UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2002
[ ] 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 of incorporation) (IRS EIN)
5388 Hickory Hollow Parkway
P. O. Box 305249
Nashville, Tennessee 37230-5249
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 263-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.0025 par value
(Title of class)
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 ____
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 3, 2002 was $78,643,183.
Number of shares of Common Stock outstanding as of September 3, 2002 was
41,956,747.
SHOP AT HOME, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
INDEX
PART I Page
----
Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
PART II
Item 5. Market for Shop At Home's Common Stock 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 22
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Company 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial
Owners and Management 56
Item 13. Certain Relationships and Related Transactions 56
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 57
SIGNATURES 63
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:
general economic and business conditions, both nationally and in the
Company's markets;
the Company's expectations and estimates concerning future financial
performance and financing plans;
anticipated trends in the Company's business;
existing and future regulations affecting the Company's business;
the Company's successful implementation of its business strategy;
fluctuations in the Company's operating results;
technological changes in the television and Internet industry;
restrictions imposed by the terms of the Company's indebtedness;
significant competition in the sale of consumer products through
electronic media;
the Company's dependence on exclusive arrangements with vendors;
the Company's ability to achieve broad recognition of its brand names;
continued employment of key personnel and the ability to hire qualified
personnel; and
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.
ITEM 1. BUSINESS
Company Overview
The Company is a retail seller of a variety of consumer products
through interactive electronic media including broadcast, cable and satellite
television and the Internet. Products marketed by the Company fall into three
principal categories: collectibles; jewelry, beauty and fitness; and
electronics. The Company produces programming in a digital format at its
facilities in Nashville, Tennessee. The programming is transmitted by satellite
to cable television systems, direct broadcast satellite (DBS) systems and
television broadcasting stations across the country.
The Company owns and operates five UHF television stations, which are
located in the San Francisco, Boston, Cleveland, Raleigh and Bridgeport markets.
Four of these television stations are located in the top 20 television markets
in the United States, including the Bridgeport, Connecticut, station which
covers a portion of the New York City designated market area (as defined by
Nielsen Media). As of June 30, 2002, the Company's television programming
reached, during all or part of the day, 69.8 million cable and DBS households,
many of which received the programming on more than one channel. The Company
estimates (based on a proprietary formula) that these 69.8 million homes are the
full-time equivalent of approximately 41.8 million cable and DBS households.
The Company operates principally in two segments: Network and
shopathometv.com. For disclosure about operating segment data see Note 18 in the
Notes to Consolidated Financial Statements.
The Company was incorporated in June 1986 under the laws of Tennessee,
and its principal place of business and executive offices are located at 5388
Hickory Hollow Parkway, Nashville, Tennessee 37013. The Company's telephone
number is (615) 263-8000, and its Internet address is www.shopathometv.com.
Industry Background
Television Programming. Electronic commerce using full-time television
programming is a rapidly expanding industry. This industry has four large public
company competitors, QVC, HSN, ShopNBC and Shop At Home.
Television station ownership allows a broadcaster to utilize the "must
carry" rules of the Federal Communications Commission (FCC). 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 broadcasting
programming that allows consumers to shop from their homes. 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. The five television stations owned by the Company enjoy these
must carry rights.
In addition, the FCC has adopted rules for implementing digital
(including high-definition) television service, also called DTV service. The FCC
has allotted to eligible existing television stations a second channel on which
to provide DTV service. Television stations will be allowed to use these
channels according to their best business judgment. These uses include multiple
standard definition program channels, data transfer, subscription video,
interactive materials, and audio signals, while continuing to provide a free
programming service digitally that is at least comparable to today's analog
service.
Internet Commerce. The Internet is an increasingly significant global
medium for communications, content and commerce. The increasing functionality,
accessibility and overall usage of the Internet have made it an attractive
commercial medium. The Internet is evolving into an alternative sales and
marketing channel to retail stores, mail-order catalogues and television
shopping. Online retailers can interact directly with customers, adjusting their
featured selections, editorial insights, shopping interfaces, pricing and visual
presentations to effectively market their products. The Company believes that
the minimal cost to originate programming on the Internet, the ability to reach
and serve a large and global group of customers electronically from a central
location, and the potential for personalized low-cost customer interaction all
provide additional economic benefits for online retailers.
Recent Developments
Channel 59-69 Auction.
In the 1997 Balanced Budget Act, Congress directed the FCC to
reallocate the 746-806 MHz band of spectrum for both public safety and
commercial use. The FCC anticipates that this spectrum will be used for next
generation, or 3G, wireless services. This band currently is being used by
analog broadcast television stations operating on channels 59 through 69. The
spectrum is occupied by more than 100 analog broadcast television stations
("incumbent stations") throughout the country, including the Company's stations
located in the Boston and Cleveland markets and a former Company station located
in Houston.
Under the FCC's rules, these incumbent stations are permitted to
continue analog operations on Channels 59 through 69 until at least December 31,
2006. Auction of the spectrum for wireless services which had been scheduled for
June 2002 is currently delayed and being reviewed to resolve spectrum allocation
issues. Because broadcasters and wireless carriers cannot use the spectrum
simultaneously, auction winners wishing to initiate commercial wireless services
before 2007 may desire to relocate the incumbent broadcast stations, including
the Company's incumbent stations.
Accordingly, assuming the auction is completed, there is a possibility
that either through an FCC-endorsed band-clearing plan, or through private
negotiations, opportunities may exist for broadcast station owners located in
the 746-806 MHz band (i.e. on channels 59-69), including the Company, to reach
agreements, including possible compensation with auction winners, to facilitate
relocation of certain stations. If such an opportunity exists, the Company may
be willing, for a negotiated price to cover its investment in these stations and
to recoup expected losses from potential over-the-air viewership losses
occurring from vacating the analog spectrum early, to relocate any or all the
stations listed above to its digital allocation. In addition to its stations in
Boston and Cleveland, the Company has retained an interest in the potential
spectrum auction profit related to its former Houston property.
The Company has elected to join forces with several other television
station group owners via its membership in The Spectrum Clearing Alliance. This
non-profit organization has retained the services of Allen & Company (an
investment banking firm) to represent its members collectively in their
respective negotiations with wireless services bidders concerning the
compensation to be paid to the television incumbents on channels 59-69 for
clearing their channels prior to the applicable 2006 deadline. Based on
preliminary projections by Allen & Company, the Company could conceivably
receive significant compensation for its spectrum. Because of the uncertainty
regarding the timing of the spectrum auction, as well as the unpredictability of
demand for the spectrum, the Company believes that any estimate of potential
compensation is highly speculative.
Distribution of Programming
The Company has a nationwide network that as of June 30, 2002, reaches 69.8
million unique cable and satellite households, with approximately 41.8 million
receiving the Company's programming on a full-time equivalent basis. The Company
distributes its programming to consumers by or through:
television stations with which the Company has entered into agreements
to purchase broadcast time;
the carriage of those television broadcasts by cable television
systems under the "must carry" or retransmission consent provisions
of federal law;
direct carriage on cable television systems under agreements with cable
system operators;
DBS providers, DirecTV and EchoStar;
the Company's website, shopathometv.com; and
the Company's owned and operated television stations.
Programming Origination. The Company originates its programming from
its studios and technical facilities in Nashville, Tennessee, and has the
capability to broadcast multiple live shows from its studios simultaneously. The
Company transmits its programming to transponders leased or subleased by it on
satellites. The satellites retransmit the Company's signal to various program
distribution sources.
The Company also originates programming on its website with video
streaming of its live television network.
Owned and Operated Stations. The following table sets forth certain
information regarding each of the broadcast stations owned by the Company:
DMA Households(1)
-----------------------------------
License (In Thousands)
DMA Expiration Rank of Broadcast
Call Sign Market Date DMA Television Cable
---------- --------------- ---------- --------- ----------------- -----------------
WSAH New York (2) 6/2007 1 7,301 5,551 (2)
KCNS San Francisco 12/2006 5 2,426 1,946
WMFP Boston 4/2007 6 2,315 2,072
WOAC Cleveland 10/2005 17 1,513 1,066
WRAY Raleigh 12/2004 29 939 499
(1) Per Nielsen Media Research, total number of broadcast television
households as of January 2002 and total number of cable
households as of July 2002.
(2) While WSAH, Bridgeport, Connecticut, is inside the New York DMA, the
station only covers a portion of the market.
Affiliations. We have a nationwide network for the distribution of our
programming through affiliation agreements with over 400 television broadcast
stations and cable television systems and both DBS providers, DirecTV and
EchoStar. Today, our programming is viewed via broadcast television stations or
cable systems in more than 170 television markets, including 97 of the top 100
designated market areas (DMAs).
Our affiliation agreements with cable system operators and third party
television stations typically have one-year terms with automatic renewal unless
either party gives 30 days' notice prior to the end of the term. We generally
have a right of first refusal before the affiliate can offer the contract to a
third party. Our experience has been that most of our affiliation agreements
continue for long periods.
Our carriage agreements with DirecTV and EchoStar are multi-year
agreements that may be terminated prior to their expiration under certain
circumstances. We cannot assure you that we will be able to extend the term of
such agreements beyond the current expiration dates or that these agreements
will not be terminated at an earlier date.
Our programming time purchased under affiliation agreements is usually
preemptible only under certain specified circumstances, such as public interest
or breaking news programming, in which case we are not required to pay our fixed
rate for the preempted time. These agreements sometimes require the affiliate to
provide for advertising of our network.
Products and Customers
Products and Merchandise. The Company focuses on presenting mass-appeal
consumer products at attractive price points that can take advantage of the
visual appeal of television including jewelry, electronics, collectibles,
fitness equipment, apparel, housewares and health and beauty aids.
The Company purchases merchandise from numerous vendors, and certain
products sold by the Company are available through multiple suppliers. The
Company also acquires unique products from a select group of vendors and
believes that it will be able to continue to identify sources of specialty
products. The mix of products and source of merchandise depends on a variety of
factors including price and availability. By monitoring product sales and
revising product offerings, the Company strives to maintain an attractive and
profitable product mix. The Company also is continually evaluating new products
and vendors to broaden its merchandise selection.
We generally do not have long-term commitments with our vendors, and
there are various sources of supply available for each category of merchandise
sold. During the year ended June 30, 2002, the Company had three vendors from
whom it purchased more than 10% each of its total cost of goods sold. The three
vendors represented two different product categories and accounted for 15.2%,
10.8% and 10.7% of the Company's cost of goods sold. The Company believes that
it could find replacement vendors for the products sold by any one of these
vendors without a material adverse effect on the Company.
The following table sets forth certain information about the principal
categories of merchandise sold by the Company during the years ended June 30,
2002, 2001 and 2000:
Type of Product Percentage of Net Revenues
- ----------------------------------------------- ----------------------------------------------------------------
2002 2001 2000
-------------------- ----------------- ------------------
Collectibles 44.1 % 58.3 % 55.8 %
Jewelry, Beauty and Home 30.0 27.5 21.1
Electronics 25.9 14.2 23.1
Total 100.0 % 100.0 % 100.0 %
Programming and Presentation of Merchandise. The Company segments most
of its programming into product or theme categories. It has the studio and
broadcasting capability to produce multiple live shows simultaneously. The
Company's technical facilities allow it to broadcast an analog and digital
signal to its main satellite transponder in the same transmission signal. The
Company replays selected programming on its website.
The Company's programs use a show-host approach, with the host
conveying information about the products and demonstrating their use. The viewer
may purchase any product the Company offers, subject to availability. The
Company seeks to differentiate itself from other televised shopping programmers
by using an informal, personal style of presentation and by offering unique
products.
Returns of Products and Merchandise. Generally, the Company currently
offers its customers a full refund on merchandise returned within 30 days of the
date of purchase.
Shipping. The Company ships customer orders as promptly as possible
after taking the order, via a combination of ground and priority delivery
services. The Company ships either from its warehouse facility or through
selected vendors who ship products directly to the customer. The Company
maintains its own customer service department to address customer inquiries
about ship dates, product, and billing information.
Customer Relations. Customers can place orders with the Company 24
hours a day, seven days a week, over the Internet or via the Company's toll-free
number (800) 366-4010. The Company uses customer sales representatives and an
automated touch-tone ordering system to accept customer orders. A majority of
its customers pay for their purchases by credit card, and the Company also
accepts payment by money order, check, debit card and electronic funds transfer.
Mechanical, electronic and other items may be covered by manufacturer
warranties. The Company strives to continuously improve its customer service and
to make objective comparisons with its competitors.
Seasonality. The Company's business is somewhat seasonal, with
its sales made in the last quarter of the calendar year normally being the
highest for the fiscal year.
Competition
Competition in Television Commerce. The television commerce industry is
competitive with QVC and HSN being the revenue leaders. The Company's
programming competes directly with QVC, HSN and, often, ShopNBC in almost all of
its markets. The Company's competitors are well-established and have
substantially greater financial, distribution and marketing resources than the
Company. They also reach a larger percentage of U.S. television households. The
Company competes generally with traditional store and catalogue retailers.
Competition in Internet Retailing. Internet commerce is also highly
competitive. Many major retailers and marketers now sell their products on the
Internet. Despite a high failure rate, new retail websites are being launched
daily and may compete directly with shopathometv.com in the future.
Employees
As of June 30, 2002, the Company employed approximately 508 persons of
which approximately 465 were full-time employees. The Company believes it
maintains a good relationship with its employees. Presently, no collective
bargaining agreements exist between the Company and its employees.
Information Technology
The Company operates on an enterprise-wide platform integrating
customer management, the Internet, and financial reporting. The system is
scalable as the Company grows and interfaces with the Company's telephone center
operations, its website, e-mail and vendors with electronic data interchange
capabilities.
The Company manages customer sales and service through a
state-of-the-art telephone system. The telephone system is combined with the
enterprise-wide computer system to support automated ordering through integrated
voice response.
The Company's web site, shopathometv.com, is designed around "best of
breed" e-commerce computer solutions. The system is totally integrated with the
broadcast network. The site is designed to support thousands of stocking units
pulled directly from the Company's product database and offers a live video
stream of the Company's television programming and show schedules. The site is
hosted at the Company's facilities in Nashville.
Broadcast Technology
Production. The Company's broadcast studio in Nashville features
state-of-the-art digital equipment. Utilizing "serial digital" video processing
allows the Company to produce programs with minimal signal degradation in any
part of the production process and to provide the viewer with optimal signal
quality. Computer video server technology and the MPEG-2 format are used
extensively to allow instant recall of product shots or promotional spots to be
used on the air. Panasonic's DVCPRO videotape format is used for digital content
recording and playback. Video promotions are produced in editing suites
utilizing computer equipment and the Motion-JPEG video format.
Distribution. The Company currently has four satellite distribution
channels: three analog and one digital. The uplink signals are transmitted
through a state-of-the-art 9.3 meter dish with a second 9.3 meter backup dish
available at the Company's Nashville facilities. A portion of the Company's
affiliates, including all five of its owned and operated stations, have begun
using the digital MPEG-2 signal to deliver the clearest picture possible to
their households. The Company's primary feed is via PanAmSat's satellite G-XI,
and the Company has a right to a backup feed if the primary feed fails.
ITEM 2. PROPERTIES
The Company's technical facilities, studios and executive offices are
located in Nashville, Tennessee in a 74,000 square foot building it owns and in
9,200 square feet of leased space in an adjacent facility. Additionally, the
Company leases a 43,000 square foot warehouse located near its Nashville
headquarters.
Each of the Company's five owned television stations has studio, office
and transmitter facilities, all of which are leased.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed against the Company in January 2000 by a former
vendor, Classic Collectibles, LLC, in state Chancery Court in Chattanooga,
Tennessee. The vendor alleges that the Company improperly canceled certain
orders, that certain amounts it paid to the Company under a written agreement
should be refunded, and that certain amounts were left owing on the account. The
vendor is also claiming entitlement to alleged lost profits of approximately $2
million, asserting the Company did not provide an amount of broadcast network
time in 1999 that the vendor alleges was orally promised in connection with the
written agreement. The Company has filed its answer and has vigorously pursued
its defense of this action. The case is currently set for a jury trial in
November 2002.
A lawsuit was filed against the Company in April 2002 by ING Merger
LLC, as successor to ING Barings LLC ("ING"), in the United States District
Court in the Southern District of New York. ING alleges that the Company failed
to pay investment banking fees and related expenses in connection with two
agreements. In its complaint, ING demands damages of approximately $450,000 plus
interest and costs. The Company has filed its answer and plans to vigorously
pursue its defense of this action.
The Company is subject to routine litigation arising from the normal
and ordinary operation of its business. The Company believes that such
litigation is not likely to have a material adverse effect on its financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR SHOP AT HOME'S COMMON STOCK
The Company's common stock is quoted in the Nasdaq National Market
under the symbol "SATH".
Equity Compensation Plan Information
(a) (b) (c)
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants warrants and rights future issuance under equity
Plan category and rights compensation plans (excluding
securities reflected in
column (a))
Equity compensation plans
approved by security holders
4,845,150 $ 3.46 2,173,200
The range of market prices for the Company's Common Stock during the
two most recent fiscal years, as reported by the high and low closing prices on
the National Market, are as follows.
HIGH LOW
FISCAL 2001
First Quarter $5.19 $2.44
Second Quarter 2.94 0.97
Third Quarter 2.03 1.28
Fourth Quarter 3.21 1.44
FISCAL 2002
First Quarter $3.38 $1.91
Second Quarter 3.05 1.85
Third Quarter 3.65 2.50
Fourth Quarter 3.22 2.00
As of June 30, 2002, there were approximately 618 owners of the
Company's Common Stock on record.
The Company has not declared or paid any dividends on its Common Stock
in the last two fiscal years and does not anticipate declaring or paying any
dividends in the foreseeable future. Any future determination as to the
declaration and payment of dividends will be made at the discretion of the
Company's Board of Directors and will depend on then-existing conditions,
including its financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and such other factors as
the Board of Directors deems relevant. The Company's ability to pay cash
dividends is substantially restricted under the terms of the Indenture entered
into in March 1998 in connection with its issuance of the 11% Senior Secured
Notes due 2005.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included as Item 8. The statements of operations and balance
sheet data set forth below as of and for each of the five years in the period
ended June 30, 2002, are derived from the audited financial statements of the
Company.
For factors affecting the comparability of Selected Financial Data, refer to
Item 7 and the footnotes below.
Years Ended June 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statements of Operations Data:
Net revenues $ 195,840 $ 177,615 $ 201,556 $ 150,399 $ 100,906
Cost of goods sold 127,260 122,353 133,751 93,396 60,410
Other operating expenses 90,685 98,448 79,153 53,726 36,099
Non-recurring expenses(1) 837 - - 986 -
Other expense (income) (4) 12 (48,992) 154 46 (900)
Interest income 552 906 749 656 564
Interest expense 10,878 11,875 9,663 8,932 2,693
---------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (33,280) (5,163) (20,416) (6,031) 3,168
Income tax expense (benefit) (10,652) 262 (7,709) (2,492) 1,204
---------------------------------------------------------------------------
Income (loss) from continuing
operations (22,628) (5,425) (12,707) (3,539) 1,964
Income (loss) from discontinued operations
of CET (3) - (598) (786) 235 (451)
Loss on disposal of CET (3) - (2,864) - - -
---------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change (22,628) (8,887) - - -
Cumulative effect of accounting change - (1,359) - - -
---------------------------------------------------------------------------
Net income (loss) (22,628) (10,246) (13,493) (3,304) 1,513
Preferred stock accretion and dividends - 8,156 6 14 14
---------------------------------------------------------------------------
Net income (loss) available for common
shareholders $(22,628) $(18,402) $ (13,499) $ (3,318) $ 1,499
===========================================================================
Weighted average common
shares - basic 41,861 36,311 30,490 23,771 14,511
Weighted average common
shares - dilutive 41,861 36,311 30,490 23,771 17,496
Basic earnings (loss) per share from
continuing operations (2) $ (0.54) $ (0.37) $ (0.42) $ (0.15) $ 0.13
Diluted earnings (loss) per share from
continuing operations (2) $ (0.54) $ (0.37) $ (0.42) $ (0.15) $ 0.11
Cash dividends per share of
common stock $ - $ - $ - $ - $ -
Balance Sheet Data:
Working capital $ 944 $ 8,579 $ 16,806 $ (17,646) $ 11,568
Total assets 178,080 180,017 227,294 170,697 143,770
Current liabilities 32,247 28,785 45,468 48,364 19,212
Long-term debt and capital leases, less
current portion 92,596 75,484 84,336 75,893 75,254
Redeemable preferred stock 145 161 12,504 834 1,393
Stockholders' equity 53,092 75,587 84,986 45,297 44,360
(1) These expenses relate to debt offering expenses of an offering not
completed (2002) and the grand opening of Shop At Home's Nashville
headquarters (1999).
(2) For details of the calculation of basic and dilutive earnings per share,
see Note 12 to the consolidated financial statements.
(3) CET is the abbreviation of Collector's Edge of Tennessee, Inc.
(4) Other income for 2001 includes a gain of $48,929 related to the sale of the
Company's Houston television station. See Note 17 to the consolidated
financial statements.
ITEM 7. 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.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Management continually
evaluates its estimates and assumptions. Management bases its estimates and
assumptions on historical information and on various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates. Management believes the following critical accounting
policies affect the more significant assumptions and estimates used in the
preparation of its consolidated financial statements:
The carrying value of the Company's goodwill and television station
licenses is tested for impairment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. If
an impairment test indicates that the carrying value of goodwill is impaired,
the carrying value of goodwill is reduced by the amount by which the carrying
value exceeds the implied fair value of that goodwill. If an impairment test
indicates that the carrying value of the television station licenses is
impaired, the carrying value of the television station licenses is reduced by
the amount by which the carrying value exceeds the fair value of the television
station licenses. Both the implied fair value of goodwill and the fair value of
the television station licenses are based upon assumptions which may prove to be
untrue in the future.
The assessment of the recoverability of the carrying value of
long-lived assets with finite lives is performed in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of. If circumstances suggest that long-lived assets with finite
lives may be impaired and a review indicates that the carrying value will not be
recoverable, as determined based on the projected undiscounted future cash
flows, the carrying value is reduced to its estimated fair value. The
determination of cash flows is based upon assumptions and forecasts that may not
occur.
The Company recognizes product sales upon delivery of merchandise to
the customer. Sales are reduced by estimated sales returns to arrive at net
sales. The Company's return policy allows merchandise to be returned at the
customer's discretion within 30 days of the date of delivery. The estimated
return percentage for the twelve months ended June 30, 2002, was arrived at
based upon empirical evidence of actual returns, and the percentage was applied
against sales to arrive at net sales. Actual levels of merchandise returned may
vary from these estimates.
Certain of the Company's accounts receivable are subject to credit
losses. The Company utilizes an installment credit process called "stretch pay"
which enables its customers to purchase merchandise over an expanded period from
two to five months. The reserve for expected credit losses is based on past
experience with similar accounts receivable. It is possible, however, that the
accuracy of the Company's estimation process could be materially affected as the
composition of this pool of accounts receivable changes over time. Management
continually reviews and refines the estimation process to make it as current as
possible; however, there can be no guarantee that estimated credit losses on
these accounts receivable will be accurate.
The Company identifies slow-moving or obsolete inventories and
estimates appropriate loss provisions. These loss provisions are calculated with
the proviso that the majority of the Company's inventories are eligible for
return under various vendor return programs. While the Company has no reason to
believe its inventory return privileges will be discontinued in the future, its
risk of loss associated with obsolete or slow-moving inventories would increase
if such were to occur.
The Company records a valuation allowance to reduce its net deferred
tax assets to the amount that is more likely than not to be realized. While
management has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for its valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in an amount in excess of the net recorded
amount, an adjustment to the valuation allowance would decrease income tax
expense in the period such determination was made. Likewise, should the Company
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to its valuation allowance would
increase income tax expense in the period such determination was made.
Overview
The Company made significant progress in fiscal 2002. Net revenues
improved 10.3%, and the loss from operations was reduced by 46.9%, or $20.2
million. Nevertheless, the Company continued to experience operating losses.
Management is continuing its efforts to return to operational profitability.
Seeking to accelerate its improvement efforts, the Company explored strategic
relationships with potential operating and financial partners during the year,
and on August 14, 2002, entered into a transaction, subject to shareholder and
other approvals, with The E.W. Scripps Company. The principal agreement
contemplating this transaction is summarized later in this section.
