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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2003
Commission file number 0-25596
SUMMIT AMERICA TELEVISION, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1282758
(State of incorporation) (IRS EIN)
400 Fifth Avenue South, Suite 205
Naples, Florida 34102
(Address of principal executive offices)
Registrant's telephone number, including area code: (786) 206-0047
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Number of shares of Common Stock outstanding as of
August 12, 2003 was 44,103,385.
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SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
Index to Form 10-Q
Three and Six Months Ended June 30, 2003 and 2002
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Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5-6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Item 3 - Quantitative and Qualitative Disclosure About
Market Risk 16
Item 4 - Controls and Procedures 17
Part II OTHER INFORMATION
Item 1 - Legal Proceedings 17-18
Item 4 - Submission Of Matters To A Vote Of Security Holders 18
Item 6 - Exhibits and Reports on Form 8-K 18-19
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of Dollars)
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June 30, December 31,
2003 2002
--------------------- -------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 5,438 $ 1,634
Accounts receivable - net 113 125
Prepaid expenses 284 502
Deferred tax assets 276 418
--------------------- -------------------
Total current assets 6,111 2,679
Property and equipment, net 5,999 6,254
Deferred tax asset 18,335 16,947
Television station licenses 89,779 89,779
Other assets 164 1,470
--------------------- -------------------
Total assets 120,388 117,129
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 1,890 2,435
Income tax payable 425
--------------------- -------------------
Total current liabilities 2,315 2,435
Long-term debt 47,500 47,500
Redeemable preferred stock:
Series A - Redeemable at $10 per share, $10 par value, 140,000 shares
authorized; 3,718 shares issued and outstanding 37 37
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 - -
Series D - $10 par value, 5,000 shares authorized, 3,000 issued and
outstanding 3,000 3,000
Stockholders' equity:
Common stock - $.0025 par value, 100,000,000 shares authorized; 44,103,385
and 42,258,097 shares issued and outstanding at June 30, 2003
and December 31, 2002, respectively 110 106
Non-voting common stock - $.0025 par value,
30,000,000 shares authorized, 0 issued and outstanding -
Additional paid in capital 116,583 111,707
Accumulated deficit (45,355) (43,926)
Note receivable from related party (3,802) (3,730)
--------------------- -------------------
Total liabilities and stockholders' equity $ 120,388 $ 117,129
===================== ===================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Thousands of Dollars)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------------- ----------------- ------------------ ------------------
Net revenues $ 1,679 $ 53,472 $ 3,352 $ 103,217
Operating expenses:
Cost of goods sold - 35,238 - 67,383
Salaries and wages 166 4,405 402 8,938
Transponder and affiliate charges - 10,967 - 21,911
General and administrative 1,009 5,515 2,174 10,581
Depreciation and amortization 175 2,987 341 5,902
Offering costs - - - 837
----------------- ----------------- ------------------ ------------------
Total operating expenses 1,350 59,112 2,917 115,552
----------------- ----------------- ------------------ ------------------
Income (loss) from operations 329 (5,640) 435 (12,335)
Interest income 38 223 75 281
Interest expense (724) (2,706) (1,455) (5,437)
Other income (expense) - (8) - (8)
Loss on unconsolidated subsidiary - - (1,306) -
----------------- ----------------- ------------------ ------------------
Net loss before taxes (357) (8,131) (2,251) (17,499)
Income tax benefit (130) (2,102) (821) (5,287)
----------------- ----------------- ------------------ ------------------
Net loss (227) (6,029) (1,430) (12,212)
Preferred stock dividends (45) - (89) -
----------------- ----------------- ------------------ ------------------
Net loss available for common shareholders $ (272) $ (6,029) $ (1,519) $ (12,212)
================= ================= ================== ==================
Basic and diluted loss per common share $ (0.01) $ (0.14) $ (0.04) $ (0.29)
================= ================= ================== ==================
Weighted average number of shares outstanding:
Basic and diluted 42,443 41,917 42,402 41,889
================= ================= ================== ==================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Thousands of Dollars)
2003 2002
------------------ -------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (1,430) $ (12,212)
Non-cash expenses/(income) included in net loss:
Depreciation and amortization 341 5,902
Deferred tax benefit (821) (5,183)
Deferred interest - 595
Interest accrued on shareholder note (72) (191)
