 64.4% or $50.7
million for the period ended December 31, 2000 compared to 64.4% or $62.5
million for the period ended December 31, 1999. The cost of goods for
collectibles.com was 69.1% or $6.8 million. Margins for the Network and
collectibles.com were negatively impacted by an increase in credit card
chargebacks from $0.8 million in the period ended December 31, 1999 to $2.0
million for the period ended December 31, 2000.
Salaries and Wages. Salaries and wages for the period ended December
31, 2000 were $9.2 million, an increase of $3.8 million or 69.5% over the
comparable 1999 period. After adding back $1.1 million in salaries capitalized
in the period last year as part of the development of the enterprise wide
computer system, this increase would be reduced to $2.7 million. Salaries and
wages, as a percent of revenues, increased to 10.6% in the 2000 period compared
to 5.5% in the 1999 period (6.6% after adding back capitalized salaries). The
increase in salaries is due to the addition of information systems and customer
service staff required to support the Company's new enterprise wide computer
system and website.
Transponder and Affiliate Charges; Advertising. Transponder and
affiliate charges for the period ended December 31, 2000 were $16.6 million, an
increase of $0.1 million or 0.7% over the comparable 1999 period. During the
same period advertising, which is primarily paid to affiliates as part of
carriage agreements, rose to $2.3 million from $0.3 million for the period ended
December 31, 1999. Total transponder, affiliate and advertising expenses rose
$2.1 million or 12.4%. During the same period, average FTE Cable Households grew
20.1%, from 20.9 million to 25.1 million.
General and Administrative Expenses. General and administrative
expenses for the quarter ended December 31, 2000 were $10.0 million, an increase
of $1.7 million or 19.9% over the comparable 1999 period. This increase was
comprised primarily of expenses associated with employee benefits, payroll taxes
and maintenance agreements due to the installation of the enterprise wide
information system, costs associated with database marketing and an increase in
the allowance for bad debt.
Depreciation and Amortization. Depreciation and amortization for the
period ended December 31, 2000 was $6.0 million, an increase of $3.2 million or
111.8% over the comparable 1999 period, due to the installation of the
enterprise wide information system and the launch of collectibles.com.
Interest. Interest expense of $5.9 million increased by $1.4 million or
30.6% over the comparable period in 1999. The increase is primarily due to
interest associated with a higher level of bank debt.
Liquidity and Capital Resources
As of December 31, 2000, the Company had total current assets of $40.5
million and total current liabilities of $50.3 million, resulting in a negative
working capital position of $9.8 million. This represents a $26.6 million
decrease in the working capital position at June 30, 2000. The major components
of the decrease were:
The Company reclassified $8.0 million of its bank debt from long term
to current liabilities due to the passage of time.
The Company used $9.3 million to reduce accounts payable. Additionally
the company used $4.5 million to redeem 416 shares of Series B Preferred Stock.
The Company also used $2.6 million to complete the closing on television station
WSAH in Bridgeport, Connecticut.
During the period ended December 31, 2000, the Company used
approximately $15.3 million for operations. The major components of this net use
were the loss of $17.0 million, which included non-cash items of a $10.4 million
increase in net deferred tax assets, offset by $6.0 million in depreciation and
amortization. Additionally the Company had expenses related to discontinued
operations of $4.4 million and a reduction of $6.0 million in receivables.
The Company gained approximately $0.9 million from investing
activities. Approximately $1.3 million was used to acquire new equipment.
Additionally, the Company eliminated the restricted cash account by finalizing
the purchase of television station WSAH in Bridgeport, Connecticut.
Approximately 90% of Shop At Home's receipts are customer credit card
charges. During the quarter ended December 31, 2000, the Company provided
"stretch pay" terms for 34.3% of its revenues. "Stretch pay" terms allow the
customer to pay for the Company's merchandise in two or three monthly credit
card installments. The Company has implemented a private label credit card which
has produced $5.2 million in sales to date ending December 31, 2000. The program
is funded by a financial institution to reduce the Company's stretch pay
receivables and bad debt.
As discussed in Note 3 to the Financial Statements, the Company
borrowed $20.0 million on October 30, 2000 under a new bank facility, thus
providing additional cash and extending the maturity of its bank debt.