The following table sets forth for the periods indicated the percentage
relationship to net revenues of certain items included in the Company's
Statements of Operations:
Years Ended June 30,
--------------------
2002 2001 2000
---- ---- ----
Net revenues 100.0 % 100.0 % 100.0 %
Cost of goods sold 65.0 68.9 66.4
Salaries and wages 9.0 12.5 7.7
Transponder and affiliate charges 21.1 22.4 17.2
General and administrative expenses 10.2 12.6 10.2
Depreciation and amortization 6.0 7.9 4.1
Offering expenses 0.4 - -
------------- ----------- -------------
Total operating expenses 111.7 124.3 105.6
Interest income 0.3 0.5 0.4
Interest expense (5.6) (6.7) (4.8)
Other income - 27.6 (0.1)
------------- ----------- -------------
Loss from continuing operations before income taxes (17.0) (2.9) (10.1)
Income tax expense (benefit) (5.4) 0.1 (3.8)
------------- ----------- -------------
Loss before discontinued operations (11.6) (3.0) (6.3)
Discontinued operations, net of tax - (2.0) (0.4)
------------- ----------- -------------
Loss before cumulative effect of
accounting change (11.6) (5.0) (6.7)
Cumulative effect of accounting change - (0.8) -
------------- ----------- -------------
Net loss (11.6) (5.8) (6.7)
============= =========== =============
Results of Operations
Fiscal Year 2002 vs. Fiscal Year 2001
Net Revenues. Shop At Home's net revenues for the year ended June 30,
2002, were $195.8 million, an increase of 10.3% over net revenues of $177.6
million for the year ended June 30, 2001. The core business of retail sales
through the television network accounted for 89.9% of net revenues. The
remaining 10.1% of net revenues were derived from shopathometv.com. Returns of
merchandise decreased to a rate of 18.3% of gross sales from 25.6% in the prior
year. The increase in net revenues is attributable to a greater number of
television households reached as well as more informative, precise on-air
presentations resulting in fewer returns of merchandise.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and freight. For the year ended June 30, 2002, the cost of goods
sold as a percentage of net revenues decreased to 65.0% from 68.9% for the year
ended June 30, 2001. The improvement was due to better merchandise planning and
price negotiations with suppliers.
Salaries and Wages. Salaries and wages for the year ended June 30,
2002, were $17.7 million, a decrease of 19.9% compared to the year ended June
30, 2001. Salaries and wages as a percent of revenues decreased to 9.0% from
12.5%. The improvement was due to the absence of any significant severance
payments (in the prior year, the Company made a $3.2 million severance payment
to its former CEO) as well as this fiscal year's reduction in average headcount.
Average headcount declined due to various cost containment initiatives
implemented by the Company through the year.
Transponder and Affiliate. Transponder and affiliate costs for the year
ended June 30, 2002, were $41.2 million, an increase of $1.4 million or 3.6%
compared to the year ended June 30, 2001. The increase was due to the addition
of new affiliates and homes reached.
General and Administrative. General and administrative expenses for the
year ended June 30, 2002, were $20.0 million, a decrease of $2.6 million or
11.4% compared to the year ended June 30, 2001. The improvement was due to
reduction of bad debt expense of $1.5 million, reflective of improved credit
approval and collection procedures, and a variety of cost containment and
renegotiation efforts.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 2002, was $11.7 million, a decrease of $2.2 million or 15.9%
compared to the year ended June 30, 2001. The decrease was primarily due to the
elimination of $2.7 million of amortization of television station license costs
as a result of the adoption of SFAS No. 142, Goodwill and Other Intangible
Assets.
Offering Costs. During the year ended June 30, 2002, the Company
pursued the private placement of $135 million of senior secured notes to
refinance its existing indebtedness and provide additional working capital. The
private placement was not completed and, consequently, the Company expensed $0.8
million of costs related to the offering.
Interest Expense. Interest expense for the year ended June 30, 2002,
was $10.9 million, a decrease of $1.0 million over the year ended June 30, 2001.
The decrease was due to lower interest rates.
Interest Income. Interest income from cash and cash equivalents for the
year ended June 30, 2002, was $0.6 million compared to $0.9 million in 2001. The
decrease in interest income was due to lower average cash balances and interest
rates.
Income Tax (Benefit) Expense. Income tax benefit from continuing
operations was $10.7 million for the year ended June 30, 2002, versus a tax
expense of $0.3 million in 2001. The expense in 2001 was the result of a full
valuation allowance being recorded against the Company's state net operating
loss carry forward. Due to the length of time until the expiration date of the
federal net operating loss carryforwards and the value of the Company's
commercial television stations, management does not deem it necessary to provide
a valuation allowance against its federal net operating loss carryforwards.
Other Income. On March 20, 2001, the Company sold its Houston
television station KZJL for $57.0 million. The gain recognized on the sale was
the result of the proceeds less $6.8 million for the net book value of fixed
assets and license cost and $1.3 million in closing costs. There were no sales
of stations in 2002.
Discontinued Operations. In December 2000, the Company discontinued
the operations of its subsidiary, Collector's Edge of Tennessee, Inc. ("CET").
This resulted in a loss of $3.5 million, net of applicable tax benefits, for the
year ended June 30, 2001.
Cumulative Effect of Accounting Change. In accordance with SEC Staff
Accounting Bulletin ("SAB") No. 101, the Company changed its method of recording
sales to customers in fiscal 2001. Beginning in fiscal 2001, the Company
recognized sales at the point of delivery rather than at the point of shipment.
As a result, the Company 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 $1.4 million (net of a tax benefit of $0.8
million) for the effects through June 30, 2000.
Fiscal Year 2001 vs. Fiscal Year 2000
Net Revenues. Shop At Home's net revenues for the year ended June 30,
2001, were $177.6 million, a decrease of 11.9% over net revenues of $201.6
million for the year ended June 30, 2000. The core business of retail sales
through the television network accounted for 89.5% of net revenues. The
remaining 10.5% of net revenues were derived from shopathometv.com. Returns of
merchandise increased to a rate of 25.6% of total revenue from 23.0% in the
prior year. Net revenues decreased primarily due to a decline in the sports
memorabilia and collectible toys categories and a lack of popular new products
in other categories.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and freight. For the year ended June 30, 2001, the cost of goods
sold as a percentage of net revenues increased to 68.9% from 66.4% for the year
ended June 30, 2000. This increase was primarily due to a greater percentage of
sales of lower-margin products as well as margin reductions in most of the
Company's merchandise categories.
Salaries and Wages. Salaries and wages for the year ended June 30,
2001, were $22.1 million, an increase of 43.4% compared to the year ended June
30, 2000. Salaries and wages as a percent of revenues increased to 12.5% from
7.7%. Included in salaries and wages for 2001 was severance compensation for the
Company's former CEO totaling $3.2 million. Salaries and wages in the prior year
were reduced by the capitalization of $1.9 million of expenditures allocated to
the website launch and the installation of an enterprise-wide computer system.
Adjusting for the former CEO's severance and the capitalization, salaries and
wages increased 9.6%. This increase was primarily due to enhanced staffing needs
associated with the enterprise-wide computer systems.
Transponder and Affiliate Charges. Transponder and affiliate costs for
the year ended June 30, 2001, were $39.8 million, an increase of $5.1 million or
14.8% compared to the year ended June 30, 2000. The increase was primarily due
to the addition of new affiliates and homes reached.
General and Administrative. General and administrative expenses for the
year ended June 30, 2001, were $22.6 million, an increase of $1.9 million or
9.3% compared to the year ended June 30, 2000. As a percentage of net revenues,
this constituted an increase to 12.6% in 2001 from 10.2% in 2000. The increase
was primarily due to $2.5 million in additional provision for bad debt offset by
a variety of cost reduction improvements implemented in 2001. The increased bad
debt reserve reflected management's view that credit card collections became
increasingly more difficult as consumer indebtedness increased and the economy
weakened.
Depreciation and Amortization. Depreciation and amortization for the
year ended June 30, 2001, was $13.9 million, an increase of $5.5 million or
66.4% compared to the year ended June 30, 2000. The increase was primarily due
to the installation of an enterprise-wide information system and the launch of
the Company's website. Additionally, a $1.1 million increase in depreciation
expense was related to the reduction of the useful life of certain computer
hardware and software from five years to three years to better reflect the
expected utility of these assets.
Interest Expense. Interest expense for the year ended June 30, 2001,
was $11.9 million, an increase of $2.2 million over the year ended June 30,
2000. The increase was due primarily to the interest on the Company's $20.0
million line of credit.
Interest Income. Interest income, from cash and cash equivalents, for
the year ended June 30, 2001, was $0.9 million compared to $0.7 million in 2000.
Average cash balances were similar year to year.
Income Tax (Benefit) Expense. Income tax expense from continuing
operations was $0.3 million for the year ended June 30, 2001 versus a tax
benefit of $7.7 million in 2000 even though the Company incurred losses in both
years. The change in the effective tax rate was primarily due to a full
valuation allowance provided against the Company's state net operating loss
carry forwards in 2001.
Other Income. On March 20, 2001 the Company sold its Houston television
station KZJL for $57.0 million. The gain recognized on the sale is the result of
the proceeds less $6.8 million for the net book value of fixed assets and
license cost and $1.3 million in closing costs.
Discontinued Operations. In December 2000, the Company discontinued
the operations of its subsidiary, CET. This resulted in a loss of $3.5
million, net of applicable tax benefits.
Cumulative Effect of Accounting Change. In accordance with SAB No. 101,
the Company changed its method of recording sales to customers in fiscal 2001.
Beginning in fiscal 2001, the Company recognized sales at the point of delivery
rather than at the point of shipment. As a result, the Company 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 $1.4
million (net of a tax benefit of $0.8 million) for the effects through June 30,
2000.
Sale of Network Assets to Scripps
On August 14, 2002, the Company entered into a Share Purchase Agreement
(the "Agreement") with a subsidiary of The E.W. Scripps Company ("Scripps")
pursuant to which the Company has agreed to indirectly sell and transfer a 70%
interest in its television and Internet home shopping network (the "Network") to
Scripps. The transaction is subject to approval of the Company's shareholders.
The Company will retain a 30% interest in the Network and will also retain
ownership of its five full-power television stations, certain wireless spectrum
assets and tax-loss carry-forward benefits.
Under the Agreement, the Company will transfer its Network to a Scripps
subsidiary (the "Operating Company") in a two-tier holding company structure.
The Operating Company will receive substantially all the assets of the Network
as well as assume certain of the Network's current liabilities. The Company will
retain its obligations under its $17.5 million senior credit facility and its
$75 million Senior Secured Notes due 2005 and will also retain certain
liabilities associated with pending litigation and certain other contractual
obligations. The Company will sell a 70% interest in the Operating Company for a
cash purchase price of $49.5 million, and the Company will be entitled to
receive $3.0 million in cash from the Operating Company prior to closing.
The Company will have the right to require Scripps to purchase the
Company's 30% interest in the Operating Company during the period beginning on
the second anniversary of the closing and ending on the fifth anniversary of the
closing at a cash purchase price equal to the fair market value of the 30%
interest. After five years, Scripps will have the right to require the Company
to sell the 30% interest to Scripps at a price equal to fair market value.
Scripps will also have the right to require the Company to sell its 30% interest
in certain other events, including a change of control of the Company, the
Company's breach of certain obligations to Scripps or the Company's insolvency.
The Company will be restricted in its ability to sell its 30% interest to a
third party without first offering to sell the 30% interest to Scripps. Scripps
will be restricted in its ability to sell all or a part of its 70% interest to a
third party, if such transfer would result in a change of control of the
Operating Company, unless the purchaser also agrees to purchase the Company's
30% interest. If the Company declines to sell its 30% interest, Scripps has the
right, but not the obligation, to require the Company to sell its interest at
the same price.
Upon closing, Scripps has agreed to loan $47.5 million to the Company
payable by the Company in three years. The loan will accrue interest at an
annual rate of 6%, payable quarterly, and will be secured by an assignment of
the Company's 30% interest in the Operating Company and the encumbrance of the
assets of the Company's television stations located in the Boston, San Francisco
and Cleveland markets. The Company will use the purchase price and these loan
proceeds to retire debt and for working capital purposes.
The Operating Company will be governed by a five member board, three
members of which will be selected by Scripps and two selected by the Company.
Scripps has agreed to loan up to $35.0 million to the Operating Company to be
used for working capital purposes.
The Company has agreed to enter into a three-year affiliation agreement
with the Operating Company, under which the Company will agree to carry the
Network programming on its five television stations located in the Boston, San
Francisco, Cleveland, Raleigh and Bridgeport, Connecticut markets. The Company
retains the right to terminate the affiliation agreement after 15 months.
In addition, on August 15, 2002, Scripps purchased 3,000 shares of
newly authorized Series D Senior Redeemable Preferred Stock from the Company for
an aggregate purchase price of $3 million. The shares of preferred stock will
mature on April 15, 2005, at which time the Company will be obligated to redeem
the shares for a price equal to their original purchase price plus accrued and
unpaid dividends. Dividends of 6% are payable quarterly, with the Company having
the right, if the sale of Network assets is closed, to defer payment of the
dividends until maturity. If the sale of Network assets is not closed, the
shares of preferred stock will pay dividends of 12%, which are payable
quarterly, at the option of the Company, in cash or additional shares of
preferred stock.
The shares of preferred stock are not convertible to any other shares
of capital stock of the Company and do not have voting rights (except for any
statutory voting right). The shares of preferred stock carry a liquidation
preference to the Company's common stock and are on parity with the Company's
outstanding shares of Series A Preferred Stock. Other than the Series A and
Series D Preferred Stock, the Company has no other series of preferred stock
outstanding.
Liquidity and Capital Resources
As a result of the proposed sale of the Network assets to Scripps, the
Company believes that it will have sufficient liquidity for continuing
operations. Should the sale of the Network assets to Scripps fail to close,
management projects that funds generated from operations will be sufficient to
continue operations throughout fiscal 2003, even if the Company fails to return
to profitability. The Company's projections are based on a continuation of its
success over the last year in adding new households cost-efficiently to the
reach of its Network. Given the fixed nature of many of its other costs,
management believes that the Company can continue as a going concern even if
revenue per home reached fails to improve or declines moderately.
The Company had $11.6 million of cash on hand at June 30, 2002. On
August 15, 2002, the Company added $3.0 million of cash via the sale of
preferred stock to Scripps. In addition, on June 30, 2002, the Company had
accounts receivable and inventory balances of $5.6 million and $13.1 million,
respectively. These assets could provide a substantial amount of additional cash
for operations if management elects to modify its merchandising and supply-chain
strategies by, for example, reducing customer financing and increasing sales
shipped directly from vendors to customers.
On September 3, 2002, the Company amended its $17.5 million senior
credit facility to reset its minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined in the agreement, covenant
to conform to recent operating results. Other provisions of the amendment are
expected to require the Company to dispose of television stations or obtain
additional equity. Station disposals are not required unless the sale price is
at least equal to the appraised value. The proceeds from any disposals or
additional equity must be used to reduce the balance of the credit facility. The
lender also extended the maturity of the loan from August 1, 2003 to September
30, 2003.
If the Company is unable to meet its minimum financial projections, and
if the Scripps transaction fails to close, a sale of assets or additional debt
or equity financing will likely be required. The Company believes that it could
successfully sell, as it did in 2001, one or more of its five owned television
stations to reduce or completely eliminate its long-term debt and to provide
funds for operations. Because of the growth of the television network affiliate
distribution system, the five stations represent less than 15% of the total
homes reached. Therefore, as the Network continues to add affiliates, the
Company's owned stations may not be crucial to the Network's ability to produce
sufficient revenue to return to profitability. There can be no assurances,
however, that the Company can sell assets or access the debt or equity markets
on a timely basis.
Our future contractual obligations and commitments at June 30, 2002
consist of the following:
PAYMENTS DUE BY PERIOD
LESS THAN OVER
TOTAL 1 YEAR 1 - 2 YEARS 3 - 4 YEARS 4 YEARS
(In thousands)
Long-term debt $ 92,500 $ - $ 17,500 $ 75,000 $ -
Capital lease
obligations 453 354 99 - -
Operating lease
obligations 9,513 2,530 2,465 3,867 651
----------------- --------------- ---------------- ---------------- ----------------
$ 102,466 $ 2,884 $ 20,064 $ 78,867 $ 651
================= =============== ================ ================ ================
In addition to the above commitments, the Company has 14,480 shares of
redeemable preferred stock outstanding at June 30, 2002. Any holder of any
shares of Series A Preferred Stock may require the Company to redeem all or any
portion of the Series A Preferred Stock for a redemption price per share of
$10.00 plus accrued and unpaid dividends. The Series A Preferred Stock is
convertible at any time into shares of the Company's common stock at a ratio of
one share of common stock for one share of Series A Preferred Stock. Holders of
the Series A Preferred Stock are entitled to receive, but only when declared by
the Board of Directors, cash dividends at the rate of $0.10 per share per annum.
The Company also has affiliate carriage agreements which are cancelable
by the Company with generally thirty days notice and in no event greater than
one year's notice.
Capital Expenditures
The Company anticipates that its capital expenditure needs during
fiscal 2003 will be moderate, consisting primarily of approximately $1.5 million
for the continuing build-out of the owned television stations' digital
transmission facilities.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. An entity shall subsequently allocate that asset retirement
cost to expense using a systematic and rational method over its useful life.
This Statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS No. 143 is effective for the Company beginning on
July 1, 2002. Management does not believe the adoption of SFAS No. 143 will have
a material effect on the consolidated financial position, results of operations
or cash flows of the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement develops one accounting model for long-lived
assets to be disposed of by sale and requires that long-lived assets be measured
at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. This Statement
also modifies the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from ongoing operations in a disposal
transaction. SFAS No. 144 is effective for the Company beginning on July 1,
2002. Management does not believe the adoption of SFAS No. 144 will have a
material effect on the consolidated financial position, results of operations or
cash flows of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. The two most significant aspects of this pronouncement, with
respect to the Company, is the elimination of SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and the amendment to SFAS No. 13, Accounting
for Leases. As a result of the elimination of SFAS No. 4, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Accounting Principles Board Opinion ("APB") No. 30,
Reporting the Results of Operations--Discontinued Events and Extraordinary
Items. The amendment to SFAS No. 13 changes the accounting treatment of certain
lease modifications that have economic effects similar to sale-leaseback
transactions to require those lease modifications to be accounted for in the
same manner as sale-leaseback transactions. The rescission of SFAS No. 4 is
effective for fiscal years beginning after May 15, 2002. The amendment to SFAS
No. 13 is effective for all transactions after May 15, 2002. Management does not
believe the adoption of SFAS No. 145 will have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company. However, should the transaction discussed in Note 20 be consummated,
any gain or loss on the early extinguishment of the Company's long-term debt
would be classified in operations rather than classified as an extraordinary
item in the Company's consolidated statement of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The principal
difference between this Statement and EITF Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for all exit or disposal activities after December 31,
2002. Management has not completed the process of determining the effect on the
consolidated financial position, results of operations or cash flows of the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may affect the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
The Company is exposed to some market risk through interest rates
related to its investment of its current cash and cash equivalents of
approximately $11.6 million as of June 30, 2002. These funds are generally
invested in highly liquid instruments with short-term maturities. As such
instruments mature and the funds are re-invested, the Company is exposed to
changes in market interest rates. This risk is not considered material and the
Company manages such risk by continuing to evaluate the best investment rates
available for short-term, high quality investments.
The Company is not exposed to market risk through potential interest
rate fluctuation on its $75.0 million Senior Secured Notes, because interest
accrues on this debt at the fixed rate of 11%. At June 30, 2002, the Company
does incur some market risk on its $17.5 million senior credit facility, which
accrues interest at a floating rate based on LIBOR (London Interbank Offered
Rate) or the lender's prime rate at the Company's option. The Company has chosen
not to incur hedging expense related to this facility at this time.
Certain risks are associated with the products sold by the Company,
namely that product prices are subject to changes in market conditions. The
Company manages this risk by maintaining minimal inventory levels as a
percentage of its revenues. The Company also reserves the right, with many
vendors, to return products. The Company's products are purchased domestically,
and, consequently, there is no foreign currency exchange risk.
The Company has no activities related to derivative financial
instruments or derivative commodity instruments.
MD&A
Selected Quarterly Data (unaudited)
(in thousands except per share data)
FYE 2002 FYE 2001
-------------------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Sep-01 Dec-01 Mar-02 Jun-02 TOTAL Sep-00 Dec-00 Mar-01 Jun-01 TOTAL
-------------------------------------------------- -------------------------------------------
Net Revenues $43,410 $ 49,213 $49,745 $ 53,472 $ 195,840 $ 40,779 $46,515 $ 50,402 $ 39,919 $ 177,615
Loss From Operations (4,854) (5,753) (6,695) (5,640) (22,942) (8,848) (5,508) (13,497) (15,333) (43,186)
Income (Loss) From Continuing Operations (4,832) (5,584) (6,183) (6,029) (22,628) (7,057) (5,203) 19,825 (12,990) (5,425)
Discontinued Operations - - - - - (398) (2,949) (115) - (3,462)
Loss Before Cumulative Effect of
Accounting Change (4,832) (5,584) (6,183) (6,029) (22,628) (7,455) (8,152) 19,710 (12,990) (8,887)
Cumulative Effect of Accounting Change - - - - - (1,359) - - - (1,359)
Net Income (Loss) (4,832) (5,584) (6,183) (6,029) (22,628) (8,814) (8,152) 19,710 12,990) (10,246)
Preferred Stock Accretion - - - - - (1,207) (4,227) (2,722) - (8,156)
Net Loss Available for Common
Shareholders (4,832) (5,584) (6,183) (6,029) (22,628) (10,021)(12,379) 16,988 (12,990) (18,402)
Per Diluted Share (0.12) (0.13) (0.15) (0.14) (0.54) (0.32) (0.35) 0.43 (0.27) (0.51)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Reports of Independent Accountants 25-26
Consolidated Balance Sheets at June 30, 2002, and June 30, 2001 27-28
Consolidated Statements of Operations for the years ended June 30, 2002,
June 30, 2001, and June 30, 2000 29
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2002, June 30, 2001, and June 30, 2000 30
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, June 30, 2001, and June 30, 2000 31-32
Notes to Consolidated Financial Statements 33-54
Report of Independent Accountants
To the Board of Directors and Stockholders of
Shop At Home, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheet of Shop At Home,
Inc. and subsidiaries as of June 30, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and the financial statement
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Shop At Home, Inc. and subsidiaries
as of June 30, 2002, and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
August 16, 2002
Report of Independent Accountants
Board of Directors and Stockholders
Shop At Home, Inc.