Provision for bad debt - 577
401K stock issuance - 115
Loss on unconsolidated subsidiary 1,306 -
Changes in current and non-current items:
Accounts receivable 12 1,329
Inventories - (476)
Prepaid expenses and other assets 218 326
Income tax receivable - 59
Accounts payable and accrued expenses (634) 3,681
Deferred revenue - (822)
------------------- -------------------
Net cash used in operations (1,080) (6,300)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (85) (1,599)
Net change in restricted cash - 353
Other assets - (226)
------------------- -------------------
Net cash used in investing activities (85) (1,472)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred finance charges - (125)
Repayments of capitalized leases - (520)
Preferred stock conversion - (16)
Exercise of stock options and warrants 4,969 72
------------------- -------------------
Net cash provided by (used in) financing activities 4,969 (589)
------------------- -------------------
NET INCREASE/(DECREASE) IN CASH 3,804 (8,361)
Cash beginning of period 1,634 19,924
------------------- -------------------
Cash end of period $ 5,438 $ 11,563
=================== ===================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Thousands of Dollars)
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2003 2002
-------------------------- --------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash received for taxes $ - $ 59
========================== ==========================
Cash paid for interest $ 1,446 $ 4,585
========================== ==========================
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Accrued Series D preferred stock dividends $ 89 $ -
========================== ==========================
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
SUMMIT AMERICA TELEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 - BASIS OF PRESENTATION AND SALE OF ASSETS
Basis of Presentation. The accompanying unaudited condensed
consolidated financial statements of Summit America Television, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. The information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
the Company's management, necessary for a fair presentation of financial
condition and results of operations of the periods.
The condensed consolidated balance sheet data for the year ended
December 31, 2002 were derived from audited consolidated financial statements,
but do not include all disclosures required by generally accepted accounting
principles.
The accounting policies followed by the Company are set forth in the
Company's financial statements in its Transition Report on Form 10-K for the
fiscal year ended December 31, 2002.
All dollar values have been expressed in thousands (000s) unless
otherwise noted except for per share data.
Sale of Assets. On October 31, 2002, the Company closed the sale of
a 70% interest in its television and internet home shopping network, Shop At
Home Network, LLC (the "Network"), to a subsidiary of The E.W. Scripps Company
("Scripps"). The Company retains a 30% interest in the Network and also retains
ownership of its five full-power television stations, certain wireless spectrum
assets and tax-loss carry-forward benefits. In connection with the sale, the
Company formally changed its legal name from Shop At Home, Inc. to Summit
America Television, Inc.
NOTE 2 - STOCK-BASED COMPENSATION
The Company follows the provisions of Accounting Principles Board
("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.
The Company has adopted the disclosure only provisions of Statements of
Financial Accounting Standards ("SFAS") No. 123, Accounting For Stock-Based
Compensation and below is providing disclosures required by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. 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 and 148 the Company's net loss per share would have been
adjusted to the pro forma amounts indicated in the following table.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
----------------- ---------------- --------------- --------------
Net loss available to common shareholders:
As reported $ (227) $ (6,029) $ (1,519) $ (12,212)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 124 108 197 216
----------------- ---------------- --------------- --------------
Pro forma $ (351) $ (6,137) $ (1,716) $ (12,428)
================= ================ =============== ==============
Basic loss per share available to common
shareholders
As reported $ (0.01) $ (0.14) (0.04) (0.29)
Pro Forma (0.01) (0.15) (0.04) (0.30)
Diluted loss per share available to common
shareholders:
As reported (0.01) (0.14) (0.04) (0.29)
Pro Forma (0.01) (0.15) (0.04) (0.30)
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 six months ended June 30, 2003
and 2002 and dividend yield of 0%; expected life of 7.5 years; expected
volatility of 29% and 61% for the six months ended June 30, 2003 and June 30,
2002, respectively; risk-free interest rate of 3.30% and 4.76% for the six
months ended June 30, 2003 and June 30, 2002, respectively.