The Company is highly leveraged. The Company believes that it has
sufficient working capital, including the gross proceeds of $57.0 million from
the anticipated closing of the sale of its Houston television station, to fund
the continuing turnaround of operations. The sale of television station KZJL in
Houston is scheduled to close during the quarter ending March 31, 2001. The
Company is obligated to use $20.0 million of the sales proceeds to repay its
bank facility. Management is evaluating its alternatives, including reinvesting
in its core business, with regard to the balance of the proceeds.
Series B Preferred Stock
On December 29, 2000, the Company redeemed for cash 416 shares of
Series B Preferred Stock. In addition, through January 25, 2001, the holders
have converted 1,000 shares of Series B Preferred Stock into shares of the
Company's common stock. As a result, of the 2,000 Series B shares originally
issued on June 30, 2000, 584 shares remain outstanding. On December 22, 2000,
the Series B holders granted the Company an extension until March 31, 2001 of
the standstill agreement which restricts their ability to short the Company's
common stock or convert the Series B. The Company retained the right during the
standstill period to redeem or mandate the conversion of the Series B Preferred
Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk and other relevant market rate
or price risks.
The Company is exposed to some market risk through interest rates,
related to its investment of its current cash and cash equivalents. These funds
are generally invested in highly liquid debt instruments with short-term
maturities. As such instruments mature and the funds are reinvested, the Company
is exposed to changes in market interest rates. This risk is not considered
material, and the Company manages such risk by continuing to evaluate the best
investment rates available for short-term high quality investments.
The Company is not exposed to market risk through changes in interest
rates on the Notes because the debt is at a fixed rate. The Company is exposed
to market risk through changes in interest rates on its $20.0 million line of
credit which could be effected with changes in the prime rate or LIBOR Rate.
Most of the Company's products are shipped directly to its customers by
its vendors or can be returned by the Company to its vendors. The Company
therefore maintains a retail inventory that is relatively small in relationship
to its sales, reducing its exposure to changes in market conditions for its
products. The Company's products are purchased domestically, and, as a
consequence, there is no foreign currency exchange risk.
The Company has no activities related to derivative financial
instruments or derivative commodity instruments.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Shop At Home, Inc. (the "Company" or "Shop At Home") based
these forward-looking statements largely on its current expectations and
projections about future events and financial trends affecting the financial
condition of its business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about Shop At Home, including,
among other things:
o general economic and business conditions, both nationally and in the
Company's markets;
o the Company's expectations and estimates concerning future financial
performance and financing plans;
o anticipated trends in the Company's business;
o existing and future regulations affecting the Company's business;
o the Company's successful implementation of its business strategy;
o fluctuations in the Company's operating results;
o technological changes in the television and Internet industries;
o restrictions imposed by the terms of the Company's indebtedness and the
issuance of the Series B Convertible Preferred Stock;
o significant competition in the sale of consumer products through
electronic media;
o the Company's dependence on exclusive arrangements with vendors;
o the Company's ability to achieve broad recognition of its brand names;
o continued employment of key personnel and the ability to hire qualified
personnel; and
o legal uncertainties and possible security breaches associated with the
Internet.
In addition, in this report, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Shop At Home, its business or management, are
intended to identify forward-looking statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report. Because of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes In Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission Of Matters To A Vote Of Security Holders.
None
Item 6. Reports On Form 8-K.
The Company filed four reports on Form 8-K during the quarter
ending December 31, 2000, reporting the following:
Form 8-K filed October 16, 2000 reporting that on October 11,
2000, the Company had signed a letter of agreement with Liberman Broadcasting to
sell its Houston television station.
Form 8-K filed October 31, 2000 reporting that on October 30,
2000 the Company entered into a senior credit facility with Foothill Capital
Corporation under which the Company has the right to borrow up to $20 million.
At the same time, the Company paid in full and terminated its existing senior
credit agreement with Union Bank of California.
Form 8-K filed November 14, 2000 reporting that on November 14,
2000 the Company held an "Internet Chat" on its Internet site, collectibles.com,
to discuss the Company's financial results for its first quarter in its fiscal
year 2001.
Form 8-K filed November 15, 2000 reporting that on November 14,
2000 the Company held a conference call with certain financial analysts to
announce and discuss the Company's financial results for the first quarter of
its fiscal year 2001, ending September 30, 2000.
Exhibits
Exhibit 27 Financial Data Schedule (For SEC use only)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Kent E. Lillie
Kent E. Lillie, President
Date:
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/s/ Arthur Tek
Arthur Tek, Executive VP & Chief Financial Officer
Date:
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