In our opinion, the consolidated financial statements listed in the Index to
Consolidated Financial Statements present fairly, in all material respects, the
financial position of Shop At Home, Inc. and its subsidiaries at June 30, 2001,
and the results of their operations and their cash flows for each of the two
years in the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule for the two years ended June 30, 2001, listed
in the Index appearing under Item 14 (a)(3) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these financial statements and the financial statement schedule in accordance
with auditing standards generally accepted in the United States of America,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
September 12, 2001
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
June 30,
--------------------------------------
2002 2001
------------------ -----------------
CURRENT ASSETS
Cash and cash equivalents $ 11,563 $ 19,557
Restricted cash 4 -
Accounts receivable - trade, net 5,575 3,103
Inventories, net 13,117 9,953
Prepaid expenses 626 884
Deferred tax assets 2,306 3,177
Notes receivable - 380
Income tax receivable - 310
------------------ -----------------
Total current assets 33,191 37,364
Property and equipment, net 30,468 39,171
Deferred tax asset 20,891 9,418
Television station licenses 89,251 89,251
Goodwill 528 528
Other assets 3,751 4,285
------------------ -----------------
Total assets $ 178,080 $ 180,017
================== =================
The accompanying notes are an integral part of these consolidated
financial statements
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
----------------------------------------------------------
2002 2001
------------------------ -----------------------
CURRENT LIABILITIES
Current portion - capital leases $ 330 $ 877
Accounts payable - trade 13,790 9,998
Credits due to customers 4,523 3,443
Other payables and accrued expenses 12,248 12,343
Deferred revenue 1,356 2,124
------------------------ -----------------------
Total current liabilities 32,247 28,785
LONG-TERM LIABILITIES
Capital leases 96 484
Long-term debt 92,500 75,000
COMMITMENTS & CONTINGENCIES
(NOTES 5, 6, 7, 9, 10,11, 13 and 15)
REDEEMABLE PREFERRED STOCK
Series A - $10 par value, 1,000,000 shares authorized, 14,480 and 16,088
issued and outstanding in 2002 and 2001, respectively-redeemable at $10 per
share plus
unpaid dividends accrued 145 161
Series B - $10 par value, 2,000 shares
authorized, 0 issued and outstanding - -
Series C - $10 par value, 10,000 shares
authorized, 0 issued and outstanding - -
STOCKHOLDERS' EQUITY
Common stock - $.0025 par value, 100,000,000 shares
authorized, 41,953,747 and 41,815,831 shares
issued and outstanding in
2002 and 2001, respectively 105 105
Non-voting common stock - $.0025 par
value, 30,000,000 shares authorized,
0 issued and outstanding - -
Additional paid in capital 111,228 110,904
Accumulated deficit (54,448) (31,820)
Notes receivable from related party (Note 10) (3,793) (3,602)
------------------------ -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,080 $ 180,017
======================== =======================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
--------------------------------------------------------------
2002 2001 2000
--------------------- ------------------- ------------------
Net revenues $ 195,840 $ 177,615 $ 201,556
Operating expenses:
Cost of goods sold 127,260 122,353 133,751
Salaries and wages 17,727 22,120 15,427
Transponder and affiliate charges 41,240 39,812 34,688
General and administrative 19,998 22,581 20,665
Depreciation and amortization 11,720 13,935 8,373
Offering costs 837 - -
--------------------- ------------------- ------------------
Total operating expenses 218,782 220,801 212,904
--------------------- ------------------- ------------------
Loss from operations (22,942) (43,186) (11,348)
Interest income 552 906 749
Interest expense (10,878) (11,875) (9,663)
Gain on sale of station (see note 17) - 48,929 -
Other income (expense) (12) 63 (154)
--------------------- ------------------- ------------------
Loss from continuing operations before taxes (33,280) (5,163) (20,416)
Income tax (benefit) expense (10,652) 262 (7,709)
--------------------- ------------------- ------------------
Loss from continuing operations (22,628) (5,425) (12,707)
Income (loss) from discontinued operations of CET to December 29, 2000, plus
applicable income tax benefit of $0, $368 and $481, respectively
(see note 16) - (598) (786)
Loss on disposal of CET, plus applicable income tax
benefit of $1,754 (see note 16) - (2,864) -
--------------------- ------------------- ------------------
Loss before cumulative effect of accounting
change (22,628) (8,887) (13,493)
Cumulative effect of accounting change plus applicable
income tax benefit of $832 (see note 1) - (1,359) -
--------------------- ------------------- ------------------
Net loss (22,628) (10,246) (13,493)
Preferred stock accretion and dividends (see note 7) - (8,156) (6)
--------------------- ------------------- ------------------
Net loss available for common shareholders $ (22,628) $ (18,402) $ (13,499)
===================== =================== ==================
Basic and diluted earnings (loss) per common share:
Loss from continuing operations $ (0.54) $ (0.37) $ (0.42)
Earnings (loss) from discontinued operations - (0.10) (0.02)
Cumulative effect of accounting change - (0.04) -
--------------------- ------------------- ------------------
Basic and diluted loss per share $ (0.54) $ (0.51) $ (0.44)
===================== =================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 2002, 2001 and 2000
(In thousands, except share data)
Additional Shareholder
Common Paid-In Accumulated Notes
Stock Capital Deficit Receivable
---------------- --------------- --------------- ---------------
Balance, June 30, 1999 (24,557,822 shares) $ 61 $ 53,317 $ (8,081) $ -
Issuance of 5,828,000 shares in connection with
public offering - net of issuance costs 15 43,219 - -
Issuance of warrants to purchase common stock - 4,002 - -
Allocation of preferred stock proceeds to beneficial
conversion feature - 3,596 - -
Preferred stock dividend - (6) - -
Exercise of 479,934 warrants 1 700 - -
Exercise of 400,600 employee stock options 1 800 - -
Tax benefit of nonqualified stock options exercised - 973 - -
Conversion of preferred stock (19,913 shares) - 199 - -
Reversal of prior conversion of preferred stock (31,820 shares) - (318) - -
Net loss - - (13,493) -
---------------- --------------- --------------- ---------------
Balance, June 30, 2000 (31,264,772 shares) 78 106,482 (21,574) -
Shareholder option note (see note 10)
- - - (3,602)
Preferred stock conversion (7,874,506 shares) 22 4,100 - -
Preferred stock dividend paid in common shares
(362,348 shares) - (489) - -
Accretion of beneficial conversion feature related to
Series B preferred stock - (3,810) - -
Loss on repurchase of Series B preferred stock
treated as a dividend - (3,643) - -
Cumulative effect of adoption of EITF 00-27 - 4,699 - -
Preferred stock dividend paid in cash - (220) - -
Exercise of 2,170,066 warrants 5 3,597 - -
Exercise of 33,400 employee stock options - 56 - -
Tax benefit of nonqualified stock options exercised - 9 - -
Issuance of 401K stock (110,724 shares) - 123 - -
Net loss - - (10,246) -
---------------- --------------- --------------- ---------------
Balance, June 30, 2001 (41,815,831 shares) 105 110,904 (31,820) (3,602)
Shareholder note interest - -
- (191)
Preferred stock dividends paid in cash - (1) - -
Issuance of 401K stock (42,166 shares) - 115 - -
Exercise of 95,750 employee stock options - 165 - -
Tax benefit of nonqualified stock options exercised - 45 - -
Net loss - - (22,628) -
---------------- --------------- --------------- ---------------
Balance, June 30, 2002 (41,953,747 shares) $ 105 $ 111,228 $ (54,448) $ (3,793)
================ =============== =============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Years Ended June 30,
-------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (22,628) $ (10,246) $ (13,493)
Non-cash expenses/(income) included in net loss:
Depreciation and amortization 11,720 13,935 9,405
Discontinued operations - 3,462 -
Loss on disposal of property and equipment 8 15 193
Note receivable forgiven - 703 -
401K stock issuance 115 123 -
Amortization of debt issue costs 1,178 399 222
Provision for bad debt 1,266 2,517 1,816
Provision for inventory obsolescence 799 3,587 855
Deferred tax benefit (10,557) (2,643) (8,190)
Gain on sale of station assets - (48,929) -
Changes in assets and liabilities:
Accounts and notes receivable (3,358) 10,059 (8,738)
Inventories (3,963) (412) (9,449)
Prepaid expenses 258 20 (295)
Income tax receivable 310 - -
Accounts payable and accrued expenses 4,812 (6,265) 4,307
Deferred revenue (768) 1,646 142
-------------------- ------------------- ------------------
Net cash used by operations (20,808) (32,029) (23,225)
-------------------- ------------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,024) (2,727) (17,671)
Purchase of licenses - (525) (2,349)
Sale of station assets, net of closing costs - 55,681 -
Net change in restricted cash (4) 5,058 375
Net change in other assets (251) 21 -
-------------------- ------------------- ------------------
Net cash provided (used) by investing activities (3,279) 57,508 (19,645)
-------------------- ------------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from debt issuance 17,500 - 20,000
Repayment of debt - (20,000) (20,000)
Repayment of capital leases (935) (1,110) (667)
Payment of debt issuance costs (429) - (956)
Payment of debt consent fees - (1,872) -
Proceeds from exercise of stock options/warrants 165 3,648 1,500
Proceeds from issuance of common stock - 56 46,624
Payment of stock issuance costs - - (3,161)
Preferred stock redemption (16) (11,457) -
Proceeds from issuance of Series B Preferred Stock - - 20,000
Payment of preferred stock dividends (1) (220) (21)
Issuance of shareholder notes (191) (3,602) -
Reduction in note receivable - 1,120 -
-------------------- ------------------- ------------------
Net cash provided (used) by financing activities 16,093 (33,437) 63,319
-------------------- ------------------- ------------------
NET (DECREASE)/INCREASE IN CASH (7,994) (7,958) 20,449
Cash and cash equivalents beginning of period 19,557 27,515 7,066
-------------------- ------------------- ------------------
Cash and cash equivalents end of period $ 11,563 $ 19,557 $ 27,515
==================== =================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, except share data)
Years Ended June 30,
-------------------------------------------------------
2002 2001 2000
------------------ ---------------- ----------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) for taxes $ (310) $ 364 $ -
------------------ ---------------- ----------------
Cash paid for interest $ 9,580 $ 10,178 $ 9,094
------------------ ---------------- ----------------
SCHEDULE OF NONCASH ACTIVITIES
Tax effect of non-qualified stock options $ 45 $ 9 $ 973
------------------ ---------------- ----------------
Reversal of conversion of preferred stock
into shares of common stock (31,820 shares) $ - $ - $ (318)
------------------ ---------------- ----------------
Property and equipment acquired through capital leases $ - $ 360 $ 1,667
------------------ ---------------- ----------------
Conversion of 0, 519 and 19,879 shares, respectively,
of Series A preferred stock into common $ - $ 5 $ 199
------------------ ---------------- ----------------
Accrued Series A preferred stock dividend $ - $ 1 $ 6
------------------ ---------------- ----------------
Conversion of 1,000 shares of Series B preferred stock
into common stock $ - $ 4,100 $ -
------------------ ---------------- ----------------
Dividend on Series B preferred stock paid in common stock $ - $ 489 $ -
------------------ ---------------- ----------------
Accretion and loss on repurchase of Series B preferred stock $ - $ 7,453 $ -
------------------ ---------------- ----------------
The accompanying notes are an integral part of these
consolidated financial statements.
SHOP AT HOME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. Unless otherwise noted, all dollar values in the
financial statements and footnotes have been expressed in (000s) except for
share and per share data and per household data.
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of Shop At Home, Inc. and its 100% directly
owned subsidiaries, SAH-Northeast Corporation ("Northeast"), SAH-Houston
Corporation ("Houston"), SAH Acquisition Corporation II ("SAH Acquisition II"),
SAH Acquisition Corporation ("SAH AQ") and Partners - SATH L.L.C. ("Partners"),
(collectively the "Company"). All material intercompany balances and
transactions have been eliminated in consolidation.
Operations. The Company markets various consumer products through a
televised "Shop At Home" service and over the Internet through its website
shopathometv.com. The programming is currently broadcast by satellite and is
available on the Internet on a twenty-four hours per day, seven days per week
schedule.
Northeast owns and operates a commercial television station, WMFP,
Channel 62, serving the Boston television market area. Northeast also operates a
commercial TV station, WSAH, channel 43, serving a portion of the New York City
market area. The assets of WSAH were acquired in June 1999.
SAH Acquisition II owns and operates three commercial television
stations: KCNS, Channel 38, serving the San Francisco television market area;
WOAC, Channel 67, serving the Cleveland television market area and; WRAY,
Channel 30, serving the Raleigh-Durham television market area, all of which were
acquired on March 27, 1998.
Partners owns real property located at 5388 Hickory Hollow Parkway,
Nashville, Tennessee, the Company's office headquarters and studios. The real
property is Partners' only asset. SAH AQ's principal asset is a 1% membership in
Partners.
Cash and cash equivalents. The Company considers all highly liquid
investments that are readily convertible to known amounts of cash or purchased
with original maturities of three months or less to be cash equivalents. The
carrying value of cash and cash equivalents approximates fair value due to the
short maturity of those instruments.
Accounts receivable--trade. The Company has reduced accounts receivable
to the net realizable value through recording allowances for doubtful accounts.
At June 30, 2002 and 2001, the Company had recorded allowances of $406 and
$2,639, respectively.
Inventories. Inventories, which consist primarily of products held for
sale such as jewelry, electronics and sports collectibles, are valued at average
cost which approximates the first-in, first-out (FIFO) basis. Allowances are
provided for carrying costs in excess of estimated market value. At June 30,
2002 and 2001, the Company had recorded allowances of $684 and $1,717,
respectively.
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 methods over the estimated
useful lives of the assets as reflected in the following table:
Furniture and fixtures 7 Years
Computer hardware and software 3 Years
Operating equipment 5-15 Years
Leasehold improvements 3-15 Years
Building 40 Years
Television station licenses. The Company has acquired five full-power
television station licenses. The licenses are granted by the Federal
Communications Commission for eight-year periods and are regularly renewed
absent serious violations of the law. Beginning July 1, 2001, the television
station licenses are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.
Prior to July 1, 2001, the television station licenses were accounted for in
accordance with Accounting Principles Board Opinion ("APB") No. 17, Intangible
Assets. See Note 4.
Goodwill. Beginning July 1, 2001, goodwill has been accounted
for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Prior
to July 1, 2001, goodwill was accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 17, Intangible Assets. See Note 4.
Debt issue costs. The Company had $3,274 and $3,798 as of June 30, 2002
and 2001, respectively, of debt issuance costs recorded as other assets. Debt
issuance costs are being amortized on a straight-line basis over the life of the
related debt, which approximates the effective interest rate implicit in the
borrowing transaction. The amortization of $1,178, $653 and $579 for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively, has been recorded as
additional interest expense.
Sales returns. The Company generally allows customers to return
merchandise for full credit or refund within 30 days from the date of receipt.
At June 30, 2002 and 2001, the Company had recorded credits due to customers of
$4,523 and $3,443, respectively, for actual and estimated returns.
Revenue recognition. The Company's principal source of revenue is retail
sales to viewing and online customers. Other sources of revenue include rental
of customer lists. Product sales are recognized upon delivery of the merchandise
to the customer. List rental income is recognized over time as the lists are
utilized. Deferred revenue consists of sales related to in transit merchandise.
Cost of goods sold. Cost of goods sold represents the purchase price of
merchandise and inbound and outbound freight costs.
Advertising. Advertising is expensed as incurred.
Income taxes. The Company files a consolidated federal income tax return
with its subsidiaries. The Company files separate or consolidated state returns
as required by each jurisdiction. 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.
Earnings (loss) per share. Basic earnings (loss) per share is computed
by dividing net income (loss) available for common shareholders by the weighted
average number of shares of common stock outstanding. Diluted earnings (loss)
per share is computed by dividing adjusted net income (loss) by the weighted
average number of shares of common stock and assumed conversions of dilutive
securities outstanding during the respective periods. Dilutive securities
represented by options, warrants, redeemable preferred stock and convertible
debt outstanding have been included in the computation except in periods where
such inclusion would be anti-dilutive. The Company uses the treasury stock
method for calculating the dilutive effect of options and warrants and the
if-converted method with respect to the effect of convertible securities.
Use of estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Impairment of long-lived assets. The Company follows SFAS No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
Be Disposed Of, which requires recognition of impairment losses for long-lived
assets with finite lives whenever events or changes in circumstances result in
the carrying amount of the assets exceeding the sum of the expected future
undiscounted cash flows associated with such assets. The measurement of the
impairment losses recognized is based on the difference between the fair values
and the carrying amounts of the assets. SFAS No. 121 also requires that
long-lived assets held for sale be reported at the lower of carrying amount or
fair value less cost to sell. The Company has not experienced such losses.
Stock-based compensation. The Company follows the provisions of APB No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. Certain pro forma disclosures as required by SFAS No. 123,
Accounting and Disclosure of Stock-Based Compensation, are included in Note 11.
Cumulative effect of accounting change. Pursuant to Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, the
Company changed its method of recognizing revenue on products it ships to its
customers in fiscal 2001. Prior to the adoption of SAB No. 101, 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 SAB
No. 101 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, covered by insurance, while the products are
in transit. In accordance with SAB No. 101, 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.
Recent accounting pronouncements. In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. An entity shall
subsequently allocate that asset retirement cost to expense using a systematic
and rational method over its useful life. This Statement applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No. 143 is
effective for the Company beginning on July 1, 2002. Management does not believe
the adoption of SFAS No. 143 will have a material effect on the consolidated
financial position, results of operations or cash flows of the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement develops one accounting model for long-lived
assets to be disposed of by sale and requires that long-lived assets be measured
at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. This Statement
also modifies the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from ongoing operations in a disposal
transaction. SFAS No. 144 is effective for the Company beginning on July 1,
2002. Management does not believe the adoption of SFAS No. 144 will have a
material effect on the consolidated financial position, results of operations or
cash flows of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. The two most significant aspects of this pronouncement, with
respect to the Company, is the elimination of SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and the amendment to SFAS No. 13, Accounting
for Leases. As a result of the elimination of SFAS No. 4, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in APB No. 30, Reporting the Results of
Operations--Discontinued Events and Extraordinary Items. The amendment to SFAS
No. 13 changes the accounting treatment of certain lease modifications that have
economic effects similar to sale-leaseback transactions to require those lease
modifications to be accounted for in the same manner as sale-leaseback
transactions. The rescission of SFAS No. 4 is effective for fiscal years
beginning after May 15, 2002. The amendment to SFAS No. 13 is effective for all
transactions after May 15, 2002. Management does not believe the adoption of
SFAS No. 145 will have a material effect on the consolidated financial position,
results of operations or cash flows of the Company. However, should the
transaction discussed in Note 20 be consummated, any gain or loss on the early
extinguishment of the Company's long-term debt would be classified in operations
rather than classified as an extraordinary item in the Company's consolidated
statement of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The principal
difference between this Statement and EITF Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for all exit or disposal activities after December 31,
2002. Management has not completed the process of determining the effect on the
consolidated financial position, results of operations or cash flows of the
Company.
Reclassifications. Certain amounts in the prior years' consolidated
financial statements have been reclassified for comparative purposes to conform
with the current year presentation.
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES
As a result of the proposed sale of the network assets to Scripps as
described in Note 20, the Company believes that it will have sufficient
liquidity for continuing operations. Should the sale to Scripps fail to be
consummated, management projects that funds generated from operations will be
sufficient to continue operations throughout fiscal 2003, even if the Company
fails to return to profitability. The Company's projections are based on a
continuation of its success over the last year in adding new households
cost-efficiently to the reach of its network. Given the fixed nature of many of
its other costs, management believes that the Company can continue as a going
concern even if revenue per home reached fails to improve or declines
moderately.
The Company had $11.6 million of cash on hand at June 30, 2002. On
August 15, 2002, the Company added $3.0 million of cash via the sale of
preferred stock to Scripps (see Note 20). In addition, on June 30, 2002, the
Company had accounts receivable and inventory balances of $5.6 million and $13.1
million, respectively, which could provide a substantial amount of additional
cash for operations if management elects to modify its merchandising and
supply-chain strategies. Examples of such potential modifications are a
reduction in customer financing and an increase in sales shipped directly from
vendors to customers.
On September 3, 2002, the Company amended its $17.5 million senior
credit facility to reset its minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined in the agreement, covenant
to conform to recent operating results. Other provisions of the amendment are
expected to require the Company to dispose of television stations or obtain
additional equity. Station disposals are not required unless the sale price is
at least equal to the appraised value. The proceeds from any disposals or
additional equity must be used to reduce the balance of the credit facility. The
lender also extended the maturity of the loan from August 1, 2003 to September
30, 2003.
If the Company is unable to meet its minimal financial projections, and
if the Scripps transaction fails to close, the sale of assets or the placement
of additional debt or equity will likely be required. The Company believes that
it could successfully sell, as it did in 2001, one or more of its five owned
television stations to reduce or completely eliminate its long-term debt and to
provide funds for operations. Because of the growth of the television network
affiliate distribution system, the five stations represent less than 15% of the
total homes reached. Therefore, as the network continues to add affiliates, the
owned stations may not be crucial to the network's ability to produce sufficient
revenue to return to profitability. There can be no assurances, however, that
the Company can sell assets or access the debt or equity markets on a timely
basis.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following major classifications:
June 30,
2002 2001
---- ----
Leasehold improvements $ 807 $ 626
Building 11,912 11,908
Operating equipment 21,036 19,786
Software 21,496 20,828
Furniture and fixtures 3,226 3,168
Land 1,250 1,250
------------------ ------------------
59,727 57,566
Accumulated depreciation (29,259) (18,395)
------------------ ------------------
Property and equipment, net $ 30,468 $ 39,171
================== ==================
Depreciation expense totaled $11,720, $11,079 and $5,736 for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively. Of the $11,079
depreciation expense in the year ended June 2001, $1,161 relates to the
reduction of lives of certain computer hardware and software from five years to
three years to better reflect the expected utility of these assets.
NOTE 4 - TELEVISION STATION LICENSES AND GOODWILL
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 primarily
addresses the accounting for the cost of an acquired business (i.e. the purchase
price allocation), including any subsequent adjustments to its cost. SFAS No.
141 supercedes APB No. 16, Business Combinations. The most significant changes
made by SFAS No. 141 are to eliminate the use of the pooling-of-interests method
and to provide new criteria for determining whether intangible assets in a
business combination should be recognized separately from goodwill. SFAS No. 141
is effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The Company adopted SFAS No. 141 effective July
1, 2001. The adoption of SFAS No. 141 did not have any impact on the Company's
financial statements.
SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets after their acquisition and supercedes APB No. 17, Intangible
Assets. The most significant changes made by SFAS No. 142 are to eliminate the
amortization of goodwill and indefinite-life intangible assets, to require that
goodwill and indefinite-life intangibles be tested for impairment at least
annually and to remove the forty year limitation on the amortization period of
intangible assets. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001, with early adoption allowed for entities with fiscal years
beginning after March 15, 2001.
The Company adopted SFAS No. 142 effective July 1, 2001. The effect of
such adoption was to discontinue amortization of the Company's television
station licenses ("FCC Licenses") and goodwill. Prior to the adoption of SFAS
No. 142, the Company amortized the television station licenses and goodwill on a
straight-line basis over 40 years. The FCC licenses are granted by the Federal
Communications Commission, stipulating each station's operating parameters as
defined by channels, effective radiated power and antenna height. In the past,
these licenses have become valuable intangible assets, appreciating in value.
The Company believes these intangible assets have an indefinite useful life
because they are expected to generate cash flow indefinitely. Thus, the Company
ceased to amortize these licenses on July 1, 2001. As of June 30, 2002 and 2001,
the carrying value of the FCC licenses was $89,251.
The Company's carrying value of goodwill of $528 at June 30,
2002 and 2001 is attributable to its network reporting segment. The Company
completed the first step of the transitional goodwill impairment test during the
quarter ended December 31, 2001 and determined that no potential impairment
exists. As a result, the Company has recognized no transitional impairment loss
in connection with the adoption of SFAS No. 142.
The Company has chosen June 30 of each year as its annual impairment
testing date for intangible assets not subject to amortization and goodwill. As
of June 30, 2002, the Company has recorded no impairment loss in connection with
these assets.
The following pro forma information reconciles the net loss and loss
per share reported for the years ended June 30, 2002, June 30, 2001 and 2000 to
the adjusted net loss and loss per share which reflect the adoption of SFAS No.
142 and compares the adjusted information to the current year results:
Twelve Months Ended
June 30,
2002 2001 2000
(Pro forma) (Pro forma)
---------------- ---------------- -----------------
Reported net loss $ (22,628) $ (18,402) $ (13,499)
Add back FCC licenses and goodwill
amortization, net of tax - 1,922 1,724
---------------- ---------------- -----------------
Adjusted net loss $ (22,628) $ (16,480) $ (11,775)
================ ================ =================
Basic and diluted loss per share:
Reported net loss $ (0.54) $ (0.51) $ (0.44)
FCC licenses and goodwill amortization - 0.06 0.05
---------------- ---------------- -----------------
Adjusted net loss $ (0.54) $ (0.45) $ (0.39)
================ ================ =================
NOTE 5 -- CAPITAL LEASES
Property and equipment includes $2,392 and $3,111 of various equipment
acquired pursuant to long term capital leases at June 30, 2002 and 2001,
respectively.
Future minimum lease payments under capitalized leases are as follows at
June 30, 2002:
2003 $ 354
2004 99
----------------
Total minimum lease payments 453
Less amount representing interest (27)
----------------
Present value of minimum lease payments 426
Less current portion (330)
----------------
Long-term portion $ 96
================
NOTE 6 -- INDEBTEDNESS
$75,000 of 11% Senior Secured Notes
In March 1998, the Company issued $75,000 of 11% Senior Secured Notes
Due 2005 (the "Notes"). Interest on the Notes is payable semi-annually on April
1 and October 1 of each year. Beginning April 1, 2002, the Notes are redeemable
at the option of the Company, in whole or in part, at a redemption price equal
to the par value plus a premium and also including accrued and unpaid interest,
if any, to the date of redemption. Upon the occurrence of a change of control,
holders of the Notes have the right to require the Company to repurchase their
Notes, in whole or in part, at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase.
The Notes are collateralized by a lien on all of the issued and
outstanding capital stock of SAH Acquisition II and the assets of SAH
Acquisition II, other than the television station licenses held by it. The Notes
are also collateralized by a lien on all of the issued and outstanding capital
stock of SAH-Northeast, the owner and operator of WMFP(TV) in Boston and
WSAH(TV) in Bridgeport. In addition, the obligations of the Company under the
Notes are jointly and severally guaranteed on a senior basis by substantially
all of the Company's subsidiaries (see Note 19).
The indenture restricts the Company from incurring additional
indebtedness in excess of $17,500, which indebtedness may be secured by a first
priority lien on certain of the Company's assets, including the Company's
accounts receivable and inventory and a first priority lien on the capital stock
and other assets of the broadcast properties not owned by SAH Acquisition II.
The indenture also restricts the Company's ability to issue preferred stock,
incur liens, pay dividends, make certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person, issue
or sell stock of subsidiaries, or sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company or encumber
the assets of the Company or its subsidiaries.
It is estimated that the carrying value of the Notes approximates fair
value at June 30, 2002. This estimate is based on the Company's assessment that
the current market for similar debt would approximate the actual interest rate
on the Notes.
Senior Credit Facility
During the year ended June 30, 2001, the Company used a portion of the
proceeds from the sale of its Houston television station (see Note 17) to repay
its then existing $20,000 senior bank facility. The senior bank facility bore
interest at a margin above LIBOR. On August 1, 2001, the Company obtained a new
$17,500 revolving line of credit from a financial institution. No principal
payments are due before maturity except as required if certain assets are sold.
The facility requires that interest be paid at least quarterly at a variable
rate (6.875% at June 30, 2002) based on LIBOR or prime rate. The facility is
collateralized by substantially all of the Company's assets, except those which
secure the Notes. The facility contains covenants restricting the sale of
assets, mergers and investments and requiring that cash on hand exceed $3.0
million at all times. This credit facility restricts the Company from paying
dividends on its common stock and has cumulative quarterly requirements for
EBITDA, as defined in the agreement. The Company failed to comply with the
cumulative EBITDA covenant for the six months ended December 31, 2001. On
February 11, 2002, the Company was granted a waiver of the EBITDA violation
within an amendment to the loan agreement with the lender. The amendment also
prospectively eliminated the EBITDA covenant through June 30, 2002. The Company
was in compliance with all covenants at June 30, 2002. Subsequent to June 30,
2002, the Company and lender agreed to lower the EBITDA requirements for the
fiscal year ending June 30, 2003, to conform to the historical fiscal 2002
results. On September 3, 2002, the Company amended its $17.5 million senior
credit facility to reset its EBITDA covenant to conform to recent operating
results. Other provisions of the amendment are expected to require the Company
to dispose of television stations or obtain additional equity. Station disposals
are not required unless the sale price is at least equal to the appraised value.