NOTE 3 - ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("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 SFAS No. 146 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. The adoption of SFAS No. 146 did not have a material
effect on the Company's consolidated balance sheet or consolidated statements of
operation.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The initial recognition and measurement provision of
FIN 45 are applicable to the guarantees issued or modified after December 31,
2002. The disclosure provisions of FIN 45 were effective December 31, 2002. The
adoption of FIN 45 did not have a material effect on the Company's consolidated
balance sheet or consolidated statements of operation.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
The Company did not create or obtain any variable interest entities that contain
the characteristics addressed in FIN 46 during the three months ended June 30,
2003. For variable rate entities in which an interest was held prior to February
1, 2003, FIN 46 applies in the first fiscal year or interim period beginning
after June 15, 2003. The Company does not expect that the adoption of FIN 46 as
it relates to variable interest rate entities held prior to February 1, 2003
will have a material effect on the Company's consolidated balance sheet or
consolidated statement of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. The Company does not expect the adoption of this statement to have a
material impact to its operating results.
NOTE 4 - INDEBTEDNESS
$47,500, 6% Secured Note
Concurrent with its purchase of the Network assets discussed in Note 1,
Scripps loaned $47,500 to the Company payable in full by October 31, 2005.
Interest accrues on the loan at the rate of 6% and is payable quarterly. Payment
and performance of the loan obligation are secured by assignment of the
Company's 30% interest in the Network, a security interest in the Company's
television stations located in the Boston, San Francisco and Cleveland markets,
and a security interest in the stock of the Company's subsidiaries that own the
assets. The Company's carrying value of the television station licenses used to
secure the loan is $61,563 at June 30, 2003. As required by the loan agreement,
the Company must adhere to various non-financial covenants and is prohibited
from encumbering further any secured assets, redeeming or issuing outstanding
stock or issuing additional shares of common or preferred stock.
NOTE 5 - LOSS PER SHARE
The following table sets forth for the periods indicated the calculation
of net loss per share included in the Company's Condensed Consolidated
Statements of Operations:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net loss $ (227) $ (6,029) $ (1,430) $ (12,212)
Preferred stock dividends (45) - (89) -
--------------- ----------------- ---------------- ---------------
Numerator for basic loss per
share available to
common stockholders $ (272) $ (6,029) $ (1,519) $ (12,212)
=============== ================= ================ ===============
Denominator for basic loss per share 42,443 41,917 42,402 41,889
Effect of dilutive securities - - - -
--------------- ----------------- ---------------- ---------------
Denominator for diluted loss per share 42,443 41,917 42,402 41,889
=============== ================= ================ ===============
Basic loss per share $ (0.01) $ (0.14) $ (0.04) $ (0.29)
=============== ================= ================ ===============
Diluted loss per share $ (0.01) $ (0.14) $ (0.04) $ (0.29)
=============== ================= ================ ===============
Although the following 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):
Six Months Ended
June 2003,
2003 2002
Employee stock options 3,073 4,845
Warrants - 2,000
Convertible preferred stock 4 14
On June 30, 2003, two investors exercised 1,600 of the 2,000 outstanding
warrants and purchased 1,600,038 shares of stock at a purchase price of $2.82
per share for a total payment to the Company of $4.5 million. The remaining 400
warrants expired June 30, 2003.
NOTE 6 - REVENUE FROM AFFILIATE FEES
For periods subsequent to the sale of 70% of the Company's interest in
the Network, substantially all of the Company's revenues are derived from the
affiliate fees charged to the Network.
NOTE 7 -- 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. Until October 31, 2002, the
Company operated principally in two segments: Shop At Home Network and
shopathometv.com. The Company operated almost exclusively in the United States.
After October 31, 2002, the Company operates in one segment: television
broadcast stations. No comparison of segment information for the three months
and six months ended June 30, 2003 to the three months and six months ended June
30, 2002 is deemed relevant.