The proceeds from any disposals or additional equity must be used to reduce the
balance of the credit facility. The lender also extended the maturity of the
loan from August 1, 2003 to September 30, 2003.
The carrying value of the revolving line of credit approximates fair
value at June 30, 2002, as the base interest rate charged is at LIBOR and is
reset to reflect changes in LIBOR.
NOTE 7 -- REDEEMABLE PREFERRED STOCK
Series A Preferred Stock
The Company is authorized to issue 1,000,000 shares of Series A
Preferred Stock, of which 14,480 shares were outstanding as of June 30, 2002.
The Series A Preferred Stock is entitled to receive dividends, preferences,
qualifications, limitations, restrictions and the distribution of assets upon
liquidation before the Company's common stock.
Holders of Series A Preferred Stock are entitled to receive, but only
when declared by the Board of Directors, cash dividends at the rate of $0.10 per
share per annum.
In the event of the Company's liquidation, dissolution or winding up,
the holders of shares of Series A Preferred Stock are entitled to receive an
amount equal to $10.00 per share, plus accrued and unpaid dividends. The Company
must pay this amount before it distributes any of its assets to the holders of
common stock or any preferred stock that is junior to the Series A Preferred
Stock.
As long as there are shares of the Series A Preferred Stock outstanding,
the Company may not issue any capital stock that ranks senior to the Series A
Preferred Stock with respect to liquidation, dissolution and winding up without
the consent of the holders of the Series A Preferred Stock. Any holder of any
shares of Series A Preferred Stock may require the Company to redeem all or any
portion of the Series A Preferred Stock, for a redemption price per share of
$10.00, plus accrued and unpaid dividends. The Series A Preferred Stock is
convertible at any time into shares of common stock at a ratio of one share of
common stock for one share of Series A Preferred Stock.
The holders of Series A Preferred Stock generally are not entitled to
vote. There are some situations, however, in which the holders of Series A
Preferred Stock are entitled to vote. First, holders of Series A Preferred Stock
may vote if required by Tennessee corporate law. Second, the Company's charter
requires the holders of a majority of shares of the Series A Preferred Stock to
consent to (1) the authorization, creation or issuance of a new class of capital
stock or series of preferred stock having rights, preferences or privileges
senior to the Series A Preferred Stock, (2) any increase in the number of
authorized shares of any class of capital stock or series of preferred stock
having rights, preferences or privileges senior to the Series A Preferred stock,
or (3) the amendment of any provision of the Company's charter which would
materially and adversely affect any right, preference, privilege or voting power
of the Series A Preferred Stock. Holders of Series A Preferred Stock have no
preemptive rights with respect to any of the Company's shares or other
securities which may be issued, and such shares are not subject to assessment.
Series B Convertible Preferred Stock
On June 30, 2000, the Company issued 2,000 shares of its Series B
Convertible Preferred Stock, $10,000 stated value per share, in consideration of
a payment of $20,000. Of the original 2,000 shares issued on June 30, 2000,
1,000 were redeemed for $10,682 cash and the balance was converted into
7,874,506 shares of common stock during the fiscal year ended June 30, 2001.
Included in the preferred stock accretion and dividends for the year
ended June 30, 2001 are $703 for dividends paid in cash and common stock, $3,810
for the beneficial conversion feature accretion, and $3,643 loss on repurchase
of preferred stock treated as a dividend.
The Company adopted certain provisions of EITF Issue No. 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
Issue No. 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 Issue No. 00-27, 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 8 -- INCOME TAXES
The components of deferred taxes and the approximate tax effects at June
30, 2002 and 2001, are as follows:
June 30,
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards
and AMT credits $ 35,066 $ 21,624
Accruals 2,306 3,177
Valuation allowance (3,476) (2,400)
------------------- -------------------
Total deferred tax assets 33,896 22,401
------------------- -------------------
Deferred tax liabilities:
Licenses and intangibles 1,876 6,676
Depreciation 8,823 3,130
------------------- -------------------
Total deferred tax liabilities 10,699 9,806
------------------- -------------------
Net deferred tax assets $ 23,197 $ 12,595
=================== ===================
Current deferred tax assets $ 2,306 $ 3,177
Long-term deferred tax assets, net 20,891 9,418
-------------------
Net deferred tax assets $ 23,197 $ 12,595
=================== ===================
At June 30, 2002 and 2001 the Company had approximately $92,910 and
$56,260, respectively, of federal net operating loss carryforwards in addition
to $0 and $95, respectively, of AMT credits available to offset taxable income
in future periods. Of these amounts, $89,099 of the net operating loss
carryforwards expire between 2019 and 2022. Due to the length of time until the
expiration date of the federal net operating loss carryforwards and the value of
the Company's commercial television stations, the Company did not deem it
necessary to provide a valuation allowance at June 30, 2002 and 2001 against its
federal net operating loss carryforwards. However, the Company did provide a
full valuation allowance against its state net operating loss carryforwards as
these carryforwards primarily relate to states in which no commercial television
stations are present.
Income tax expense (benefit) varies from the amount computed by applying
the federal corporate income tax rate of 34% to income (loss) before income
taxes as follows:
Years Ended June 30,
-------------------
2002 2001 2000
---- ---- ----
Computed "expected" income tax benefit from
continuing operations $ (11,315) $ (1,755) $ (6,941)
Increase (decrease) in income taxes
resulting from:
State income tax benefit, net
of federal effect (126) (204) (859)
Nondeductible expenses 10 94 64
Change in valuation allowance 1,076 2,400 -
Other (297) (273) 27
---------------- ---------------- -----------------
Actual income tax expense (benefit) $ (10,652) $ 262 $ (7,709)
================ ================ =================
The components of income tax expense (benefit) for the years ended June
30, 2002, 2001 and 2000, are as follows:
Years Ended June 30,
-------------------
2002 2001 2000
---- ---- ----
Current:
State $ 8 $ 54 $ -
Federal - - -
-------------- -------------- ---------------
8 54 -
-------------- -------------- ---------------
Deferred:
State (200) 2,325 (794)
Federal (10,460) (2,117) (6,915)
-------------- -------------- ---------------
(10,660) 208 (7,709)
-------------- -------------- ---------------
Total expense (benefit) $ (10,652) $ 262 $ (7,709)
============== ============== ===============
The Company has allocated deferred tax benefits directly to additional
paid in capital for the years ended June 30, 2002, 2001 and 2000 of $45, $9 and
$973, respectively. These amounts reflect the tax benefit received from the
exercise of nonqualified stock options and disqualifying dispositions by
employees of qualified stock options.
NOTE 9 - COMMITMENTS
Transponder Use Agreement and Purchased Air-Time. The Company's
principal satellite transponder is leased on a fully protected and
non-preemptible basis, which means as a broker of satellite services, The
SPACECONNECTION, Inc. has agreed to furnish the Company alternative service on
another transponder of similar quality and location or, if necessary, on another
satellite to support an in-orbit failure of PanAmSat's G-11. The transponder use
agreement expires in October 2006 and contains an option to extend the agreement
for an additional five years. The expenses for the transponder and purchased air
time (primarily for cable and direct broadcast satellite access fees) were
$41,240, $35,463 and $33,291 for the fiscal years ended June 30, 2002, 2001 and
2000, respectively.
Lease Commitments. Rental expense for office, studio and miscellaneous
equipment, including the transponder lease expense, was $2,975, $3,086 and
$3,194 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
Certain of these leases contain renewal options.
Future minimum lease payments of noncancelable operating leases are as
follows at June 30, 2002:
2003 $ 2,530
2004 2,465
2005 1,996
2006 1,871
2007 651
-----------------------
Total $ 9,513
=======================
The Company has agreements with various affiliated television and cable
system operators to purchase air-time. The terms of the agreements vary from
week-to-week to one year periods and are generally cancelable on 30 days notice.
NOTE 10 -- RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 2002, 2001 and 2000, the Company
engaged in some related party transactions in the normal course of business,
none of which exceeded $60 in total except as described below.
An entity affiliated with Frank A. Woods, a director of the Company,
was paid in October 2000 a finder's fee of $200 in connection with the Company's
$20,000 senior bank facility.
In May 2001, Charles W. Bone was added to the Board of Directors. During
2001 and part of 2002, Mr. Bone was a partner in the firm Wyatt, Tarrant &
Combs, LLP that represents the Company in various legal issues. During 2002 and
2001, the Company paid $307 and $432 in fees to Wyatt, Tarrant & Combs, LLP,
respectively. During 2002, the Company paid $88 in fees to Mr. Bone's new firm,
Bone McAllester Norton PLLC.
In May 2001, the Board of Directors appointed A.E. Jolley and J. Daniel
Sullivan, as a committee of Independent Directors, to set compensation for the
members of the Office of the Chair consisting of J.D. Clinton, Chairman, Charles
W. Bone, George R. Ditomassi, Jr. and Frank Woods. Compensation was set at $7.5
monthly for Charles W. Bone and Frank Woods. In addition to an initial grant of
options to purchase 12,500 shares of stock made by the Board of Directors for
the service of these Directors on an Executive Committee charged with running
the Company after the Chief Executive Officer's termination, the committee
decided that for their service as the Office of the Chair to grant additional
options to purchase 25,000 shares to Charles Bone and Frank Woods. The committee
also allowed Mr. Bone to exercise his outstanding warrants using a three year
note. The committee also granted options to purchase 50,000 shares to George R.
Ditomassi. The Company recognized no compensation expense related to the stock
options as they were granted at the then current market price. In addition, J.D.
Clinton was loaned, by the Company, the exercise price for all of his remaining
warrants. The loan matures on June 30, 2004 (see discussion of loan below). The
Office of the Chair was dissolved on October 1, 2001.
On June 30, 2001, Mr. Clinton exercised warrants to purchase 1,545,066
shares of common stock through an affiliated entity, SAH Holdings, Ltd., for a
total purchase price of $2,565 and exercised warrants to purchase 542,500 shares
of common stock through another affiliated entity, Clinton Investments, Ltd.,
for a total purchase price of $900. Mr. Bone, on the same date, exercised
warrants to purchase 82,500 shares of common stock through an affiliated entity,
Caleb Investments, LP, for a total purchase price of $137. The Company loaned
these entities the funds to make this purchase and each of these entities
executed a non-recourse promissory note to the issuer payable in full on June
30, 2004. The notes carry interest at the prime rate, also payable at maturity.
The Company recognized $191 of interest income on these notes in fiscal 2002.
The loans are non-recourse to the entities but are collateralized by the
underlying shares purchased.
In connection with the relocation of the primary residence of Kent E.
Lillie, former President & Chief Executive Officer of the Company, from Atlanta,
Georgia, to Nashville, Tennessee, the Company made an interest-free loan to Mr.
Lillie in the principal amount of $800. This note was forgiven as part of Mr.
Lillie's severance agreement during fiscal 2002.
In September 1999 the Company entered into a lease agreement with
INSOUTH Bank whereby the Company leased a portion of an office building located
adjacent to the Company's Nashville facilities. INSOUTH Bank is controlled by
J.D. Clinton, Chairman of the Board of Directors of the Company and a principal
shareholder. The Company paid INSOUTH Bank $172, $163 and $101 for the fiscal
years 2002, 2001 and 2000, respectively.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
In 1999 the Company's Board of Directors adopted the 1999 Employee
Stock Option Plan (the "1999 Plan") which provides for the issuance of options
to purchase up to 6,000,000 shares of the Company's common stock. The 1999 Plan
is administered by a committee of the Board of Directors consisting of
non-employee directors. All directors and key employees are eligible to receive
options. 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 stock on the
date of the grant. No options may be granted after July 21, 2009. No option that
is an incentive stock option shall be exercisable after the expiration of ten
years from the date such option was granted (five years if granted to a 10%
shareholder). The options may provide for vesting, in full or in part, after a
change in control of the Company. At June 30, 2002 there were 2,173,200 of
remaining shares available for grant under the 1999 Plan.
In 1991, the Company adopted a stock incentive plan for eligible
employees (the "1991 Plan"). 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 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. Options
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. No options may be granted after October 15, 2001. No
option that is an incentive stock option shall be exercisable after the
expiration of ten years from the date such option was granted or five years
after the expiration in the case of any such option that was granted to a 10%
stockholder. A maximum of 1,500,000 shares of common stock may be issued under
the plan upon the exercise of options.
No compensation expense has been recognized for options granted under
the plans. Had compensation expense for the Company's plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the methods in SFAS No. 123, the Company's net loss and net loss per share
would have been adjusted to the pro forma amounts indicated in the following
table.
2002 2001 2000
------------------------- --------------------------- -------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
---------- ------------ ------------ ----------- ----------- -----------
Net loss available to
common shareholders $(22,628) $ (23,061) $ (18,402) $ (21,407) $ (13,499) $ (15,503)
Basic loss per share $ (0.54) $ (0.55) $ (0.51) $ (0.58) $ (0.44) $ (0.51)
Diluted loss per share $ (0.54) $ (0.55) $ (0.51) $ (0.58) $ (0.44) $ (0.51)
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 grants in the years ended June 30, 2002, 2001
and 2000, respectively: dividend yield of 0%; expected volatility of 61%, 90%
and 77%; risk-free interest rate of 4.76%, 5.47% and 6.05%; and expected life of
7.5 years.
A summary of the status of the Company's options as of June 30, 2002,
2001 and 2000 and changes during the periods ending on those dates is presented
below:
June 30,
2002 2001 2000
---------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------- ------------ ---------------- ------------ --------------- ------------
Outstanding at beginning of
period 3,488,850 $ 4.21 2,821,600 $ 7.62 2,449,200 $ 6.14
Granted 2,147,500 2.52 1,797,350 2.24 1,007,000 9.18
Exercised (95,750) 1.51 (33,400) 1.53 (400,600) 2.00
Forfeited/expired (695,450) 4.29 (1,096,700) 10.27 (234,000) 7.75
-------------- ---------------- ---------------
Outstanding at end of period 4,845,150 3,488,850 2,821,600
3.46 4.21 7.62
============== ================ ===============
Options exercisable at period
end 2,437,452 1,507,100 987,500
Weighted average fair value of
options granted during the
year $ 1.68 $ 1.85 $ 7.08
Options Outstanding Options Exercisable
Weighted
Average WeightedAverage WeightedAverage
Number Remaining Exercise Number Exercise
Outstanding Contractual Price Exercisable Price
Range of Exercise Prices at 6/30/02 Life at 6/30/02
- -------------------------------- -------------- --------------- ------------ --------------- ------------
$0.00 - $1.99 867,250 9 years $ 1.50 338,850 $ 1.37
$2.00 - $2.99 2,865,600 8 years 2.58 1,459,102 2.65
$3.00 - $3.99 454,000 7 years 3.57 289,700 3.64
$4.00 - $5.99 111,900 8 years 4.70 43,900 4.75
$6.00 - $7.99 114,900 7 years 6.72 80,400 6.83
$8.00 - $9.99 75,500 7 years 8.83 32,600 8.80
$10.00 - $10.99 22,500 7 years 10.68 11,000 10.69
$11.00 - $11.99 14,500 7 years 11.22 6,200 11.26
$12.00 - $12.99 134,000 8 years 12.50 53,200 12.49
$13.00 - $13.99 185,000 7 years 13.11 122,500 13.09
-------------- ---------------
4,845,150 2,437,452
============== ===============
At June 30, 2002, warrants to purchase 2,000,000 shares of common stock
were outstanding. The warrants' exercise price is $2.82 per common share. The
warrants expire on June 30, 2003.
NOTE 12 -- LOSS PER SHARE
The following table sets forth for the periods indicated the calculation
of net loss per share included in the Company's Consolidated Statements of
Operations:
Years Ended June 30,
(shares in thousands)
2002 2001 2000
---- ---- ----
Numerator:
Loss from continuing operations $(22,628) $(5,425) $(12,707)
Preferred stock accretion and dividends - (8,156) (6)
--------------- -------------- --------------
Numerator for basic earnings per
share-income (loss) available to
common stockholders $(22,628) $(13,581) $(12,713)
=============== ============== ==============
Denominator:
Denominator for basic earnings per
share-weighted-average shares 41,861 36,311 30,490
Effect of dilutive securities - - -
--------------- -------------- --------------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 41,861 36,311 30,490
=============== ============== ==============
Basic loss from continuing operations per share $ (0.54) $ (0.37) $ (0.42)
=============== ============== ==============
Diluted loss from continuing operations per share $ (0.54) $ (0.37) $ (0.42)
=============== ============== ==============
Although the amounts are excluded from the computations in loss years because
their inclusion would be anti-dilutive, they are shown here for informational
and comparative purposes only (in thousands):
Employee stock options 4,845 3,489 1,007
Warrants 2,000 2,000 2,035
Convertible preferred stock 14 16 94
NOTE 13 -- EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan (the "401K Plan") covering
all full-time employees who have attained six months of service and are age 21
or older. Participants are permitted to make contributions in an amount equal to
1% to 15% of their compensation actually paid. The Company is required to
contribute a matching contribution equal to 50% of the first 5% of each
participant's annual contribution. The Company may also contribute additional
discretionary amounts. As of July 1, 1999, the Company elected to contribute its
matching contribution in the form of Company stock. The Company's common stock
match to the 401K plan for fiscal year ended June 30, 2002, 2001, and 2000 was
42, 101 and 10 shares of common stock with related expense of $115, $122 and
$98, respectively. The match is awarded as of December 31. The Board of
Directors has decided to change the Company match from common stock to a cash
match for calendar year 2002. As a result, the Company expensed an additional
$65 in fiscal 2002.
NOTE 14 -- CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk include cash on deposit in financial
institutions and accounts receivable. Receivables are due from credit card
companies and, ultimately, customers. The Company maintains reserves which
management believes are adequate to provide for losses. Management believes the
financial institutions holding the cash to be financially sound.
The electronic retailing industry is sensitive to general economic
conditions and business conditions affecting consumer spending. The Company's
product lines include jewelry, coins and other unique items that may make the
Company more sensitive to economic conditions than retailers of ordinary items.
During the year ended June 30, 2002, the Company had three vendors from
whom it purchased more than 10% each of its total cost of goods sold. The three
vendors' products were in two different product categories and accounted for
approximately 15.2%, 10.8% and 10.7% of the Company's cost of goods sold. The
Company believes that it could find replacement vendors for the products sold by
any one of these vendors without a material adverse effect on the Company.
NOTE 15 -- CONTINGENCIES
A lawsuit was filed against the Company in January 2000 by a former
vendor, Classic Collectibles, LLC, in state Chancery Court in Chattanooga,
Tennessee. The vendor alleges that the Company improperly canceled certain
orders, that certain amounts it paid to the Company under a written agreement
should be refunded, and that certain amounts were left owing on the account. The
vendor is also claiming entitlement to alleged lost profits of approximately
$2,000, asserting the Company did not provide an amount of broadcast network
time in 1999 that the vendor alleges was orally promised in connection with the
written agreement. The Company has filed its answer and has vigorously pursued
its defense of this action. The case is currently set for a jury trial in
November 2002.
A lawsuit was filed against the Company in April 2002 by ING Merger
LLC, as successor to ING Barings LLC ("ING"), in the United States District
Court in the Southern District of New York. ING alleges that the Company failed
to pay investment banking fees and related expenses in connection with two
agreements. In its complaint, ING demands damages of approximately $450 plus
interest and costs. The Company has filed its answer and plans to vigorously
pursue its defense of this action.
The Company is subject to routine litigation arising from the normal
and ordinary operation of its business. The Company believes that such
litigation is not likely to have a material adverse effect on its financial
position, results of operations or cash flows.
NOTE 16 -- DISCONTINUANCE OF COLLECTOR'S EDGE
The Company discontinued the operations of its subsidiary and segment,
Collector's Edge of Tennessee, Inc. ("CET"), which formerly manufactured and
distributed football trading cards, at the end of December 2000. The Company
sold CET's assets on February 19, 2001, for $1,500, $500 in cash and a note for
$1,000 due in six equal installments which was paid in full on August 15, 2001.
Revenues from CET were as follows:
Twelve Months Ended
June
2002 2001 2000
---------------- ---------------- ---------------
$0 $2,519 $9,700
NOTE 17 -- SALE OF HOUSTON TELEVISION STATION KZJL
On March 20, 2001 the Company sold its Houston television station KZJL
for $57,000. In addition to the cash received, the Company retained rights to
50% of any profits from any sale of the station's Channel 60 - 69 spectrum. The
gain recognized on the sale is the result of the proceeds less $6,752 for the
net book value of fixed assets and license cost and $1,319 in closing costs.
NOTE 18 -- OPERATING SEGMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires reporting segment information that is consistent with the
way in which management operates the Company. The Company operates principally
in two segments: Shop At Home Network and shopathometv.com. 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. Intersegment sales and
transfers are accounted for as if the sales or transfers were with third
parties, that is, at current market prices.
OPERATING SEGMENT DATA
Years Ended June 30,
2002 2001 2000
---- ---- ----
Revenue:
Network $ 176,086 $ 161,589 $ 198,114
shopathometv.com 19,754 18,686 4,675
Intersegment eliminations - (2,660) (1,233)
----------------- ------------------ ----------------
$ 195,840 $ 177,615 $ 201,556
================= ================== ================
Operating loss:
Network $ (22,356) $ (33,594) $ (4,447)
shopathometv.com (586) (9,592) (6,901)
----------------- ------------------ ----------------
$ (22,942) $ (43,186) $ (11,348)
================= ================== ================
Depreciation and amortization:
Network $ 9,453 $ 11,854 $ 7,761
shopathometv.com 2,267 2,081 612
----------------- ------------------ ----------------
$ 11,720 $ 13,935 $ 8,373
================= ================== ================
Interest income:
Network $ 552 $ 906 $ 749
shopathometv.com - - -
----------------- ------------------ ----------------
$ 552 $ 906 $ 749
================= ================== ================
Interest expense:
Network $ 10,878 $ 11,875 $ 9,490
shopathometv.com - - 173
----------------- ------------------ ----------------
$ 10,878 $ 11,875 $ 9,663
================= ================== ================
Income (loss) before taxes:
Network $ (32,692) $ 4,429 $ (13,342)
shopathometv.com (588) (9,592) (7,074)
----------------- ------------------ ----------------
$ (33,280) $ (5,163) $ (20,416)
================= ================== ================
Income taxes:
Network $ (10,452) $ 3,907 $ (5,035)
shopathometv.com (200) (3,645) (2,674)
----------------- ------------------ ----------------
$ (10,652) $ 262 $ (7,709)
================= ================== ================
Total assets:
Network $ 167,726 $ 169,624 $ 211,433
shopathometv.com 10,354 10,393 8,830
Collector's Edge - - 8,331
Intersegment eliminations - - (1,300)
----------------- ----------------- ----------------
$ 178,080 $ 180,017 $ 227,294
================= ================== ================
Capital expenditures:
Network $ 3,011 $ 2,664 $ 11,133
shopathometv.com 13 63 6,617
----------------- ------------------ ----------------
$ 3,024 $ 2,727 $ 17,750
================= ================== ================
NOTE 19 -- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial
information for the Company, segregating the parent from the Company's
subsidiaries which are the guarantors of the Notes and the subsidiaries which
are not guarantors of the Notes. The guarantor subsidiaries are wholly-owned
subsidiaries of the Company and guarantees are full, unconditional, joint and
several. The separate company financial statements of each guarantor subsidiary
have not been included herein because management does not believe that their
inclusion would be more meaningful to investors than the presentation of the
condensed consolidating financial information presented below.