NOTE 8 -- INVESTMENTS
As a result of the sale of the Network, the Company has retained an
equity method investment in 30% of the Network operations. The carrying value of
this equity method investment is included in other assets in the accompanying
condensed consolidated balance sheets. The Company recognized a loss of $1,306
on the remaining investment in the Network as a reduction to investment income
(reflected as a non-cash charge) in the three months ended March 31, 2003. As of
June 30, 2003, in accordance with the accounting rules for equity method
investments, the Company had written down this investment to zero, and therefore
the Company has no additional losses related to the performance of this
investment.
Summarized balance sheet information of the Network is as follows:
June 30, 2003
Current Assets $ 35,511
Noncurrent Assets 19,580
Current Liabilities 27,758
Noncurrent liabilities -
Summarized statement of operations information of the Network,
calculated for the period during which the Company had the equity method
investment, is as follows:
For the Three Months Ended For the Six Months Ended
June 30, 2003 June 30, 2003
Net sales $ 56,638 $ 114,955
Gross profit 19,692 39,153
Net loss (7,092) (14,522)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" and the Company's condensed 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 condensed 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 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 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. The fair value of the television station licenses
are based upon assumptions which may prove to be untrue in the future.
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. During the second quarter of
the calendar year, the Company rescinded certain transactions that it had
previously authorized. The Company believes that no tax liability arose out of
the rescission of such transactions. Should the Company determine that it would
not be able to realize all or part of its net deferred tax assets in the future
or should such rescission be found to be ineffective for tax purposes, in whole
or in part, there would be an increase in income tax expense, which increase
could be material.
OVERVIEW
Seeking to reduce operating losses and to improve shareholder value,
the Company's management completed the sale of 70% of the Company's interest in
the Network to Scripps on October 31, 2002. The sale substantially reduced the
size of the Company's operations. Results after October 31, 2002 are therefore
not easily comparable with those previously reported.
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:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold - 65.9 - 65.3
Salaries and wages 9.9 8.2 12.0 8.7
Transponder and affiliate charges - 20.5 - 21.2
General and administrative expenses 60.1 10.3 64.8 10.3
Depreciation and amortization 10.4 5.6 10.2 5.7
Offering expenses - - - 0.8
--------------------- ----------------- ----------------- --------------------
Total operating expenses 80.4 110.5 87.0 112.0
Interest income 2.2 0.4 2.2 0.3
Interest expense (43.1) (5.1) (43.4) (5.3)
Loss on unconsolidated subsidiary (39.0)
--------------------- ----------------- ----------------- --------------------
Loss from continuing operations
before income taxes (21.3) (15.2) (67.2) (17.0)
Income tax benefit (7.8) (3.9) (24.5) (5.2)
--------------------- ----------------- ----------------- --------------------
Net loss (13.5) (11.3) (42.7) (11.8)
Three Months Ended June 30, 2003 compared with Three Months Ended June 30, 2002
Because the Company sold a 70% interest in the Network on October 31,
2002, but retained ownership of its five broadcast television stations, its
operations were fundamentally different during the quarter ended June 30, 2003,
compared with the quarter ended June 30, 2002. These differences resulted from
the change of the Company's operation from a retail seller of merchandise to a
television station operator that receives substantially all of its revenues from
the affiliate fees charged to the Network. To illustrate this conclusion,
certain material changes in significant line items of the Company's financial
statements are described below:
Net Revenues. The Company's net revenues for the quarter ended June 30,
2003, were $1.7 million, a decrease of 96.9% from $53.5 million in the prior
year.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and related shipping charges. For the quarter ended June 30, 2002,
the cost of goods sold was 65.9% of revenues. The cost of goods sold was $35.2
million for the quarter ended June 30, 2002, and there were no cost of goods
sold in the quarter ended June 30, 2003.
Salaries and Wages. Salaries and wages for the quarter ended June 30,
2003, were $0.2 million, compared to $4.4 million in the prior year. Salaries
and wages, as a percent of revenues, increased to 9.9% for the quarter ended
June 30, 2003, compared with 8.2% for the same quarter in the prior year.
Transponder and Affiliate Charges. Transponder and affiliate charges
for the quarter ended June 30, 2003, were $0.0 million compared with $11.0
million in the quarter ended June 30, 2002.