CONSOLIDATING BALANCE SHEET DATA
June 30, 2002 June 30, 2001
Guarantor Non-Guarantor GuarantorNon-Guarantor
Parent SubsidiariesSubsidiariesEliminationsConsolidatedParentSubsidiariesSubsidiariesEliminationsConsolidated
Assets:
Cash and cash equivalents $ 11,542 $ 21 $ - $ - $11,563 $ 19,562 $ (5) $ - $ - $ 19,557
Restricted cash 4 - - - 4 - - - - -
Accounts receivable 58,214 - - (52,639) 5,575 51,935 10 - (48,842) 3,103
Inventories 13,117 - - - 13,117 9,953 - - - 9,953
Prepaid expenses 615 11 - - 626 873 11 - - 884
Deferred tax assets 2,306 - - - 2,306 3,177 - - - 3,177
Notes receivable - - - - - 380 - - - 380
Income tax receivable - - - - - 310 - - - 310
------------- -------- ------- ------------ --------- ----------- -------- --------- --------- ----------
Total current assets 85,798 32 - (52,639) 33,191 86,190 16 - (48,842) 37,364
Property and equipment,
net 12,402 6,037 12,029 - 30,468 21,195 5,649 12,327 - 39,171
Deferred tax assets 38,245 - - (17,354) 20,891 9,418 - - - 9,418
Television station licenses - 89,251 - - 89,251 - 89,251 - - 89,251
Goodwill 528 - - - 528 528 - - - 528
Other assets 3,584 167 - - 3,751 4,128 157 - - 4,285
Investment in subsidiaries 23,816 - - (23,816) - 23,816 - - (23,816) -
------------- -------- ------- ------------ --------- ----------- -------- --------- --------- ----------
Total assets $ 164,373 $95,487 $12,029 $ (93,809) $178,080 $ 145,275 $95,073 $ 12,327 $72,658) $ 180,017
============= ======== ======= ============ ========= =========== ======== ========= ========= ==========
Liabilities and
Stockholders' Equity:
Current portion--capital
leases $ 330 $ - $ - $ - $ 330 $ 877 $ - $ - $ - $ 877
Accounts payable and
accrued expenses 29,926 63,568 13,522 (76,455) 30,561 25,425 60,073 12,924 (72,638) 25,784
Deferred revenue 1,356 - - - 1,356 2,124 - - - 2,124
------------- -------- ------- ------------ --------- ----------- -------- --------- --------- -----------
Total current liabilities 31,612 63,568 13,522 (76,455) 32,247 28,426 60,073 12,924 (72,638) 28,785
Long-term debt including
capital leases 92,596 - - - 92,596 75,484 - - - 75,484
Deferred income taxes - 17,354 - (17,354) - - 17,194 - (17,194) -
Redeemable preferred
stock 145 - - - 145 161 - - - 161
Common stock 105 - - - 105 105 - - - 105
Additional paid-in capital 111,228 - - - 111,228 110,904 - - - 110,904
Accumulated deficit (67,520) 14,565 (1,493) - (54,448) (66,203) 17,806 (597) 17,174 (31,820)
Note receivable (3,793) - - - (3,793) (3,602) - - - (3,602)
------------- -------- -------- ----------- --------- ----------- -------- --------- --------- -----------
Stockholders' equity $ 164,373 $ 95,487 $12,029 $(93,809) $ 178,080 $ 145,275 $95,073 $12,327 $(72,658) $180,017
============= ======== ======== =========== ========= =========== ======== ========= ========= ===========
Consolidating Statement of Operations and Cash Flow Data
June 30, 2002 June 30, 2001 June 30, 2000
Guarantor Non-Guarantor Guarantor Non-Guarantor Guarantor Non-Guarantor
ParentSubsidiariesSubsidiariesConsolidatedParentSubsidiariesSubsidiariesConsolidatedParentSubsidiariesSubsidiariesConsolidated
------- ---------- ------------ ---------- ------ ---------- ----------- ---------- ------ ---------- ------------ -----------
Net revenues ......$ 187,183 $8,657 $ -- $195,840 $168,460 $ 9,155 $ -- $177,615 $194,602 $ 6,954 $ -- $ 201,556
Cost of goods sold 127,260 -- -- 127,260 122,353 -- -- 122,353 133,751 -- -- 133,751
Operating expenses 83,039 8,183 300 91,522 88,312 9,836 300 98,448 69,308 9,548 297 79,153
--------- ----- ------ ------- ------- ------- ------- ------- -------- ------- ------- ---------
Income (loss) from
continuing
operations (23,116) 474 (300) (22,942) (42,205) (681) (300) (43,186) (8,457) (2,594) (297) (11,348)
Interest income ... 551 1 -- 552 901 5 -- 906 749 -- -- 749
Interest expense . (10,874) (4) -- (10,878) (11,875) -- -- (11,875) (9,663) -- -- (9,663)
Other income ..... (12) -- -- (12) 63 48,929 -- 48,992 (185) 31 -- (154)
(expense) -------- ----- ------- -------- -------- -------- ------- ------- ------- ------ ------ ---------
taxes .......... (33,451) 471 (300) (33,280) (53,116) 48,253 (300) (5,163) (17,556) (2,563) (297) (20,416)
Income tax expense
(benefit) ....... (10,812) 160 -- (10,652) (18,074) 18,336 -- 262 (6,735) (974) -- (7,709)
--------- ------ ------ -------- -------- ------- ------ ------- ------- ------ ------ ---------
Income (loss) from
continuing
operations ..... (22,639) 311 (300) (22,628) (35,042) 29,917 (300) (5,425) (10,821) (1,589) (297) (12,707)
Discontinued ..... -- -- -- -- -- (3,462) -- (3,462) -- (786) -- (786)
operations
Cumulative effect of
accounting change -- -- -- -- (1,359) -- -- (1,359) -- -- -- --
-------- ------ ------ -------- -------- -------- ------- -------- ------- ------- ------ ---------
Net income (loss) $ (22,639) $ 311 $(300) $(22,628) $(36,401) $26,455 $ (300) $(10,246)$(10,821) $(2,375) $(297) $ (13,493)
======== ====== ====== ======== ======== ======== ====== ======== ======== ======= ====== =========
CASH FLOWS
Cash provided by
(used in)
operations $ (21,812) $1,004 $ -- $(20,808) $ 1,229 $(33,258) $ -- $(32,029) $(24,693) $1,468 $-- $ (23,225)
Cash provided by
(used in)
investing (2,301) (978) -- (3,279) 1,906 55,602 -- 57,508 (17,394) (2,251) -- (19,645)
activities
Cash provided by
(used in)
financing
activities 16,093 -- -- 16,093 (11,565) (21,872) -- (33,437) 63,319 -- -- 63,319
-------- ------ ------- ------- ------- -------- ------ -------- -------- ------ ----- ---------
Increase (decrease)
in cash (8,020) 26 -- (7,994) (8,430) 472 -- (7,958) 21,232 (783) -- 20,449
Cash at beginning of
period ......... 19,562 (5) -- 19,557 27,992 (477) -- 27,515 6,760 306 -- 7,066
------- ------ ------- -------- ------- -------- ------ ------- ------- ------ ----- ---------
Cash at end of period$11,542 $ 21 $ -- $ 11,563 $19,562 $ (5) $-- $19,557 $27,992 $ (477)$ -- $ 27,515
======= ====== ======= ======== ======= ======== ====== ======= ======= ====== ===== =========
*there are no eliminations entries therefore the eliminations
column has been omitted.
NOTE 20 - SUBSEQUENT EVENTS
On August 14, 2002, the Company entered into a Share Purchase Agreement
(the "Agreement") with a subsidiary of The E.W. Scripps Company ("Scripps")
pursuant to which the Company has agreed to indirectly sell and transfer a 70%
interest in its television and Internet home shopping network (the "Network") to
Scripps. The transaction is subject to approval of the Company's shareholders.
The Company will retain a 30% interest in the Network and will also retain
ownership of its five full-power television stations, certain wireless spectrum
assets and tax-loss carry-forward benefits.
Under the Agreement, the Company will transfer its Network to a Scripps
subsidiary (the "Operating Company") in a two-tier holding company structure.
The Operating Company will receive substantially all the assets of the Network
as well as assume certain of the Network's current liabilities. The Company will
retain its obligations under its $17.5 million senior credit facility and its
$75 million Senior Secured Notes due 2005 and will also retain certain
liabilities associated with pending litigation and certain other contractual
obligations. The Company will sell a 70% interest in the Operating Company for a
cash purchase price of $49.5 million, and the Company will be entitled to
receive $3.0 million in cash from the Operating Company prior to closing.
The Company will have the right to require Scripps to purchase the
Company's 30% interest in the Operating Company during the period beginning on
the second anniversary of the closing and ending on the fifth anniversary of the
closing at a cash purchase price equal to the fair market value of the 30%
interest. After five years, Scripps will have the right to require the Company
to sell the 30% interest to Scripps at a price equal to fair market value.
Scripps will also have the right to require the Company to sell its 30% interest
in certain other events, including a change of control of the Company, the
Company's breach of certain obligations to Scripps or the Company's insolvency.
The Company will be restricted in its ability to sell its 30% interest to a
third party without first offering to sell the 30% interest to Scripps. Scripps
will be restricted in its ability to sell all or a part of its 70% interest to a
third party, if such transfer would result in a change of control of the
Operating Company, unless the purchaser also agrees to purchase the Company's
30% interest. If the Company declines to sell its 30% interest, Scripps has the
right, but not the obligation, to require the Company to sell its interest at
the same price.
Upon closing, Scripps has agreed to loan $47.5 million to the Company
payable by the Company in three years. The loan will accrue interest at an
annual rate of 6%, payable quarterly, and will be secured by an assignment of
the Company's 30% interest in the Operating Company and the encumbrance of the
assets of the Company's television stations located in the Boston, San Francisco
and Cleveland markets. The Company will use the purchase price and these loan
proceeds to retire debt and for working capital purposes.
The Operating Company will be governed by a five member board, three
members of which will be selected by Scripps and two selected by the Company.
Scripps has agreed to loan up to $35.0 million to the Operating Company to be
used for working capital purposes.
The Company has agreed to enter into a three-year affiliation agreement
with the Operating Company, under which the Company will agree to carry the
Network programming on its five television stations located in the Boston, San
Francisco, Cleveland, Raleigh and Bridgeport, Connecticut, markets. The Company
retains the right to terminate the affiliation agreement after 15 months.
In addition, on August 15, 2002, Scripps purchased 3,000 shares of
newly authorized Series D Senior Redeemable Preferred Stock from the Company for
an aggregate purchase price of $3 million. The shares of preferred stock will
mature on April 15, 2005, at which time the Company will be obligated to redeem
the shares for a price equal to their original purchase price plus accrued and
unpaid dividends. Dividends of 6% are payable quarterly, with the Company having
the right, if the sale of Network assets is closed, to defer payment of the
dividends until maturity. If the sale of Network assets is not closed, the
shares of preferred stock will pay dividends of 12%, which are payable
quarterly, at the option of the Company, in cash or additional shares of
preferred stock.
The shares of preferred stock are not convertible to any other shares
of capital stock of the Company and do not have voting rights (except for any
statutory voting right). The shares of preferred stock carry a liquidation
preference to the Company's common stock and are on parity with the Company's
outstanding shares of Series A Preferred Stock. Other than the Series A and
Series D Preferred Stock, the Company has no other series of preferred stock
outstanding.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information with respect to directors and executive officers of the
Company to be included in the definitive Proxy Statement which the Company will
file for the 2002 Annual Meeting of Shareholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information 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 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 under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
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
Reports of Independent Accountants
Consolidated Balance Sheets as of June 30, 2002 and
2001 Consolidated Statements of Operations for the
years ended June 30,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years
ended June 30, 2002, 2001 and 2000.
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
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 60.
(b) Reports on Form 8-K
Form 8-K filed April 24, 2002, reported that on April 22, 2002, Shop At
Home, Inc. held a conference call to discuss the Company's financial results for
the third quarter of its fiscal year 2002, ending March 31, 2002. These results
were filed with the SEC on the Form 10-Q filed on April 19, 2002. The Company
has elected to voluntarily file a copy of this transcript on this Form 8-K to
ensure that the contents of such conference call are fully disseminated and that
any investor of Shop At Home, Inc. has full access to such transcript.
SHOP AT HOME, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
(Thousands of Dollars)
Balance at Charged to Balance
beginning Returns and at end
of year Allowances Deductions (1) of year
--------------- ---------------- --------------- ------------
Year ended June 30, 2002
Estimated credits
due to customers $ 3,443 $ 40,832 $ 39,752 $ 4,523
=============== ================ =============== ============
Year ended June 30, 2001
Estimated credits
due to customers $ 2,711 $ 58,734 $ 58,002 $ 3,443
=============== ================ =============== ============
Year ended June 30, 2000
Estimated credits
due to customers $ 3,069 $ 58,582 $ 58,940 $ 2,711
=============== ================ =============== ============
(1) Merchandise returned
Balance at Balance
beginning Additional at end
of year provisions Reduction of year
--------------- ---------------- --------------- ------------
Year ended June 30, 2002
Accounts receivable
reserves $ 2,489 $ 1,266 $ 3,349 $ 406
=============== ================ =============== ============
Year ended June 30, 2001
Accounts receivable
reserves $ 1,595 $ 2,517 $ 1,623 $ 2,489
=============== ================ =============== ============
Year ended June 30, 2000
Accounts receivable
reserves $ 543 $ 1,816 $ 764 $ 1,595
=============== ================ =============== ============
Balance at Balance
beginning Additional at end
of year provisions Deductions of year
--------------- ---------------- --------------- ------------
Year ended June 30, 2002
Inventory reserves $ 1,717 $ 799 $ 1,832 $ 684
============== =============== ============== ============
Year ended June 30, 2001
Inventory reserves $ 669 $ 3,587 $ 2,539 $ 1,717
============== =============== ============== ============
Year ended June 30, 2000
Inventory reserves $ 304 $ 855 $ 490 $ 669
============== =============== ============== ============
INDEX TO EXHIBITS
Exhibit
No. Description
3(i).4 Restated Charter, recorded August 13, 1999, filed as Exhibit
3(i).4 to the Annual Report on Form 10-K, filed on August 31,
1999, and incorporated herein by this reference.
3(i).5 Articles of Amendment to the Restated Charter, recorded
April 13, 2000, filed as Exhibit 3.3 to the Registration
Statement on Form S-3, filed on July 26, 2000, and
incorporated herein by this reference.
3(i).6 Articles of Amendment to the Restated Charter, recorded June
30, 2000, filed as Exhibit 3.1 to the Current Report on
Form 8-K, filed on July 5, 2000, and incorporated herein by
reference.
3(i).7 Amendment to Amended and Restated Charter, filed as Exhibit
3.1 to the Current Report on Form 8-K, filed June 1,
2001, and incorporated by this reference.
3(i).8* Amendment to Amended and Restated Charter, recorded August 15,
2002.
3(ii).1 Restated Bylaws, adopted July 21, 1999, filed as Exhibit
3(ii).1 to the Annual Report on Form 10-K, filed on August
31, 1999, and incorporated herein by this reference.
4.4 Specimen of Preferred Stock certificate, filed as Exhibit
4.9 to Amendment No. 1 to the Registration Statement on
Form S-4, filed on January 20, 1995, and incorporated herein
by this reference.
4.6 Form of Trust Indenture with PNC Bank, N.A., as Trustee, with
regard to the 11% Secured Notes due 2005, containing a
specimen of the Note, filed as Exhibit 4.6 to Amendment No. 2
to the Registration Statement on Form S-1, filed on
March 21, 1998, and incorporated herein by this reference.
4.7 Form of Security and Pledge Agreement, filed as Exhibit 4.7
to Amendment No. 2 to the Registration Statement on Form
S-1, filed on March 21, 1998, and incorporated herein by this
reference.
4.8 Form of Warrant, filed as Exhibit 4.2 to the Current Report
on Form 8-K, filed on July 5, 2000, and incorporated
herein by this reference.
4.9 First Supplement to Indenture, between the Company and Chase
Manhattan Trust Company, National Association, Dated
October 26, 2000, filed as Exhibit 4.1 to the Quarterly
Report on Form 10-Q, filed May 15, 2001, and incorporated by
this reference.
4.10 Second Supplement to Indenture, between the Company and Chase
Manhattan Trust Company, National Association, dated
February 20, 2001, filed as Exhibit 4.2 to the Quarterly
Report on Form 10-Q, filed May, 15, 2001, and incorporated
by this reference.
4.11 Third Supplement to Indenture, between the Company and Chase
Manhattan Trust Company, National Association, dated
March 30, 2001, filed as Exhibit 4.3 to the Quarterly Report
on Form 10-Q, filed May 15, 2001, and incorporated by
this reference.
4.12 Rights Agreement, adopted by the Board of Directors of the
Company, dated June 1, 2001, filed as Exhibit 4.1 to the
Current Report on Form 8-K, filed June 1, 2001, and
incorporated by this reference.
4.13* Preferred Share Purchase Agreement, dated
August 14, 2002, between the Registrant and
Scripps Networks, Inc.
10.1 Company's Omnibus Stock Option Plan, filed as Exhibit 10.3
to the Annual Report on Form 10-K, for the fiscal year
ended June 30, 1992, 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
Registration Statement on Form S-4, filed on December 28,
1994, and incorporated herein by this reference.
10.49 Amendment No.1 to Company's Omnibus Stock Option Plan
filed as Appendix A to the Company's Proxy Statement on
Schedule 14A for the fiscal year ended June 30, 1996, filed
on November 18, 1996, and incorporated herein by this
reference.
10.50 Form of options issued to directors dated June 19, 1997,
filed as Exhibit 10.50 to the Registration Statement on
Form S-1, filed on January 14, 1998, and incorporated herein
by this reference.
10.53 1999 Employee Stock Option Plan, filed as Exhibit 10.53 to
the Annual Report on Form 10-K, filed August 31, 1999,
and incorporated herein by this reference.
10.55 Employment Agreement with Arthur D. Tek and Shop At Home,
Inc. dated February 25, 1999, filed as Exhibit 10.55 to
the Annual Report on Form 10-K/A, filed on October 28, 1999,
and incorporated herein by this reference.
10.56 Lease Agreement with INSOUTH Bank dated September 1, 1999,
filed as Exhibit 10.56 to the Annual Report on Form
10-K/A, filed on October 28, 1999, and incorporated herein by
this reference.
10.57 Registration Rights Agreement, between the Company and certain
investors, dated June
30, 2000, and filed as Exhibit 10.1 to the Current Report on
Form 8-K, filed on July 5, 2000, and incorporated herein by
this reference.
10.58 Securities Purchase Agreement, between the Company and
certain investors, dated June 30, 2000, and filed as Exhibit
10.2 to the Current Report on Form 8-K, filed on July 5, 2000,
and incorporated herein by this reference.
10.61 Waiver and Agreement, between the Company and the holders
of the Series B Convertible Preferred Stock, dated
September 21, 2000, filed as Exhibit 10.1 to the Current
Report on Form 8-K, filed September 22, 2000, and
incorporated by this reference.
10.62 Loan and Security Agreement, between the Company and Foothill
Capital Corporation, dated October 30, 2000, filed as Exhibit
10.1 to the Current Report on Form 8-K, filed October 31,
2000, and incorporated by this reference.
10.63 Asset Purchase Agreement, between the Company and its
affiliates and LBI Holdings II, Inc., and its affiliates,
regarding KZJL (TV) Houston, Texas, dated November 10, 2000,
filed as Exhibit 10.1 to the Quarterly Report on Form
10-Q, filed November 4, 2000, and incorporated by this
reference.
10.64 Redemption and Waiver Agreement, between the Company and the
holders of the Series B Convertible Preferred Stock,
dated December 22, 2000, filed as Exhibit 10.1 to the
Current Report on Form 8-K, filed January 2, 2001, and
incorporated by this reference.
10.65 Employment Agreement, between the Company and Theodore M.
Engle, III, dated February 1, 2001, filed as Exhibit 10.1
to the Quarterly Report on Form 10-Q, filed May 15, 2001, and
incorporated by this reference.
10.66 Severance Agreement, between the Company and Kent E.
Lillie, dated May 16, 2001, filed as Exhibit 10.1.1 to the
Current Report on From 8-K, filed May 16, 2001, and
incorporated by this reference.
10.67 Notice of Company to the holders of the Series B Convertible
Preferred Stock, dated July 3, 2001, filed as Exhibit
99.1 to the Current Report on Form 8-K, filed July 5, 2001,
and incorporated by this reference.
10.68 Loan and Security Agreement, between the Company and Foothill
Capital Corporation, dated August 1, 2001.
10.69 Employment Agreement between Thomas N. Merrihew and Shop At
Home, Inc., dated July 20, 2001
10.70 Employment Agreement between Bennett Scott Smith and Shop At
Home, Inc., dated November 22, 2001
10.71 Employment Agreement between Frank A. Woods and Shop At
Home, Inc., dated March 20, 2002
10.72 Employment Agreement between George R. Ditomassi and Shop
At Home, Inc., dated March 20, 2002
10.73 Share Purchase Agreement, dated August 14, 2002, between Shop
At Home, Inc. and Scripps Networks, Inc.
11 Schedule of Computation of Net Income Per Share (in Note 12
to Consolidated Financial Statements of the Company for
the period ended June 30, 2000, included herein).
21 Subsidiaries of the Company.
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of PricewaterhouseCoopers LLP
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SHOP AT HOME, INC.
By: /s/ George R. Ditomassi Date: 09/06/02
---------------------------
George R. Ditomassi
Co-Chief Executive Officer, Director
By: /s/ Frank A. Woods Date: 09/06/02
-----------------------------------
Frank A. Woods
Co-Chief Executive Officer, Director
By: /s/ Arthur D. Tek Date: 09/06/02
-----------------------------------
Arthur D. Tek
Executive Vice President and
Chief Financial Officer
By: /s/ R. Steven Chadwell Date: 09/06/02
---------------------------
R. Steven Chadwell
Vice President, Finance
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Company and in the capacities on the dates indicated.
By: /s/ J.D. Clinton Date: 09/06/02
-----------------------------------
J.D. Clinton, Chairman
By: /s/ Charles W. Bone Date: 09/06/02
-----------------------------------
Charles W. Bone, Director
By: /s/ A.E. Jolley Date: 09/06/02
-----------------------------------
A.E. Jolley, Director
By: /s/ Joseph I. Overholt Date: 09/06/02
---------------------------
Joseph I. Overholt, Director
By: /s/ Don C. Stansberry, Jr. Date: 09/06/02
-----------------------------------
Don C. Stansberry, Jr., Director
CERTIFICATION
I, George R. Ditomassi, certify that:
1. I have reviewed this annual report on Form 10-K of Shop At Home, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 6, 2002
/s/George R. Ditomassi
George R. Ditomassi
Co-Chief Executive Officer
CERTIFICATION
I, Frank A. Woods, certify that:
1. I have reviewed this annual report on Form 10-K of Shop At Home, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 6, 2002
/s/Frank A. Woods
Frank A. Woods
Co-Chief Executive Officer
CERTIFICATION
I, Arthur D. Tek certify that:
1. I have reviewed this annual report on Form 10-K of Shop At Home, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 6, 2002
/s/Arthur D. Tek
Arthur D. Tek
Chief Financial Officer
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement Nos.
333-15033 and 333-34680 of Shop At Home, Inc. on Form S-8 and Amendment No. 1 to
Registration Statement No. 333-42258 of Shop At Home, Inc. on Form S-3 of our
report dated August 16, 2002, appearing in this Annual Report on Form 10-K of
Shop At Home, Inc. for the year ended June 30, 2002.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
September 5, 2002
Exhibit 23.2
Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-3/A (No. 333-42258) and S-8 (No. 333-15033 and 333-34680)
of Shop At Home, Inc. of our report dated September 12, 2001 relating to the
financial statements and financial statement schedule, which appears in the
Annual Report to Shareholders, which is incorporated in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
September 12, 2001
Exhibit 3(i).8
ARTICLES OF AMENDMENT
TO THE AMENDED AND RESTATED CHARTER
OF
SHOP AT HOME, INC.
Pursuant to the provisions of Section 48-16-102 of the Tennessee Code
Annotated, the undersigned Corporation adopts the following Articles of
Amendment to its Charter:
1. The name of the Corporation is Shop At Home, Inc.
2. The purpose of this amendment is to set forth the designations, limitations
and relative rights of the Corporation's Series D Senior Redeemable Preferred
Stock, a new series of the Corporation's previously authorized preferred stock,
par value $10.00 per share.
3. The Charter of the Corporation is amended by inserting therein as Section 7.6
the following text determining the terms of the Series D Senior Redeemable
Preferred Stock:
7.6 Series D Redeemable Preferred Stock
7.6.1 Certain Defined Terms. For purposes of this Section 7.6, the
following terms have the following meanings:
(a) "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in Cincinnati, Ohio or Nashville,
Tennessee are authorized or required by law to remain closed.
(b) "Issuance Date" means, with respect to each Series D
Preferred Share, the date of issuance of the applicable Series D Preferred
Share.
(c) "Original Issue Price" per Series D Preferred Share means
$1,000 (as adjusted for stock splits, stock dividends, combinations and
reclassifications).
(d) "Person" means an individual, limited liability company,
partnership, joint venture, corporation, trust, unincorporated organization or
other entity or a government or any department or agency thereof.
(e) "Series D Preferred Shares" means shares of Series D
Senior Redeemable Preferred Stock of the Corporation.
(f) "Share Purchase Agreement" means the Share Purchase
Agreement dated August 14, 2002 between the Corporation and Scripps Networks,
Inc.
7.6.2 Dividends. The holders of Series D Preferred Shares are entitled
to receive dividends at a rate of 6% per annum of the Original Issue Price of
each Series D Preferred Share, which dividends will be cumulative, accruing
daily from the Issuance Date, payable on the first day of each calendar quarter
after the Issuance Date (each, a "Series D Dividend Date"). If the Share
Purchase Agreement is terminated for any reason, the holders of Series D
Preferred Shares will be entitled to receive additional dividends at a rate of
6% per annum of the Original Issue Price of each Series D Preferred Share, which
dividends will be cumulative, accruing daily from the date of termination of the
Share Purchase Agreement, payable on each Series D Dividend Date after the date
of such termination. The foregoing dividends and additional dividends will be
referred to herein as "Series D Dividends". If a Series D Dividend Date is not a
Business Day, then the Series D Dividend will be due and payable on the Business
Day immediately following the Series D Dividend Date. If the transactions
contemplated by the Share Purchase Agreement have not been consummated, the
Corporation shall pay Series D Dividends in cash or, at the Corporation's
option, in such number of fully paid and nonassessable Series D Preferred Shares
equal to the quotient of accrued and unpaid Series D Dividends with respect to
such Series D Preferred Shares held by such holder and the Original Issue Price.
If the transactions contemplated by the Share Purchase Agreement are
consummated, the Corporation shall pay Series D Dividends in cash; provided
however that, at the Corporation's option, the Corporation may defer payment of
the Series D Dividends until redemption of the Series D Preferred Shares (or
such earlier time as the Corporation chooses); provided that such deferred
Series D Dividends will constitute a debt obligation of the Corporation and
accrue interest at the rate of 6% per annum. At any time upon a holder's
request, the Corporation shall issue one or more promissory notes to evidence
such debt obligation.