General and Administrative. General and administrative expenses for the
quarter ended June 30, 2003, were $1.0 million, a decrease of $4.5 million or
81.7% from the prior year.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended June 30, 2003, was $0.2 million, compared with $3.0 million in the
prior year.
Interest. Interest expense of $0.7 million decreased by $2.0 million or
73.2% from the prior year. The decrease is primarily due to interest associated
with the Company's prior debt being repaid as a result of the transaction with
Scripps.
Income Tax Benefit. Income tax benefit from continuing operations was
$0.1 million for the quarter ended June 30, 2003, compared with the $2.1 million
benefit for the quarter ended June 30, 2002.
Six Months Ended June 30, 2003 compared with Six Months June 30, 2002
As stated above, the Company sold a 70% interest in the Network on
October 31, 2002, and retained ownership of its five broadcast television
stations, which caused fundamentally different operating results for the quarter
ended June 30, 2003, compared with the quarter ended June 30, 2002. These
differences are attributable to the change of the Company's operation from a
retail seller of merchandise to a television station operator that receives
substantially all of its revenues from the affiliate fees charged to the
Network. Certain illustrative material changes in significant line items of the
Company's financial statements are described below:
Net Revenues. The Company's net revenues for the period ended June 30,
2003, were $3.4 million, a decrease of 96.8% from $103.2 million for the same
period in the prior year.
Cost of Goods Sold. Cost of goods sold represents the purchase price of
merchandise and related shipping charges. For the period ended June 30, 2002,
the cost of goods sold was 65.3% of revenues. The cost of goods sold was $67.4
million for the period ended June 30, 2002, and there were no cost of goods sold
in the period ended June 30, 2003.
Salaries and Wages. Salaries and wages for the period ended June 30,
2003 were $0.4 million, compared to $8.9 million in the prior year. Salaries and
wages, as a percent of revenues, increased to 12.0% in the June 30, 2003 period
compared to 8.7% in the prior year.
Transponder and Affiliate Charges. Transponder and affiliate charges
for the period ended June 30, 2003 were $0.0 million compared to $21.9 million
in the period ended June 30, 2002.
General and Administrative. General and administrative expenses for the
period ended June 30, 2003 were $2.2 million, a decrease of $8.4 million or
79.5% from the prior year.
Depreciation and Amortization. Depreciation and amortization for the
period ended June 30, 2003 was $0.3 million, compared to $5.9 million in the
prior year.
Offering Costs. The Company incurred $0.8 million in non-recurring
offering costs during the period ended June 30, 2002. The costs related to the
Company's uncompleted refinancing of its long-term debt.
Interest. Interest expense of $1.5 million decreased by $4.0 million or
73.2% from the prior year. The decrease is primarily due to interest associated
with the Company's prior debt being repaid as a result of the sale of Network
assets.
Income Tax Benefit. Income tax benefit from continuing operations was
$0.8 million for the period ended June 30, 2003 versus $5.3 million benefit for
the period ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5.4 million of cash on hand at June 30, 2003, the
largest portion of which was received when two investors exercised warrants
previously issued by the Company and purchased 1,600,038 shares of the Company's
common stock. The purchase price of the common stock was $2.82 per share, for a
total payment to the Company of $4,512,107. (The remaining 400 warrants expired
on June 30, 2003.) Management believes that current cash on hand and the
affiliate fee income from its owned stations will be sufficient to fund
operating expenses and interest payments through the end of the fiscal year and
beyond, as well as to construct new digital transmission facilities for three of
the Company's stations.
The Company's future contractual obligations and commitments at June
30, 2003, 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 $ 47,500 $ - $ - $ 47,500 $ -
Redeemable
preferred stock 3,000 - - 3,000 -
Operating lease
obligations 3,282 741 782 775 984
----------------- --------------- ---------------- ---------------- ----------------
$ 53,782 $ 741 $ 782 $ 51,275 $ 984
================= =============== ================ ================ ================
In addition to the above commitments, the Company has 3,718 shares of
redeemable preferred stock outstanding at June 30, 2003. Any holder of 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.
CAPITAL EXPENDITURES
The Company projects capital expenditures during 2003 of approximately
$0.4 million, primarily for the construction of digital transmission facilities
at three of its stations and for maintaining and upgrading equipment and
facilities in the normal course of business.