7.6.3 Reorganizations. Any recapitalization, reorganization,
reclassification, consolidation or merger with or into another Person or other
transaction that is affected in such a way that holders of Common Stock are
entitled to receive stock, securities or assets with respect to or in exchange
for Common Stock is referred to herein as "Organic Change." Prior to the
consummation of any Organic Change, the Corporation shall secure from the
successor resulting from such Organic Change or the parent company of such
successor a written agreement (in form and substance reasonably satisfactory to
the holders of a majority of the Series D Preferred Shares then outstanding) to
deliver to each holder of Series D Preferred Shares in exchange for such shares,
a security of such successor or the parent company of such successor evidenced
by a written instrument substantially similar in form and substance to the
Series D Preferred Shares (including, without limitation, having a liquidation
preference equal to the Liquidation Preference of the Series D Preferred Shares
held by such holder) and reasonably satisfactory to the holders of a majority of
the Series D Preferred Shares then outstanding.
7.6.4 Redemptions
(a). Optional Redemption At Right of the Corporation. The
Corporation may redeem all, but not less than all, of the Series D Preferred
Shares outstanding at any time at a price per Series D Preferred Share equal to
the Original Issue Price, plus all accrued and unpaid dividends and interest
thereon.
(b) Optional Redemption At Right of the Holder Upon Change of
Control. In addition to the rights of the holders of Series D Preferred Shares
under Section 7.6.3, upon a Change of Control (as hereinafter defined) of the
Corporation, then each holder of Series D Preferred Shares may, at such holder's
option, require the Corporation to redeem to the extent of funds legally
available therefor all or a portion of such holder's Series D Preferred Shares
at a price per Series D Preferred Share equal to the Original Issue Price, plus
all accrued and unpaid dividends and interest thereon. Within ten days following
a Change of Control, the Corporation shall deliver written notice thereof via
facsimile and overnight courier (a "Notice of Change of Control") to each holder
of Series D Preferred Shares. At any time during the period beginning after
receipt of a Notice of Change of Control or after a Third-Party Transaction
Termination, any holder of the Series D Preferred Shares then outstanding may
require the Corporation to redeem all or a portion of the holder's Series D
Preferred Shares then outstanding by delivering written notice thereof via
facsimile and overnight courier to the Corporation, which notice must indicate
the number of Series D Preferred Shares that such holder is submitting for
redemption. Upon the Corporation's receipt of a notice as aforesaid from any
holder of Series D Preferred Shares, the Corporation shall promptly, but in no
event later than two Business Days following such receipt, notify each holder of
Series D Preferred Shares by facsimile of the Corporation's receipt of such
notice. The Corporation shall deliver the applicable redemption price by the
later of (i) consummation of the Change in Control transaction or (ii) five days
following receipt of the aforesaid notice; provided however that in no event
will the Corporation consummate such redemption or pay the redemption price
pursuant hereto prior to the Corporation's repurchase of those Senior Notes (as
hereinafter defined) that are required to be repurchased pursuant to the
covenants contained in Sections 1015 and 1016 of that certain Indenture between
the Corporation and PNC Bank, National Association dated March 27, 1998 relating
thereto. Payments provided for in this Section 7.6.3(b) will have priority to
payments to other holders of Common Stock and Junior Preferred Stock (as defined
in Section 7.6.7) in connection with a Change of Control.
For purposes of this Section 7.6.3(b), "Change of Control" means (i) the
consolidation, merger or other business combination of the Corporation with or
into another Person (other than (A) a consolidation, merger or other business
combination in which holders of the Corporation's voting power immediately prior
to the transaction continue after the transaction to hold, directly or
indirectly, the voting power of the surviving entity or entities necessary to
elect a majority of the members of the board of directors (or their equivalent
if other than a corporation) of such entity or entities, or (B) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Corporation), (ii) the sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the assets
of the Corporation and its subsidiaries taken as a whole (either in one
transaction or a series of transactions), including stock of the Corporation's
subsidiaries, to any person other than the Corporation or another subsidiary;
provided however that the transactions contemplated by the Share Purchase
Agreement will not constitute a Change in Control hereunder, (iii) any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than 50% of the voting power of all classes of any class or
classes of capital stock pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect at least a majority of the
Corporation's board of directors, and (iv) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Corporation (together with any new directors whose election by
such Board of Directors or whose nomination for election by the stockholders of
the Corporation was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Corporation;
provided however that if the Corporation's $75,000,000 11% senior secured notes
due April 1, 2005 (the "Senior Notes") are no longer outstanding, a "Change in
Control" will also include any other similarly defined event in any document
evidencing indebtedness for borrowed money in excess of $1,000,000 that gives
the lender under such agreement the right to accelerate payment of the
obligations under such agreement.
(c) Mandatory Redemption. If the transactions contemplated by
the Share Purchase Agreement are consummated, the Corporation shall redeem, to
the extent the Corporation has funds legally available therefor, all of the
outstanding Series D Preferred Shares for a consideration per Series D Preferred
Share equal to the Original Issue Price thereof, plus all accrued and unpaid
dividends and interest thereon, on April 15, 2005. If the Share Purchase
Agreement is terminated for any reason, the Corporation shall redeem, to the
extent the Corporation has funds legally available therefor, all of the
outstanding Series D Preferred Shares for a consideration per Series D Preferred
Share equal to the Original Issue Price thereof, plus all accrued and unpaid
dividends and interest thereon, on the earlier of (a) April 15, 2005 and (b)
redemption of the Senior Notes and payment in full of the Corporation's
$17,500,000 senior credit facility pursuant to that certain Loan and Security
Agreement between the Corporation and Foothill Capital Corporation dated August
1, 2001.
(d) Provisions Regarding Redemptions. Whether or not funds are
legally available therefor, failure by the Corporation to pay, in full, any
redemption price required to be paid pursuant to Section 7.6.4(b) or (c) or
otherwise fail to consummate any redemption will constitute a default hereunder.
Notwithstanding the foregoing, if the Corporation's legally available funds are
insufficient to redeem the total number of Series D Preferred Shares required to
be redeemed pursuant to Section 7.6.4(b) or (c) on the applicable redemption
date, those funds that are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon the number of Series D Preferred Shares held by each such
holder. Series D Preferred Shares not redeemed will remain entitled to the
preferences provided in these Articles of Amendment at any time. Thereafter, at
any time and from time to time when sufficient additional funds are legally
available for the redemption of Series D Preferred Shares that remain
outstanding, the Corporation shall immediately use such funds to redeem the
Outstanding Series D Preferred Shares that the Corporation was obliged to redeem
on the applicable redemption date but that the Corporation has not redeemed,
plus any shares representing Series D Dividends that have accrued thereon. The
Corporation shall provide notice of any redemption pursuant to Section 7.6.4(a)
or (c) to each holder of Series D Preferred Shares at such holder's address as
it appears on the transfer books of the Corporation specifying the number of
Series D Preferred Shares to be redeemed, the redemption price and the
redemption date and calling upon such holder to surrender to the Corporation, in
the manner and at the place designated, such holder's certificate(s)
representing the Series D Preferred Shares to be redeemed. On the date of any
redemption pursuant to this Section 7.6.4, (i) the Corporation shall pay, by
wire transfer to an account designated by each holder, the redemption price for
each Series D Preferred Share so redeemed and (ii) after payment has been made
in accordance with clause (i), Series D Dividends on the Series D Preferred
Shares so called for redemption will cease to accrue and all rights of the
holders thereof as shareholders of the Corporation (except the right to receive
the redemption price) will cease.
7.6.5 Voting Rights. Except as otherwise required by Tennessee law, the
holders of Series D Preferred Shares will not have any voting rights except in
accordance with the following sentence. The holder of each Series D Preferred
Share will be entitled to notice of any stockholders' meeting in accordance with
the bylaws of the Corporation.
7.6.6. Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of the Series D Preferred Shares will be entitled to
receive in cash out of the assets of the Corporation, whether from capital or
from earnings available for distribution to its stockholders (the "Liquidation
Funds") before any amount shall be paid to the holders of any of the capital
stock of the Corporation of any class junior in rank to the Series D Preferred
Shares in respect of the preferences as to distributions and payments on the
liquidation, dissolution and winding up of the Corporation, an amount per Series
D Preferred Share equal to the Original Issue Price of the applicable Series D
Preferred Share plus accrued and unpaid dividends and interest thereon; provided
that, if the Liquidation Funds are insufficient to pay the full amount due to
the holders of Series D Preferred Shares and holders of any class ranking pari
passu with the Series D Preferred Stock, then each holder of Series D Preferred
Shares and such shares of any class ranking pari passu with the Series D
Preferred Stock will receive a percentage of the Liquidation Funds equal to such
holder's pro rata percentage of the full amount of Liquidation Funds payable to
all holders of Series D Preferred Shares and such shares of any class ranking
pari passu with the Series D Preferred Stock. The purchase or redemption by the
Corporation of stock of any class, in any manner permitted by law, will not, for
the purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Corporation.
7.6.7 Preferred Rank. All shares of Common Stock and existing Preferred
Stock (other than the Series A Preferred Stock, which will rank on parity with
the Series D Preferred Stock with respect to distributions to which the holders
of both series are entitled), will be of junior rank (for purposes of this
Section 7.6.7, "Junior Preferred Stock") to all Series D Preferred Shares with
respect to the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Corporation. The rights of the
shares of Common Stock and the Junior Preferred Stock will be subject to the
preferences and relative rights of the Series D Preferred Shares. Without the
prior express written consent of the holders of not less than two-thirds of the
then outstanding Series D Preferred Shares, the Corporation shall not hereafter
authorize or issue additional or other capital stock that is of senior rank to
the Series D Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the
Corporation. Without the prior express written consent of the holders of not
less than two-thirds of the then outstanding Series D Preferred Shares, the
Corporation shall not hereafter authorize or make any amendment to the
Corporation's Charter or bylaws, or file any resolution of the board of
directors of the Corporation with the Secretary of State of the State of
Tennessee or enter into any agreement containing any provisions, that would
adversely affect or otherwise impair the rights or relative priority of the
holders of the Series D Preferred Shares relative to the holders of the Common
Stock or the Junior Preferred Stock or the holders of any other class of capital
stock. In the event of the merger or consolidation of the Corporation with or
into another Person, the Series D Preferred Shares shall maintain their relative
powers, designations and preferences provided for herein and no merger shall
have a result inconsistent therewith.
7.6.8 Vote to Change the Terms of or Issue Additional Preferred Shares.
The affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the holders of not less than two-thirds of the then
outstanding Series D Preferred Shares will be required for (a) any change to the
Corporation's Charter that would amend, alter, change or repeal any of the
powers, designations, preferences and rights of the Series D Preferred Shares
and (b) the issuance of Series D Preferred Shares other than pursuant to the
Preferred Share Purchase Agreement dated as of August 14, 2002 between the
Corporation and The E.W. Scripps Company (the "Series D Purchase Agreement") and
other than pursuant to Section 7.6.2.
7.6.9 Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the loss, theft,
destruction or mutilation of any certificates representing the Series D
Preferred Shares, and, in the case of loss, theft or destruction, of an
indemnification undertaking by the holder to the Corporation in customary form
and, in the case of mutilation, upon surrender and cancellation of such
certificate(s), the Corporation shall execute and deliver new preferred stock
certificate(s) of like tenor and date.
7.6.10 Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in the Charter are cumulative and in
addition to all other remedies available under the Charter, at law or in equity
(including a decree of specific performance and/or other injunctive relief). No
remedy contained herein will be deemed a waiver of compliance with the
provisions giving rise to such remedy. Nothing herein will limit a holder's
right to pursue actual damages for any failure by the Corporation to comply with
the terms of the Charter. The Corporation covenants to each holder of Series D
Preferred Shares that there will be no characterization concerning this
instrument other than as expressly provided herein. Amounts set forth or
provided for herein with respect to payments and the like (and the computation
thereof) will be the amounts to be received by the holder thereof and will not,
except as expressly provided herein, be subject to any other obligation of the
Corporation (or the performance thereof). The Corporation acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to the
holders of the Series D Preferred Shares and that the remedy at law for any such
breach may be inadequate. The Corporation therefore agrees that, in the event of
any such breach or threatened breach, the holders of the Series D Preferred
Shares will be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
7.6.11 Specific Will Not Limit General; Construction. No specific
provision contained in the Charter will limit or modify
any more general provision contained herein.
7.6.12 Failure or Indulgence Not Waiver. No failure or delay on the
part of a holder of Series D Preferred Shares in the exercise of any power,
right or privilege hereunder will operate as a waiver thereof, nor will any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
7.6.13 Notice. Whenever notice is required to be given under the
Charter, unless otherwise provided herein, such notice will be given in
accordance with the Series D Purchase Agreement.
7.6.15 Number of Series D Preferred Shares. The Corporation shall not
issue more than 5,000 Series D Preferred Shares.
7.6.16 Reacquired Shares. Any Series D Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall, upon
their cancellation, become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
4. This amendment was duly adopted by the Board of Directors of the
Corporation on August 13, 2002. Under Section 48-16-102 of the Tennessee Code
Annotated shareholder approval of this amendment is not required.
Dated: August 14, 2002
SHOP AT HOME, INC.
By: /s/ Frank A Woods
Co-Chief Executive Officer
Attest:
/s/ George J. Phillips
- ----------------------------
George J. Phillips
Executive Vice President & Secretary
Exhibit 4.13
PREFERRED SHARE PURCHASE AGREEMENT
BETWEEN
SHOP AT HOME, INC.
AND
THE E.W. SCRIPPS COMPANY
DATED AUGUST 14, 2002
TABLE OF CONTENTS
1. PURCHASE AND SALE OF PREFERRED SHARES...............................3
a. Purchase of Shares.........................................3
b. Form of Payment............................................3
c. Closing Fee................................................3
2. BUYER'S REPRESENTATIONS AND WARRANTIES..............................3
a. Investment Purpose.........................................3
b. Accredited Investor Status.................................3
c. Reliance on Exemptions.....................................3
d. Information................................................4
e. No Governmental Review.....................................4
f. Transfer or Resale.........................................4
g. Legends....................................................4
h. Authorization; Enforcement; Validity.......................5
i. Domicile...................................................5
3. REPRESENTATIONS AND WARRANTIES OF SATH..............................5
a. Organization and Qualification.............................5
b. Authorization; Enforcement; Validity.......................5
c. Capitalization.............................................5
d. Issuance of Shares.........................................6
e. No Conflicts...............................................6
f. SEC Documents; Financial Statements........................7
g. Absence of Certain Changes.................................7
h. Absence of Litigation......................................7
i. No Undisclosed Events, Liabilities, Developments or
Circumstances........................................7
j. No General Solicitation....................................8
k. No Integrated Offering.....................................8
l. Employee Relations.........................................8
m. Intellectual Property Rights...............................8
n. Environmental Laws.........................................8
o. Title......................................................9
p. Insurance..................................................9
q. Regulatory Permits.........................................9
r. Internal Accounting Controls...............................9
s. No Materially Adverse Contracts, Etc.......................9
t. Tax Status.................................................10
u. Transactions With Affiliates...............................10
v. Application of Takeover Protections........................10
w. FCC Licenses; Operations of Licensed Facilities............10
4. COVENANTS...........................................................11
a. Reasonable Best Efforts....................................11
b. Form D and Blue Sky........................................11
c. Filing of Form 8-K.........................................11
d. FCC Filings; Other Action..................................11
5. POST CLOSING COVENANTS..............................................11
a. Reporting Status...........................................11
b. Financial Information......................................12
6. CONDITIONS TO SATH'S OBLIGATION TO SELL.............................12
7. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE........................12
8. INDEMNIFICATION.....................................................13
9. GOVERNING LAW; MISCELLANEOUS........................................14
a. Governing Law; Jurisdiction; Jury Trial....................14
b. Counterparts...............................................14
c. Headings...................................................14
d. Severability...............................................14
e. Entire Agreement; Amendments...............................14
f. Notices....................................................14
g. Successors and Assigns.....................................16
h. No Third Party Beneficiaries...............................16
i. Survival...................................................16
j. Further Assurances.........................................16
k. Placement Agent and Financial Advisors.....................16
l. No Strict Construction.....................................16
m. Remedies...................................................16
n. Payment Set Aside..........................................16
PREFERRED SHARE PURCHASE AGREEMENT
THIS PREFERRED SHARE PURCHASE AGREEMENT, dated as of August 14, 2002
(this "Agreement"), is between Shop At Home, Inc., a Tennessee corporation, with
headquarters located at 5388 Hickory Hollow Parkway, Antioch, Tennessee 37013
("SATH"), and The E.W. Scripps Company, an Ohio corporation, with headquarters
located at 312 Walnut Street, 28th Floor, Cincinnati, Ohio, or its designee
("Buyer").
WHEREAS:
A. SATH and Buyer are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Rule 506 of
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act");
B. SATH, pursuant to the terms of the Articles of Amendment to Amended
and Restated Charter attached hereto as Exhibit A (the "Articles of Amendment"),
intends to authorize a new series of its preferred stock, par value $10.00 per
share, to be designated as SATH's Series D Senior Redeemable Preferred Stock
(the "Series D Preferred Stock"); and
C. Buyer wishes to purchase, upon the terms and conditions
stated in this Agreement, 3,000 shares of the Series D
Preferred Stock (the "Shares").
NOW THEREFORE, SATH and Buyer hereby agree as follows:
PURCHASE AND SALE OF PREFERRED SHARES.
Purchase of Shares. Subject to the satisfaction (or waiver) of the conditions
set forth in Sections 6 and 7, SATH shall issue and sell to Buyer and Buyer
shall purchase from SATH the Shares. The aggregate purchase price (the "Purchase
Price") of the Shares to be paid upon consummation of such purchase will be
$3,000,000.
Form of Payment. Buyer shall pay the Purchase Price to SATH for the Shares by
wire transfer of immediately available funds in accordance with SATH's written
wire instructions and SATH shall deliver to Buyer stock certificates (in
denominations as Buyer shall request) (the "Stock Certificates") representing
the Shares, duly executed on behalf of SATH and registered in the name of Buyer
or its designee.
Closing Fee. Upon the closing under that certain Share Purchase Agreement dated
August 14, 2002 between SATH and Scripps Networks, Inc., SATH shall pay Buyer a
closing fee of $100,000.
BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants that:
Investment Purpose. Buyer is acquiring the Shares for its own account for
investment only and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making the
representations herein, Buyer does not agree to hold the Shares for any minimum
or other specific term and reserves the right to dispose of the Shares at any
time in accordance with or pursuant to a registration statement or an exemption
pursuant to the 1933 Act.
Accredited Investor Status. Buyer is an "accredited investor" as that term is
defined in Rule 501(a)(3) of Regulation D. Reliance on Exemptions. Buyer
understands that the Shares are being offered and sold to it in reliance on
specific exemptions from the registration requirements of the United States
federal and state securities laws and that SATH is relying in part upon the
truth and accuracy of, and Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of Buyer set forth in
this Agreement in order to determine the availability of such exemptions and the
eligibility of Buyer to acquire the Shares.
Information. Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of SATH and
materials relating to the offer and sale of the Shares as it has requested.
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of SATH. Neither such inquiries nor any other due diligence
investigations conducted by Buyer or its advisors, if any, or its
representatives will modify, amend or affect Buyer's right to rely on SATH's
representations and warranties contained in Sections 3 and 9(m). Buyer
understands that its investment in the Shares involves a high degree of risk.
Buyer has sought such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to its
acquisition of the Shares.
No Governmental Review. Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares or the fairness or suitability of
the investment in the Shares nor have such authorities passed upon or endorsed
the merits of the offering of the Shares. Transfer or Resale. Buyer understands
that: (i) the Shares have not been and are not being registered under the 1933
Act or any state securities laws, and may not be offered for sale, sold,
assigned or transferred unless (A) subsequently registered thereunder, (B) Buyer
has delivered to SATH an opinion of counsel, in a generally acceptable form, to
the effect that such Shares to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
Buyer provides SATH with reasonable assurances that such Shares can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or
a successor rule thereto) ("Rule 144"); (ii) any sale of the Shares made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144,
and further, if Rule 144 is not applicable, any resale of the Shares under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither SATH nor any other person
is under any obligation to register the Shares under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder. Notwithstanding the foregoing, the Shares may be pledged in
connection with a bona fide margin account or other loan secured by the Shares.
Legends. Buyer understands that the Stock Certificates will bear a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such Stock Certificates): THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO
RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
THE SECURITIES.
SATH shall remove the foregoing legend and shall issue a Stock Certificate
without such legend to the holder of the Shares upon which it is stamped, if,
unless otherwise required by state securities laws, (i) such Shares are
registered for resale under the 1933 Act, (ii) in connection with a sale
transaction, such holder provides SATH with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Shares may be made without registration under the 1933 Act, or
(iii) such holder provides SATH with reasonable assurances that the Shares can
be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold.
Authorization; Enforcement; Validity. This Agreement has been duly and validly
authorized, executed and delivered on behalf of Buyer and is the valid and
binding agreement of Buyer enforceable against Buyer in accordance with its
terms. Domicile. Buyer is domiciled in the United States of America in the State
of Ohio. REPRESENTATIONS AND WARRANTIES OF SATH. SATH represents and warrants to
Buyer that: Organization and Qualification. SATH and its "Subsidiaries" (which
for purposes
of this Agreement has the meaning set forth in Regulation S-X promulgated under
the 1933 Act) are duly organized and validly existing in good standing under the
laws of the jurisdiction in which they are organized, and have the requisite
power and authority to own their properties and to carry on their business as
now being conducted. Each of SATH and its Subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "Material Adverse Effect" means any material adverse
effect on the business, properties, assets, operations, results of operations,
financial condition or prospects of SATH and its Subsidiaries, if any, taken as
a whole, or on the transactions contemplated by this Agreement and the Articles
of Amendment and each of the other agreements and instruments entered into or to
be entered into by the parties in connection with the transactions contemplated
by this Agreement (collectively, the "Transaction Documents"), or on SATH's
authority or ability to perform its obligations under the Transaction Documents.
SATH has no Subsidiaries except as set forth on Schedule 3(a).
Authorization; Enforcement; Validity. SATH has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement or any
of the other Transaction Documents, and to issue the Shares in accordance with
the terms hereof and thereof. The execution, delivery and performance of each of
the Transaction Documents by SATH, and the consummation of SATH's obligation
hereunder and thereunder, have been duly authorized by SATH's Board of Directors
and no further consent or authorization is required by SATH, its Board of
Directors or its stockholders. This Agreement and the other Transaction
Documents to which SATH is party have been duly executed and delivered by SATH.
This Agreement and the other Transaction Documents to which SATH is a party
constitute the valid and binding obligations of SATH enforceable against SATH in
accordance with their terms. Capitalization. As of the date hereof, the
authorized capital stock of SATH consists of (i) 100,000,000 shares of Common
Stock, of which as of the date hereof 41,956,747 shares are issued and
outstanding, 6,211,750 shares are reserved for issuance pursuant to SATH's stock
option and purchase plans and 2,000,000 shares are issuable and reserved for
issuance pursuant to securities exercisable or exchangeable for, or convertible
into, shares of Common Stock, (ii) 30,000,000 shares of non-voting common stock,
par value $0.0025 per share, of which as of the date hereof none are issued and
outstanding, and (iii) 1,000,000 shares of preferred stock, par value $10.00 per
share, of which as of the date hereof (A) 140,000 shares are designated as
Series A Preferred Stock of which 5,015 shares are outstanding, (B) 2,000 shares
are designated as Series B Preferred Stock of which no shares are outstanding,
(C) 10,000 shares are designated as Series C Preferred Stock of which no shares
are issued and outstanding and (D) 5,000 shares are designated as Series D
Preferred Stock of which no shares are issued and outstanding. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed in Schedule 3(c), (i) no
shares of SATH's capital stock are subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by SATH; (ii)
there are no outstanding debt securities issued by SATH; (iii) there are no
outstanding options, warrants, scrips, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of SATH or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
SATH or any of its Subsidiaries is or may become bound to issue additional
shares of capital stock of SATH or any of its Subsidiaries or options, warrants,
scrips, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of SATH or any of its Subsidiaries; (iv) there are no agreements or
arrangements under which SATH or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act; (v) there are
no outstanding securities or instruments of SATH or any of its Subsidiaries that
contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which SATH or any of its
Subsidiaries is or may become bound to redeem a security of SATH or any of its
Subsidiaries; (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Shares as described in this Agreement; and (vii) SATH does not have any
stock appreciation rights or "phantom stock" plans or agreements or any similar
plan or agreement. SATH has furnished to Buyer complete and accurate copies of
SATH's Charter, as amended and as in effect on the date hereof (the "Charter"),
and SATH's By-laws, as amended and as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable or
exchangeable for Common Stock or other capital stock of SATH and the material
rights of the holders thereof in respect thereto. Issuance of Shares. The Shares
are duly authorized and, upon issuance in accordance with the terms hereof, will
be duly and validly designated, authorized and issued, fully paid and
non-assessable and not subject to preemptive rights, and the owner of such
shares will acquire good title thereto, free and clear of all liens and
encumbrances (other than any lien or encumbrance created by such owner) and will
be entitled to the rights and preferences set forth in this Agreement and the
other Transaction Documents applicable thereto. Assuming the accuracy of Buyer's
representations and warranties set forth in Section 2, SATH's issuance of the
Shares to Buyer is exempt from registration under the 1933 Act.
No Conflicts. Except as disclosed on Schedule 3(e), the execution and delivery
of this Agreement and Transaction Documents to which it is a party by SATH, the
performance by SATH of its obligations hereunder and thereunder and the
consummation by SATH of the transactions contemplated hereby and thereby will
not (i) result in a violation of the Charter or the By-laws; (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which SATH or any of its Subsidiaries is a party; or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of Nasdaq) applicable to SATH or any of its Subsidiaries or by which
any property or asset of SATH or any of its Subsidiaries is bound or affected.
Neither SATH nor its Subsidiaries is in violation of any term of the Charter or
By-laws or their organizational charters or by-laws, respectively. Except as
disclosed in Schedule 3(e), neither SATH nor any of its Subsidiaries is in
violation of any term of or in default under any contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to SATH or its Subsidiaries, except where such
violations and defaults would not result, either individually or in the
aggregate, in a Material Adverse Effect. The business of SATH and its
Subsidiaries is not being conducted, and shall not be conducted, in violation of
any law, ordinance or regulation of any governmental entity, except where such
violations would not result, either individually or in the aggregate, in a
Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required pursuant to the 1933 Act, SATH is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations pursuant to
or contemplated by the Transaction Documents or to perform its obligations
pursuant to the Articles of Amendment in accordance with the terms hereof or
thereof. SATH and its Subsidiaries are unaware of any facts or circumstances
that might give rise to any of the foregoing. SATH is not in violation of the
listing requirements of Nasdaq and has no actual knowledge of any facts that
would reasonably lead to delisting or suspension of the Common Stock by Nasdaq
in the foreseeable future.
SEC Documents; Financial Statements. Since June 30, 1997, SATH has filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the "SEC Documents"). A complete list of SATH's
SEC Documents is set forth on Schedule 3(f). As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents. None of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. As of their respective dates, the financial
statements of SATH included in the SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of SATH as of the dates thereof and the
results of its operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments). No
other information provided by or on behalf of SATH to Buyer that is not included
in the SEC Documents, including, without limitation, information referred to in
Section 2(d), contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made, not misleading.
Absence of Certain Changes. Except as disclosed in Schedule 3(g), since June 30,
2001, there has been no material adverse change and no material adverse
development in the business, properties, assets, operations, results of
operations, financial conditions, or prospects of SATH or its Subsidiaries. SATH
has not taken any steps, and does not currently expect to take any steps, to
seek protection pursuant to any bankruptcy law nor does SATH or any of its
Subsidiaries have any knowledge or reason to believe that its creditors intend
to initiate involuntary bankruptcy proceedings or any actual knowledge of any
fact that would reasonably lead a creditor to do so. Except as disclosed in
Schedule 3(g), since June 30, 2001, SATH has not declared or paid any dividends,
sold any assets, individually or in the aggregate, in excess of $50,000 outside
of the ordinary course of business or had capital expenditures, individually or
in the aggregate, in excess of $50,000.
Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the best knowledge of SATH
or any of its Subsidiaries, threatened against or affecting SATH, the Shares,
any of SATH's Subsidiaries or any of SATH's or SATH's Subsidiaries' officers or
directors in their capacities as such, except as expressly set forth in Schedule
3(h). Except as set forth in Schedule 3(h), to the best knowledge of SATH none
of the directors or officers of SATH has been involved in securities related
litigation during the past five years.
No Undisclosed Events, Liabilities, Developments or Circumstances. Except for
the issuance of the Shares as contemplated by this Agreement, no event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur, with respect to SATH or its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by SATH under applicable securities laws
on a registration statement on Form S-3 (including information permitted to be
incorporated by reference therein) filed with the SEC relating to an issuance
and sale by SATH of its Common Stock and that has not been publicly disclosed.
No General Solicitation. Neither SATH, nor any of its affiliates, nor any person
acting on its or their behalf, has engaged in any form of general solicitation
or general advertising (within the meaning of Regulation D under the 1933 Act)
in connection with the offer or sale of the Shares.
No Integrated Offering. Neither SATH, nor any of its affiliates, nor any person
acting on its or their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under
circumstances that would require registration of the issuance by SATH of any of
the Shares under the 1933 Act or cause this offering of the Shares to be
integrated with prior offerings by SATH for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of Nasdaq, nor will SATH or any of its Subsidiaries
take any action or steps that would require registration of the issuance by SATH
of any of the Shares under the 1933 Act or cause the offering of the Shares to
be integrated with other offerings.
Employee Relations. Neither SATH nor any of its Subsidiaries is involved in any
union labor dispute nor, to the knowledge of SATH or any of its Subsidiaries, is
any such dispute threatened. None of SATH's or its Subsidiaries' employees is a
member of a union which relates to such employee's relationship with SATH,
neither SATH nor any of its Subsidiaries is a party to a collective bargaining
agreement, and SATH and its Subsidiaries believe that their relations with their
employees are good. No executive officer (as defined in Rule 501(f) of the 1933
Act) has notified SATH that such officer intends to leave SATH or otherwise
terminate such officer's employment with SATH. Except as set forth on Schedule
3(l), no executive officer, to the best knowledge of SATH and its Subsidiaries,
is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject SATH or any of its Subsidiaries to any liability with
respect to any of the foregoing matters.
Intellectual Property Rights. SATH and its Subsidiaries own or possess adequate
rights or licenses to use all trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
other intellectual property rights (collectively, Intellectual Property Rights)
necessary to conduct their respective businesses as now conducted, except where
the failure to own or possess such rights would not result, either individual or
in the aggregate, in a Material Adverse Effect. Except as set forth on Schedule
3(m), none of SATH's Intellectual Property Rights (other than licenses for
commercially available software) have expired or terminated, or are expected to
expire or terminate within two years from the date of this Agreement, except
where such expiration or termination would not result, either individually or in
the aggregate, in a Material Adverse Effect. SATH and its Subsidiaries do not
have any knowledge of any infringement by SATH or its Subsidiaries of any
Intellectual Property Rights of others, or of any development of similar or
identical trade secrets or technical information by others and, except as set
forth on Schedule 3(m), there is no claim, action or proceeding being made or
brought against, or to SATH's knowledge, being threatened against, SATH or its
Subsidiaries regarding its Intellectual Property Rights; and SATH and its
Subsidiaries are unaware of any facts or circumstances that might give rise to
any of the foregoing, except where any of the foregoing would not result, either
individually or in the aggregate, in a Material Adverse Effect. SATH and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.
Environmental Laws. Except as set forth on Schedule 3(n) SATH and its
Subsidiaries (i) are in compliance with any and all applicable foreign, federal,
state and local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
except where, in each of the foregoing cases, the failure to so comply would not
result, either individually or in the aggregate, in a Material Adverse Effect.
Title. SATH and its Subsidiaries have good and marketable title in fee simple to
all real property and good and marketable title to all personal property owned
by them or any of them that is material to the business of SATH or any
Subsidiary, in each case free and clear of all liens, encumbrances and defects
except as described in Schedule 3(o) and those liens, encumbrances or defects
that do not materially affect the value of such property and do not interfere
with the use and proposed use of such property by SATH or any Subsidiary. Any
real property or facility held under lease by SATH or any Subsidiary is held by
SATH or such Subsidiary under a valid, subsisting and enforceable lease with
such exceptions as are not material and do not interfere with the use and
proposed use of such property and facility by SATH or any Subsidiary.
Insurance. SATH and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as SATH's management believes to be prudent and customary in the
businesses in which SATH and its Subsidiaries are engaged. Neither SATH nor any
such Subsidiary has been refused any insurance coverage sought or applied for
and neither SATH nor any such Subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not have a Material Adverse
Effect, taken as a whole.
Regulatory Permits. SATH and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, except
the absence of which would not result, either individually or in the aggregate,
in a Material Adverse Effect. Neither SATH nor any such Subsidiary has received
any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit. Internal Accounting Controls. SATH and
each of its Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
No Materially Adverse Contracts, Etc. Neither SATH nor any of its Subsidiaries
is subject to any charter, corporate or other legal restriction, or any
judgment, decree, order, rule or regulation that in the judgment of SATH's
officers has or is expected in the future to have a Material Adverse Effect.
Neither SATH nor any of its Subsidiaries is a party to any contract or agreement
that in the judgment of SATH's officers has or is expected to have a Material
Adverse Effect. SATH has made available to Buyer true and correct copies of all
contracts, leases, restrictions, agreements, instruments and commitments to
which SATH or any Subsidiary is a party or by which its properties are bound (i)
which provides a benefit to SATH and SATH Subsidiaries of, or commits SATH or
any Subsidiary to expend, $500,000 or more (or, in the case of any agreement
with any customer of SATH or any Subsidiary, $50,000 or more), (ii) which if
breached by any party thereto would result in liability or loss to SATH and SATH
Subsidiaries of $500,000 or more (or in the case of any agreement with any
customer of SATH or any Subsidiary, $50,000 or more) or (iii) which provides for
the distribution of programming of SATH to more than 250,000 FTE Subscribers (as
hereinafter defined) by any Distribution System (as hereinafter defined)
(collectively, the "Material Agreements"). Each Material Agreement is valid,
binding, in full force and effect and enforceable by SATH or the relevant
Subsidiary in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors generally and by general equitable principles. Except as
disclosed in Schedule 3(s), SATH and SATH Subsidiaries have performed all
material obligations required to be performed by them to date under the Material
Agreements and they are not (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect thereunder and, to
the knowledge of SATH, no other party to any of the Material Agreements is (with
or without the lapse of time or the giving of notice, or both) in breach or
default in any material respect thereunder.
Tax Status. Each of SATH and each of its Subsidiaries (i) has made or filed all
federal and state income and all other tax returns, reports and declarations
required by any jurisdiction to which it is subject (unless and only to the
extent that SATH and each of its Subsidiaries has set aside on its books
provisions reasonably adequate for the payment of all unpaid and unreported
taxes), (ii) has paid all taxes and other governmental assessments and charges
due, except those being contested in good faith and for which SATH has made
appropriate reserves on its books, and (iii) has set aside on its books
provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which the returns, reports or declarations referred
to in clause (i) apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of SATH
know of no basis for any such claim, except those being contested in good faith
and for which SATH has made appropriate reserves on its books.
Transactions With Affiliates. Except as set forth on Schedule 3(u) and in the
SEC Documents filed at least ten days prior to the date hereof, and other than
the grant of stock options disclosed on Schedule 3(c), none of the officers,
directors or employees of SATH is presently a party to any transaction with SATH
or any of its Subsidiaries (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such
officer, director or employee or, to the knowledge of SATH, any corporation,
partnership, trust or other entity in which any such officer, director, or
employee has a substantial interest or is an officer, director, trustee or
partner.
Application of Takeover Protections. SATH, its board of directors and its
shareholders have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Charter or the laws of Tennessee that is or
could become applicable to Buyer as a result of the transactions contemplated by
this Agreement, including, without limitation, SATH's issuance of the Shares and
Buyer's ownership of the Shares.
FCC Licenses; Operations of Licensed Facilities. SATH and its Subsidiaries have
operated the television stations for which SATH and any of its Subsidiaries hold
licenses from the Federal Communications Commission ("FCC"), in each case which
are owned or operated by SATH and its Subsidiaries (the "Licensed Facilities"),
in material compliance with the terms of the licenses issued by the FCC to SATH
and its Subsidiaries (the "FCC Licenses"), and in material compliance with the
Communications Act of 1934, as amended (the "Communications Act"), except where
the failure to do so could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on SATH. SATH has, and each of its
Subsidiaries has, timely filed or made all applications, reports and other
disclosures required by the FCC to be made with respect to Licensed Facilities
and has timely paid all FCC regulatory fees with respect thereto, except where
the failure to do so could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on SATH. SATH and each of its
Subsidiaries have, and are the authorized legal holders of, all FCC Licenses
necessary or used in the operation of the businesses of Licensed Facilities as
presently operated. All FCC Licenses are validly held and are in full force and
effect, unimpaired by any act or omission of SATH, any of its Subsidiaries (or,
to SATH's knowledge, their respective predecessors) or their respective
officers, employees or agents, except where such impairments could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on SATH. Except as set forth on Schedule 3(w), no application,
action or proceeding is pending for the renewal of any FCC License and, to
SATH's knowledge, there is not before the FCC any material investigation,
proceeding, notice of violation or order of forfeiture relating to any Licensed
Facility that, if adversely determined, could reasonably be expected to have a
Material Adverse Effect on SATH, and SATH has no knowledge of any basis that
could reasonably be expected to cause the FCC not to renew any FCC License
(other than proceedings to amend FCC rules or the Communications Act of general
applicability to the television broadcast industry). There is not pending and,
to SATH's knowledge, there is not threatened, any action by or before the FCC to
revoke, suspend, cancel, rescind, fail to renew, or modify in any material
respect any FCC License that, if adversely determined, could reasonably be
expected to have a Material Adverse Effect on SATH (other than proceedings to
amend FCC rules or the Communications Act of general applicability to the
television broadcast industry). The representations and warranties contained in
this Section 3(x) are made as of the date hereof. COVENANTS.
Reasonable Best Efforts. Each party shall use its reasonable best efforts to
timely satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7. Form D and Blue Sky. SATH shall file a Form D with respect to
the Shares as required under Regulation D and provide a copy thereof to Buyer
promptly after such filing. SATH shall take such action as SATH reasonably
determines is necessary in order to obtain an exemption for or to qualify the
Shares for sale to Buyer under applicable securities laws of the states of the
United States, and shall provide evidence of any such action so taken to Buyer.
SATH shall make all filings and reports relating to the offer and sale of the
Shares required under applicable securities laws of the states of the United
States.
Filing of Form 8-K. On or before the second Business Day following the date
hereof SATH shall file a Current Report on Form 8-K with the SEC describing the
terms of the transactions contemplated by the Transaction Documents and
including as exhibits to such Form 8-K this Agreement and the Articles of
Amendment in the form required by the 1934 Act.
FCC Filings; Other Action. SATH and Buyer shall (i) promptly make any
submissions required under the FCC's Rules or the Communications Act or
requested by the FCC or its staff; (ii) use reasonable efforts to cooperate with
one another in (A) determining whether any filings are required to be made with,
or consents, authorizations or approvals are required to be obtained from, the
FCC in connection with the execution, delivery and performance of the
Transaction Documents, and (B) timely making all such filings and timely seeking
all such consents, authorizations or approvals; and (iii) take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective the transactions
contemplated hereby, including, without limitation, taking or undertaking all
such further action as may be necessary to resolve such objections, if any, as
the FCC may assert under communications laws with respect to the transactions
contemplated hereby.
e. Public Statements. Before any party or any Affiliate of such party
releases any information concerning this Agreement or the other agreements and
documents executed or to be executed in connection herewith, or any other
matters contemplated hereby or thereby, which is intended for or may result in
public dissemination thereof, such party shall cooperate with the other parties,
shall furnish drafts of all documents or proposed oral statements to the other
parties, provide the other parties the opportunity to review and comment upon
any such documents or statements and shall not release or permit release of any
such information without the consent of the other parties, except to the extent
required by applicable law or the rules of any securities exchange or automated
quotation system on which its securities or those of its Affiliate are traded.
f. Use of Proceeds. SATH shall use the proceeds from the Purchase Price
solely in connection with the business of the its home shopping cable television
network and interactive web-based business called the Shop At Home Network and
for no other purpose whatsoever.
POST CLOSING COVENANTS
Reporting Status. Until the later of (i) the date that is one year after the
date as of which Buyer may sell all of the Shares without restriction pursuant
to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii)
April 15, 2005 (the "Reporting Period"), SATH shall file all reports required to
be filed with the SEC pursuant to the 1934 Act, and SATH shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act or the rules and regulations thereunder would otherwise permit such
termination.
Financial Information. SATH shall send the following to Buyer during the
Reporting Period: (i) within two days after the filing thereof with the SEC, a
copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any
Current Reports on Form 8-K and any registration statements (other than on Form
S-8) or amendments filed pursuant to the 1933 Act, provided that if any such
report is filed with the SEC through EDGAR then notice of such filing will be
sufficient; (ii) on the same day as the release thereof, facsimile copies or
email copies of all press releases issued by SATH or any of its Subsidiaries;
and (iii) copies of any notices and other information made available or given to
the stockholders of SATH generally, contemporaneously with the making available
or giving thereof to the stockholders.
CONDITIONS TO SATH'S OBLIGATION TO SELL. The obligation of SATH to issue and
sell the Shares to Buyer is subject to the satisfaction of each of the following
conditions, provided that these conditions are for SATH's sole benefit and may
be waived by SATH at any time in its sole discretion by providing Buyer with
prior written notice thereof:
a. The Secretary of State of the State of Tennessee shall have accepted
the Articles of Amendment for filing upon submission
thereof by SATH.
b. Buyer shall have delivered to SATH the Purchase Price for the Shares by
wire transfer of immediately available funds
pursuant to the wire instructions provided by SATH.
c. The representations and warranties of Buyer shall be true and correct and
Buyer shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by Buyer at or prior to the date hereof.
d. No temporary restraining order, preliminary or permanent injunction or other
order issued by any U.S. federal or state court of competent jurisdiction or
other material legal restraint or prohibition issued or promulgated by a U.S.
federal or state governmental entity preventing the consummation of any of the
transactions contemplated by this Agreement shall be in effect and there shall
not be any U.S. federal or state law or regulation enacted or deemed applicable
to any of the transactions contemplated by this Agreement that makes
consummation of such transactions illegal.
CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE. The obligation of Buyer to
purchase the Shares from SATH is subject to the satisfaction of each of the
following conditions, provided that these conditions are for Buyer's sole
benefit and may be waived by Buyer at any time in its sole discretion by
providing SATH with prior written notice thereof:
a. The Secretary of State of the State of Tennessee shall have accepted the
Articles of Amendment for filing upon submission by SATH, and SATH shall have
delivered to Buyer a copy thereof as filed, certified by the Secretary of State
of the State of Tennessee. b. The representations and warranties of SATH shall
be true and correct and SATH shall have performed, satisfied and complied with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by SATH at or prior to the date
hereof.
c.Buyer shall have received the opinion of Bone McAllester Norton PLLC, in
form, scope and substance set forth in Exhibit B attached to and made part
hereof.
d.SATH shall have executed and delivered to Buyer the Stock Certificates (in
such denominations as Buyer shall request).
e.SATH's Board of Directors shall have adopted resolutions consistent with
Section 3(b) and in a form reasonably acceptable to Buyer (the "Resolutions").
f. SATH shall have delivered to Buyer a certificate evidencing the incorporation
and good standing of SATH issued by the Secretary of State of Tennessee as of a
date within ten days of the date hereof. g. SATH shall have delivered to Buyer a
copy of its Amended and Restated Charter, as amended (the "Charter"), certified
as a true and complete by the Secretary of State of the State of Tennessee as of
a date within ten days of the date hereof. h. SATH shall have delivered to Buyer
a secretary's certificate certifying as to the authenticity of the copies of (A)
the Resolutions, (B) the Charter and (C) the By-laws, each as in effect at the
date hereof, attached thereto. i. SATH shall have made all filings under all
applicable federal and state securities laws necessary to consummate the
issuance of the Shares pursuant to this Agreement in compliance with such laws.
j. No temporary restraining order, preliminary or permanent injunction
or other order issued by any U.S. federal or state court of competent
jurisdiction or other material legal restraint or prohibition issued or
promulgated by a U.S. federal or state governmental entity preventing the
consummation of any of the transactions contemplated by this Agreement shall be
in effect and there shall not be any U.S. federal or state law or regulation
enacted or deemed applicable to any of the transactions contemplated by this
Agreement that makes consummation of such transactions illegal.
k. SATH shall have delivered to Buyer such other documents
relating to the transaction contemplated by the Transaction
Documents as Buyer or its counsel may reasonably request.
INDEMNIFICATION.
a. In consideration of Buyer's execution and delivery of the Transaction
Documents and acquiring the Shares thereunder and in addition to all of SATH's
other obligations under the Transaction Documents, SATH shall defend, protect,
indemnify and hold harmless Buyer and each other holder of the Shares and all of
their stockholders, partners, members, officers, directors, employees and direct
or indirect investors and any of the foregoing persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the "Buyer
Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Buyer Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "Buyer Indemnified
Liabilities"), incurred by any Buyer Indemnitee as a result of, or arising out
of, or relating to (a) any misrepresentation or breach of any representation or
warranty made by SATH in the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, (b) any breach of any
covenant, agreement or obligation of SATH contained in the Transaction Documents
or any other certificate, instrument or document contemplated hereby or thereby,
or (c) any cause of action, suit or claim brought or made against such Buyer
Indemnitee (other than a cause of action, suit or claim that is brought or made
by SATH and is not a stockholder derivative suit) and arising out of or
resulting from the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby or any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the Shares. To the extent that the foregoing undertaking by SATH is
unenforceable for any reason, SATH shall make the maximum contribution to the
payment and satisfaction of each of the Buyer Indemnified Liabilities that is
permissible under applicable law.
b. In consideration of SATH's performance hereunder, Buyer shall defend,
protect, indemnify and hold harmless SATH and all of its stockholders,
directors, and employees and any of the foregoing persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the "SATH
Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith, and including reasonable attorneys' fees and disbursements
(the "SATH Indemnified Liabilities"), incurred by any SATH Indemnitee as a
result of, or arising out of, or relating to any misrepresentation or breach of
any representation or warranty made by Buyer in this Agreement.
GOVERNING LAW; MISCELLANEOUS.
Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement will be
governed by the internal laws of the State of Tennessee, without giving effect
to any choice of law 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. Notwithstanding the
choice of law provisions hereof, each party hereby irrevocably submits to the
non-exclusive jurisdiction of the state and federal courts sitting in the City
of Cincinnati, Ohio, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service will constitute good and sufficient
service of process and notice thereof. Nothing contained herein will be deemed
to limit in any way any right to serve process in any manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which will be considered one and the same
agreement and will become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature will
be considered due execution and will be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.
Headings. The headings of this Agreement are for convenience of reference and
will not form part of, or affect the interpretation of, this Agreement.
Severability. If any provision of this Agreement is invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability will not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
Entire Agreement; Amendments. This Agreement supersedes all other prior oral or
written agreements between Buyer, SATH, their affiliates and persons acting on
their behalf with respect to the matters discussed herein, and this Agreement
and the instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither SATH nor Buyer makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be amended other than by an instrument in
writing signed by SATH and the holders of at least two-thirds of the Series D
Preferred Stock. No provision hereof may be waived other than by an instrument
in writing signed by the party against whom enforcement is sought. No such
amendment will be effective to the extent that it applies to less than all of
the holders of the Series D Preferred Stock then outstanding.
Notices. Any notices, consents, waivers or other communications required or
permitted to be given pursuant to this Agreement must be in writing and will be
deemed to have been delivered: (i) upon receipt, when delivered personally; (ii)
upon receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one Business Day after deposit with a nationally recognized overnight
delivery service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:
If to SATH: Shop At Home, Inc.
5388 Hickory Hollow Parkway
Antioch, Tennessee 37013
Telephone: (615) 263-8000
Facsimile: (615) 263-8911
Attention: George J. Phillips,
Executive Vice President and General Counsel
With a copy to: Bone McAllester Norton PLLC
424 Church Street, Suite 900
Nashville, Tennessee 37219
Telephone: (615) 238-6300
Facsimile: (615) 238-6301
Attention: Charles W. Bone, Esq.
If to the Buyer: The E.W. Scripps Company
312 Walnut Street, 28th Floor
Cincinnati, Ohio 45202
Telephone: (513) 977-3997
Facsimile: (513) 977-3024
Attention: Timothy Peterman,
Vice President Corporate Development
With a copy to: Baker & Hostetler LLP
312 Walnut Street, Suite 2650
Cincinnati, Ohio 45202-4074
Telephone: (513) 929-3400
Facsimile: (513) 929-0303
Attention: William Appleton, Esq.
or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party five days prior to the effectiveness of such change. Written
confirmation of receipt (I) given by the recipient of such notice, consent,
waiver or other communication, (II) mechanically or electronically generated by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of the first page of such transmission or (III) provided by
a nationally recognized overnight delivery service shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.
Successors and Assigns. This Agreement will be binding upon and inure to the
benefit of the parties and their respective permitted successors and assigns,
including any transferees of the Shares. SATH shall not assign this Agreement or
any rights or obligations hereunder without the prior written consent of the
holders of at least two-thirds of the Shares then outstanding, including by
merger or consolidation, except pursuant to an Organic Change (as defined in
Section 7.6.3 of the Articles of Amendment) with respect to which SATH is in
compliance with Section 7.6.3 of the Articles of Amendment. Buyer may assign
some or all of its rights hereunder without the consent of SATH, provided,
however, that any such assignment will not release Buyer from its obligations
hereunder unless such obligations are assumed by such assignee and SATH has
consented to such assignment and assumption, which consent shall not be
unreasonably withheld.
No Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not
for the benefit of, nor may any provision hereof be enforced by, any other
person. Survival. The representations and warranties of SATH and Buyer contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set forth in Section 8, will survive
consummation of the transactions contemplated by this Agreement.
Further Assurances Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
Placement Agent and Financial Advisors. SATH has not engaged any placement agent
in connection with the sale of the Shares. SATH shall be responsible for the
payment of any placement agent's fees, financial advisor's fees or brokers'
commissions relating to or arising out of the transactions contemplated hereby.
SATH shall pay, and hold Buyer harmless against, any liability, loss or expense
(including, without limitation, attorney's fees and out-of-pocket expenses)
arising in connection with any such claim. No Strict Construction. The language
used in this Agreement will be deemed to be the language chosen by the parties
to express their mutual intent, and no rules of strict construction will be
applied against any party.
Remedies. Buyer and each holder of the Shares will have all rights and remedies
set forth in the Transaction Documents and the Articles of Amendment and all
rights and remedies that such holders have been granted at any time under any
other agreement or contract and all of the rights that such holders have under
any law. Any person having any rights under any provision of this Agreement will
be entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Payment Set Aside. To
the extent that SATH makes a payment or payments to Buyer pursuant to this
Agreement or any other Transaction Document, or Buyer enforces or exercises its
rights hereunder or thereunder, and such payment or payments or the proceeds of
such enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or required to be refunded, repaid or otherwise restored to SATH, a trustee,
receiver or any other person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied will be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
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IN WITNESS WHEREOF, Buyer and SATH have caused this Preferred Share
Purchase Agreement to be duly executed as of the date first written above.
SHOP AT HOME, INC.
By: /s/ Frank A. Woods
- --------------------------
Title: Co-Chief Executive Officer
- --------------------------
By: /s/ George R. Ditomassi
- --------------------------
Title: Co-Chief Executive Officer
- --------------------------
THE E.W. SCRIPPS COMPANY
By: /s/ Richard A. Boehne
Title: Executive Vice President
EXHIBIT A
ARTICLES OF AMENDMENT
TO THE AMENDED AND RESTATED CHARTER
OF
SHOP AT HOME, INC.
Pursuant to the provisions of Section 48-16-102 of the Tennessee Code
Annotated, the undersigned Corporation adopts the following Articles of
Amendment to its Charter:
1. The name of the Corporation is Shop At Home, Inc.
2. The purpose of this amendment is to set forth the designations, limitations
and relative rights of the Corporation's Series D Senior Redeemable Preferred
Stock, a new series of the Corporation's previously authorized preferred stock,
par value $10.00 per share.
3. The Charter of the Corporation is amended by inserting therein as Section 7.6
the following text determining the terms of the Series D Senior Redeemable
Preferred Stock:
7.6 Series D Redeemable Preferred Stock
7.6.1 Certain Defined Terms. For purposes of this Section 7.6, the
following terms have the following meanings:
(a) "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in Cincinnati, Ohio or Nashville,
Tennessee are authorized or required by law to remain closed.
(b) "Issuance Date" means, with respect to each Series D
Preferred Share, the date of issuance of the applicable Series D Preferred
Share.
(c) "Original Issue Price" per Series D Preferred Share means
$1,000 (as adjusted for stock splits, stock dividends, combinations and
reclassifications).
(d) "Person" means an individual, limited liability company,
partnership, joint venture, corporation, trust, unincorporated organization or
other entity or a government or any department or agency thereof.
(e) "Series D Preferred Shares" means shares of Series D
Senior Redeemable Preferred Stock of the Corporation.
(f) "Share Purchase Agreement" means the Share Purchase
Agreement dated August 14, 2002 between the Corporation and Scripps Networks,
Inc.
7.6.2 Dividends. The holders of Series D Preferred Shares are entitled
to receive dividends at a rate of 6% per annum of the Original Issue Price of
each Series D Preferred Share, which dividends will be cumulative, accruing
daily from the Issuance Date, payable on the first day of each calendar quarter
after the Issuance Date (each, a "Series D Dividend Date"). If the Share
Purchase Agreement is terminated for any reason, the holders of Series D
Preferred Shares will be entitled to receive additional dividends at a rate of
6% per annum of the Original Issue Price of each Series D Preferred Share, which
dividends will be cumulative, accruing daily from the date of termination of the
Share Purchase Agreement, payable on each Series D Dividend Date after the date
of such termination. The foregoing dividends and additional dividends will be
referred to herein as "Series D Dividends". If a Series D Dividend Date is not a
Business Day, then the Series D Dividend will be due and payable on the Business
Day immediately following the Series D Dividend Date. If the transactions
contemplated by the Share Purchase Agreement have not been consummated, the
Corporation shall pay Series D Dividends in cash or, at the Corporation's
option, in such number of fully paid and nonassessable Series D Preferred Shares
equal to the quotient of accrued and unpaid Series D Dividends with respect to
such Series D Preferred Shares held by such holder and the Original Issue Price.
If the transactions contemplated by the Share Purchase Agreement are
consummated, the Corporation shall pay Series D Dividends in cash; provided
however that, at the Corporation's option, the Corporation may defer payment of
the Series D Dividends until redemption of the Series D Preferred Shares (or
such earlier time as the Corporation chooses); provided that such deferred
Series D Dividends will constitute a debt obligation of the Corporation and
accrue interest at the rate of 6% per annum. At any time upon a holder's
request, the Corporation shall issue one or more promissory notes to evidence
such debt obligation.
7.6.3 Reorganizations. Any recapitalization, reorganization,
reclassification, consolidation or merger with or into another Person or other
transaction that is affected in such a way that holders of Common Stock are
entitled to receive stock, securities or assets with respect to or in exchange
for Common Stock is referred to herein as "Organic Change." Prior to the
consummation of any Organic Change, the Corporation shall secure from the
successor resulting from such Organic Change or the parent company of such
successor a written agreement (in form and substance reasonably satisfactory to
the holders of a majority of the Series D Preferred Shares then outstanding) to
deliver to each holder of Series D Preferred Shares in exchange for such shares,
a security of such successor or the parent company of such successor evidenced
by a written instrument substantially similar in form and substance to the
Series D Preferred Shares (including, without limitation, having a liquidation
preference equal to the Liquidation Preference of the Series D Preferred Shares
held by such holder) and reasonably satisfactory to the holders of a majority of
the Series D Preferred Shares then outstanding.
7.6.4 Redemptions
(a). Optional Redemption At Right of the Corporation. The
Corporation may redeem all, but not less than all, of the Series D Preferred
Shares outstanding at any time at a price per Series D Preferred Share equal to
the Original Issue Price, plus all accrued and unpaid dividends and interest
thereon.
(b) Optional Redemption At Right of the Holder Upon Change of
Control. In addition to the rights of the holders of Series D Preferred Shares
under Section 7.6.3, upon a Change of Control (as hereinafter defined) of the
Corporation, then each holder of Series D Preferred Shares may, at such holder's
option, require the Corporation to redeem to the extent of funds legally
available therefor all or a portion of such holder's Series D Preferred Shares
at a price per Series D Preferred Share equal to the Original Issue Price, plus
all accrued and unpaid dividends and interest thereon. Within ten days following
a Change of Control, the Corporation shall deliver written notice thereof via
facsimile and overnight courier (a "Notice of Change of Control") to each holder
of Series D Preferred Shares. At any time during the period beginning after
receipt of a Notice of Change of Control or after a Third-Party Transaction
Termination, any holder of the Series D Preferred Shares then outstanding may
require the Corporation to redeem all or a portion of the holder's Series D
Preferred Shares then outstanding by delivering written notice thereof via
facsimile and overnight courier to the Corporation, which notice must indicate
the number of Series D Preferred Shares that such holder is submitting for
redemption. Upon the Corporation's receipt of a notice as aforesaid from any
holder of Series D Preferred Shares, the Corporation shall promptly, but in no
event later than two Business Days following such receipt, notify each holder of
Series D Preferred Shares by facsimile of the Corporation's receipt of such
notice. The Corporation shall deliver the applicable redemption price by the
later of (i) consummation of the Change in Control transaction or (ii) five days
following receipt of the aforesaid notice; provided however that in no event
will the Corporation consummate such redemption or pay the redemption price
pursuant hereto prior to the Corporation's repurchase of those Senior Notes (as
hereinafter defined) that are required to be repurchased pursuant to the
covenants contained in Sections 1015 and 1016 of that certain Indenture between
the Corporation and PNC Bank, National Association dated March 27, 1998 relating
thereto. Payments provided for in this Section 7.6.3(b) will have priority to
payments to other holders of Common Stock and Junior Preferred Stock (as defined
in Section 7.6.7) in connection with a Change of Control.
For purposes of this Section 7.6.3(b), "Change of Control" means (i) the
consolidation, merger or other business combination of the Corporation with or
into another Person (other than (A) a consolidation, merger or other business
combination in which holders of the Corporation's voting power immediately prior
to the transaction continue after the transaction to hold, directly or
indirectly, the voting power of the surviving entity or entities necessary to
elect a majority of the members of the board of directors (or their equivalent
if other than a corporation) of such entity or entities, or (B) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Corporation), (ii) the sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the assets
of the Corporation and its subsidiaries taken as a whole (either in one
transaction or a series of transactions), including stock of the Corporation's
subsidiaries, to any person other than the Corporation or another subsidiary;
provided however that the transactions contemplated by the Share Purchase
Agreement will not constitute a Change in Control hereunder, (iii) any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than 50% of the voting power of all classes of any class or
classes of capital stock pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect at least a majority of the
Corporation's board of directors, and (iv) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board of
Directors of the Corporation (together with any new directors whose election by
such Board of Directors or whose nomination for election by the stockholders of
the Corporation was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the Corporation;
provided however that if the Corporation's $75,000,000 11% senior secured notes
due April 1, 2005 (the "Senior Notes") are no longer outstanding, a "Change in
Control" will also include any other similarly defined event in any document
evidencing indebtedness for borrowed money in excess of $1,000,000 that gives
the lender under such agreement the right to accelerate payment of the
obligations under such agreement.
(c) Mandatory Redemption. If the transactions contemplated by
the Share Purchase Agreement are consummated, the Corporation shall redeem, to
the extent the Corporation has funds legally available therefor, all of the
outstanding Series D Preferred Shares for a consideration per Series D Preferred
Share equal to the Original Issue Price thereof, plus all accrued and unpaid
dividends and interest thereon, on April 15, 2005. If the Share Purchase
Agreement is terminated for any reason, the Corporation shall redeem, to the
extent the Corporation has funds legally available therefor, all of the
outstanding Series D Preferred Shares for a consideration per Series D Preferred
Share equal to the Original Issue Price thereof, plus all accrued and unpaid
dividends and interest thereon, on the earlier of (a) April 15, 2005 and (b)
redemption of the Senior Notes and payment in full of the Corporation's
$17,500,000 senior credit facility pursuant to that certain Loan and Security
Agreement between the Corporation and Foothill Capital Corporation dated August
1, 2001.
(d) Provisions Regarding Redemptions. Whether or not funds are
legally available therefor, failure by the Corporation to pay, in full, any
redemption price required to be paid pursuant to Section 7.6.4(b) or (c) or
otherwise fail to consummate any redemption will constitute a default hereunder.
Notwithstanding the foregoing, if the Corporation's legally available funds are
insufficient to redeem the total number of Series D Preferred Shares required to
be redeemed pursuant to Section 7.6.4(b) or (c) on the applicable redemption
date, those funds that are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed based upon the number of Series D Preferred Shares held by each such
holder. Series D Preferred Shares not redeemed will remain entitled to the
preferences provided in these Articles of Amendment at any time. Thereafter, at
any time and from time to time when sufficient additional funds are legally
available for the redemption of Series D Preferred Shares that remain
outstanding, the Corporation shall immediately use such funds to redeem the
Outstanding Series D Preferred Shares that the Corporation was obliged to redeem
on the applicable redemption date but that the Corporation has not redeemed,
plus any shares representing Series D Dividends that have accrued thereon. The
Corporation shall provide notice of any redemption pursuant to Section 7.6.4(a)
or (c) to each holder of Series D Preferred Shares at such holder's address as
it appears on the transfer books of the Corporation specifying the number of
Series D Preferred Shares to be redeemed, the redemption price and the
redemption date and calling upon such holder to surrender to the Corporation, in
the manner and at the place designated, such holder's certificate(s)
representing the Series D Preferred Shares to be redeemed. On the date of any
redemption pursuant to this Section 7.6.4, (i) the Corporation shall pay, by
wire transfer to an account designated by each holder, the redemption price for
each Series D Preferred Share so redeemed and (ii) after payment has been made
in accordance with clause (i), Series D Dividends on the Series D Preferred
Shares so called for redemption will cease to accrue and all rights of the
holders thereof as shareholders of the Corporation (except the right to receive
the redemption price) will cease.
7.6.5 Voting Rights. Except as otherwise required by Tennessee law, the
holders of Series D Preferred Shares will not have any voting rights except in
accordance with the following sentence. The holder of each Series D Preferred
Share will be entitled to notice of any stockholders' meeting in accordance with
the bylaws of the Corporation.
7.6.6. Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of the Series D Preferred Shares will be entitled to
receive in cash out of the assets of the Corporation, whether from capital or
from earnings available for distribution to its stockholders (the "Liquidation
Funds") before any amount shall be paid to the holders of any of the capital
stock of the Corporation of any class junior in rank to the Series D Preferred
Shares in respect of the preferences as to distributions and payments on the
liquidation, dissolution and winding up of the Corporation, an amount per Series
D Preferred Share equal to the Original Issue Price of the applicable Series D
Preferred Share plus accrued and unpaid dividends and interest thereon; provided
that, if the Liquidation Funds are insufficient to pay the full amount due to
the holders of Series D Preferred Shares and holders of any class ranking pari
passu with the Series D Preferred Stock, then each holder of Series D Preferred
Shares and such shares of any class ranking pari passu with the Series D
Preferred Stock will receive a percentage of the Liquidation Funds equal to such
holder's pro rata percentage of the full amount of Liquidation Funds payable to
all holders of Series D Preferred Shares and such shares of any class ranking
pari passu with the Series D Preferred Stock. The purchase or redemption by the
Corporation of stock of any class, in any manner permitted by law, will not, for
the purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Corporation.
7.6.7 Preferred Rank. All shares of Common Stock and existing Preferred
Stock (other than the Series A Preferred Stock, which will rank on parity with
the Series D Preferred Stock with respect to distributions to which the holders
of both series are entitled), will be of junior rank (for purposes of this
Section 7.6.7, "Junior Preferred Stock") to all Series D Preferred Shares with
respect to the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Corporation. The rights of the
shares of Common Stock and the Junior Preferred Stock will be subject to the
preferences and relative rights of the Series D Preferred Shares. Without the
prior express written consent of the holders of not less than two-thirds of the
then outstanding Series D Preferred Shares, the Corporation shall not hereafter
authorize or issue additional or other capital stock that is of senior rank to
the Series D Preferred Shares in respect of the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the
Corporation. Without the prior express written consent of the holders of not
less than two-thirds of the then outstanding Series D Preferred Shares, the
Corporation shall not hereafter authorize or make any amendment to the
Corporation's Charter or bylaws, or file any resolution of the board of
directors of the Corporation with the Secretary of State of the State of
Tennessee or enter into any agreement containing any provisions, that would
adversely affect or otherwise impair the rights or relative priority of the
holders of the Series D Preferred Shares relative to the holders of the Common
Stock or the Junior Preferred Stock or the holders of any other class of capital
stock. In the event of the merger or consolidation of the Corporation with or
into another Person, the Series D Preferred Shares shall maintain their relative
powers, designations and preferences provided for herein and no merger shall
have a result inconsistent therewith.
7.6.8 Vote to Change the Terms of or Issue Additional Preferred Shares.
The affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the holders of not less than two-thirds of the then
outstanding Series D Preferred Shares will be required for (a) any change to the
Corporation's Charter that would amend, alter, change or repeal any of the
powers, designations, preferences and rights of the Series D Preferred Shares
and (b) the issuance of Series D Preferred Shares other than pursuant to the
Preferred Share Purchase Agreement dated as of August 14, 2002 between the
Corporation and The E.W. Scripps Company (the "Series D Purchase Agreement") and
other than pursuant to Section 7.6.2.
7.6.9 Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the loss, theft,
destruction or mutilation of any certificates representing the Series D
Preferred Shares, and, in the case of loss, theft or destruction, of an
indemnification undertaking by the holder to the Corporation in customary form
and, in the case of mutilation, upon surrender and cancellation of such
certificate(s), the Corporation shall execute and deliver new preferred stock
certificate(s) of like tenor and date.
7.6.10 Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in the Charter are cumulative and in
addition to all other remedies available under the Charter, at law or in equity
(including a decree of specific performance and/or other injunctive relief). No
remedy contained herein will be deemed a waiver of compliance with the
provisions giving rise to such remedy. Nothing herein will limit a holder's
right to pursue actual damages for any failure by the Corporation to comply with
the terms of the Charter. The Corporation covenants to each holder of Series D
Preferred Shares that there will be no characterization concerning this
instrument other than as expressly provided herein. Amounts set forth or
provided for herein with respect to payments and the like (and the computation
thereof) will be the amounts to be received by the holder thereof and will not,
except as expressly provided herein, be subject to any other obligation of the
Corporation (or the performance thereof). The Corporation acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to the
holders of the Series D Preferred Shares and that the remedy at law for any such
breach may be inadequate. The Corporation therefore agrees that, in the event of
any such breach or threatened breach, the holders of the Series D Preferred
Shares will be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
7.6.11 Specific Will Not Limit General; Construction. No specific
provision contained in the Charter will limit or modify
any more general provision contained herein.
7.6.12 Failure or Indulgence Not Waiver. No failure or delay on the
part of a holder of Series D Preferred Shares in the exercise of any power,
right or privilege hereunder will operate as a waiver thereof, nor will any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
7.6.13 Notice. Whenever notice is required to be given under the
Charter, unless otherwise provided herein, such notice will be given in
accordance with the Series D Purchase Agreement.
7.6.15 Number of Series D Preferred Shares. The Corporation shall
not issue more than 5,000 Series D Preferred Shares.
7.6.16 Reacquired Shares. Any Series D Preferred Shares purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall, upon
their cancellation, become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
4. This amendment was duly adopted by the Board of Directors of the
Corporation on August 13, 2002. Under Section 48-16-102 of the Tennessee Code
Annotated shareholder approval of this amendment is not required.
Dated: August 14, 2002
SHOP AT HOME, INC.
By:________________________________
Co-Chief Executive Officer
Attest:
- -------------------------------
George J. Phillips
Executive Vice President & Secretary
EXHIBIT B
FORM OF OPINION OF
BONE MCALLESTER NORTON PLLC
August 14, 2002
The E. W. Scripps Company
Attention: Timothy Peterman
312 Walnut Street, 28th Floor
Cincinnati, Ohio 45202
RE: Preferred Share Purchase Agreement between Shop At Home,
Inc. and The E. W. Scripps Company dated August 14, 2002
Ladies and Gentlemen:
We have acted as counsel to Shop At Home, Inc., a Tennessee
corporation (the "Company"), in connection with the Preferred Share Purchase
Agreement dated as of August 14, 2002, to which the Company is a party (the
"Agreement") and related documents. We are providing this opinion (the
"Opinion") to you ("Recipient") at the request of the Company and pursuant to
Section 7(c) of the Agreement. Capitalized terms used in this Opinion shall have
the meanings ascribed to them in the Agreement unless otherwise defined in this
Opinion.
In order to render this Opinion, we have examined and are
relying upon copies of the following executed documents (collectively, the
"Documents"):
[i] The Agreement.
[ii] A copy of the Company's Charter, together with all
amendments thereto, certified by the Secretary of State of the State of
Tennessee.
[iii] The Company's Bylaws, dated August 11, 1999.
[iv] Resolutions of the Board of Directors relating to
the authorization of the Company's execution, delivery,
and performance of the Agreement.
[v] The stock certificate number PD-1 executed on behalf
of the Company, dated August 15, 2002.
[vi] A Certificate of Existence issued by the Secretary
of State of the State of Tennessee, dated August 13, 2002.
For the purpose of rendering this Opinion, we have examined
such questions of law as we have deemed appropriate. As to certain questions of
fact, we have relied without independent investigation (unless expressly
otherwise indicated herein) on, and we have assumed the accuracy and validity
of, statements of certain officers and directors of the Company. However, except
for the Documents described above we have not, unless expressly otherwise
indicated herein, reviewed any other documents or conducted any other
examination of any public records, and the opinions rendered herein are limited
accordingly.
For purposes of this Opinion, we have assumed that Recipient
has the corporate power and authority to enter into and perform its obligations
under the Agreement, and we have assumed the due execution and delivery by, and
valid and binding effect upon, Recipient. We also have assumed the authenticity
of all documents submitted to us as originals, the genuineness of all
signatures, and the conformity to originals of all documents submitted to us as
copies.
Based upon the foregoing, and subject to the assumptions,
qualifications and limitations set forth herein, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Tennessee.
The Company has the necessary power and authority under the
statutes governing its organization and under the terms of its charter and
bylaws to conduct its business as currently conducted and to own, lease and use
its assets in the manner in which its assets are currently owned, leased and
used.
The Company has 1,000,000 authorized shares of preferred
stock, par value $10.00 per share, of which 5,000 such authorized shares are
designated as Series D Preferred Stock. The Series D Preferred Stock has been
duly authorized and, when issued, sold and delivered in accordance with the
terms and conditions of the Agreement, will be validly issued, fully paid and
nonassessable.
Assuming the truth and accuracy of Recipient's representations
contained in the Agreement, the offer and sale of the Series D Preferred Stock
to Recipient pursuant to the terms of the Agreement are exempt from the
registration requirements of the 1933 Act.
No preemptive rights, rights of first refusal or similar
rights to purchase securities of the Company exist, and no such rights will
arise or become exercisable by virtue of or in connection with the transactions
contemplated by the Agreement.
To our knowledge, there is no pending Proceeding, and, to our
knowledge, no Person has threatened to commence any Proceeding materially
affecting or that questions the validity or enforceability of the transactions
contemplated by the Agreement.
The Company has the requisite power and authority to enter
into and to perform its obligations pursuant to the Agreement. The execution,
delivery and performance by the Company of the Agreement, and the consummation
of the transactions contemplated by the Agreement, have been duly authorized by
all necessary corporate and shareholder action on the part of the Company. The
Agreement constitutes the legal, valid and binding obligation of the Company,
enforceable against it in accordance with the terms of the Agreement.
The execution and delivery by the Company of the Agreement and
the consummation by the Company of the transactions contemplated thereby will
not (a) violate the charter or bylaws of the Company, each as in effect on the
date hereof; (b) violate any law applicable to the transactions contemplated by
the Agreement; or (c) cause a default by the Company under, or give rise to a
right of payment under or the right to terminate, amend, modify, abandon or
accelerate obligations under, any material written contract to which the Company
is a party or by which it or any of its assets or properties are bound. With
your permission, we have assumed that the term "material written agreement" as
used in clause (c) above includes only (i) the Indenture dated as of March 27,
1998, between the Company, as Issuer, and J.P. Morgan Trust Company, N.A.,
successor to PNC Bank, National Association, as Trustee, relating to the
issuance of the Company's $75,000,000 11% Senior Secured Notes, and (ii) the
Loan and Security Agreement dated as of August 1, 2001, between the Company, as
Borrower, and Foothill Capital Corporation, as Lender.
Except for any notice filings to be made in connection with
federal and state securities laws after consummation of the transactions
contemplated by the Agreement, the Company is not required to make any filing
with or give any notice to or obtain any consent from any Person in connection
with the execution and delivery of the Agreement or consummation of the
transactions contemplated thereby.
The foregoing opinions are subject to and expressly limited by
the following assumptions, qualifications and limitations, in addition to those
previously set forth:
A. The opinion concerning enforceability of the Agreement in
Paragraph 7 above is subject to [i] all applicable bankruptcy, insolvency,
reorganization, fraudulent conveyancing, preferential transfer, moratorium or
similar laws of general application and court decisions affecting the rights of
creditors; and [ii] general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity), including
concepts of good faith, fair dealing, commercial reasonableness and
unconscionability.
B. The Company and the Recipient are also parties to certain
other agreements executed and delivered on August 14, 2002, related to the
transaction contemplated by the Agreement. For the purpose of rendering this
Opinion, you have not asked us to review any other documents except the
Agreement and the other Documents listed above, and the opinions expressed above
relate solely to the Documents listed above and not to any other documents,
agreements or instruments referred to in or incorporated by reference into any
of the Documents listed above.
C. The qualification "to our knowledge," whenever used in this
Opinion, means that during the course of our representation of the Company
pursuant to the transactions contemplated by the Agreement, no information has
come to the attention of the lawyers in our firm who have had active involvement
in negotiating the transaction contemplated by the Agreement, preparing the
Agreement or preparing this Opinion contrary to the opinions so qualified.
However, except for representations that we have obtained from the Company
concerning the facts underlying the opinions expressed above, and except as may
be expressly disclosed herein, we have not undertaken any independent
investigation to determine the existence or absence of such facts.
D. This Opinion is limited to the law (excluding the
principles of conflict of laws) of the State of Tennessee
and the federal laws of the United States of America, and we do not express any
opinion concerning any other law.
E. This Opinion is furnished for the benefit of Recipient
only, in connection with the delivery of the Agreement only, and may not be
relied upon by any other person or entity, or in any other context, without our
prior written consent. We expressly disclaim any responsibility for advising you
of any change occurring hereafter in circumstances concerning the transaction
which is the subject of this Opinion, including any changes in the law or in
factual matters occurring after the date of this Opinion.
Very truly yours,