NEW ACCOUNTING PRONOUNCEMENTS
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. The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated balance sheet or consolidated statements of operation.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). The
interpretation requires that upon issuance of a guarantee, the entity must
recognize a liability for the fair value of the obligation it assumes under that
obligation. This interpretation is intended to improve the comparability of
financial reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The initial recognition and measurement provision of
FIN 45 are applicable to the guarantees issued or modified after December 31,
2002. The disclosure provisions of FIN 45 were effective December 31, 2002. The
adoption of FIN 45 did not have a material effect on the Company's consolidated
balance sheet or consolidated statements of operation.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
The Company did not create or obtain any variable interest entities that contain
the characteristics addressed in FIN 46 during the three months ended June 30,
2003. For variable rate entities in which an interest was held prior to February
1, 2003, FIN 46 applies in the first fiscal year or interim period beginning
after June 15, 2003. The Company does not expect that the adoption of FIN 46 as
it relates to variable interest rate entities held prior to February 1, 2003
will have a material effect on the Company's consolidated balance sheet or
consolidated statement of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. The Company does not expect the adoption of this statement to have a
material impact to its operating results.
ITEM 3. 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 $5.4 million as of June 30, 2003. 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 $47.5 million of long-term debt, because interest
accrues on this debt at the fixed rate of 6%.
The Company has no activities related to derivative financial
instruments or derivative commodity instruments.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the chief executive officer
and principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of June 30,
2003. Based on that evaluation, the Company's management, including the chief
executive officer and principal financial officer, concluded that the Company's
disclosure controls and procedures were effective. During the period covered by
this report, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Classic Collectibles, LLC
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 also claims 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, participated in discovery,
and continues to vigorously pursue its defense. The case is set for a jury trial
in September 2003.
Dixie Health, Inc.
On September 27, 2002, Dixie Health, Inc. ("Dixie") sued the Company,
later adding the Network as a defendant, in the United States District Court for
the Middle District of Tennessee at Nashville. Dixie asserts causes of action
based upon Summit's alleged use of trade dress owned by Dixie, arising from
events occurring after the Company's termination of Dixie as a vendor. Dixie
asserted violations of the Lanham Act, unfair competition and false advertising,
unfair or deceptive acts or practices, and an amount owed on the account. The
Company has filed its answer and counterclaim and intends to vigorously pursue
its defense.
Other Matters
The Company is also subject to legal actions arising in the ordinary
course of its business. The Company believes that the ultimate outcome of these
actions is not likely to have a material adverse effect on its financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on June 2, 2003.
There was one proposal presented for approval, which was the election of the
entire board of directors. All director nominees presented for approval were
elected by the shareholders, each to hold office until his or her successor is
elected and qualified. There were no broker non-votes on this matter. The
results of voting are as follows:
Election of the Entire Board of Directors
Nominee For Withheld
------- --- --------
Caroline Beasley 34,345,672 812,047
Charles W. Bone 31,797,203 3,360,516
J. D. Clinton 32,616,745 2,540,974
George R. Ditomassi 33,892,280 1,265,439
J. Edward Pearson 34,568,872 588,572
Don C. Stansberry, Jr. 33,107,675 2,050,044
Frank A. Woods 32,020,628 3,137,091
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit Number Document Description
31 Certification of the Chief Executive Officer and
Principal Financial Officer pursuant to Rule
13a-14(a)
32 Certification of the Chief Executive Officer and
Principal Financial Officer pursuant to Rule
13a-14(b) and Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ending June
30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUMMIT AMERICA TELEVISION, INC.
Date: August 12, 2003 By: /s/ George R. Ditomassi
------------------------------------
George R. Ditomassi
Chief Executive Officer
(in his capacities as Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
Exhibit 31
CERTIFICATION
I, George R. Ditomassi, certify that:
1. I have reviewed this quarterly report of Summit America Television,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 12, 2003
/s/George R. Ditomassi
George R. Ditomassi
Chief Executive Officer
and Principal Financial Officer
Exhibit 32
SECTION 1350 CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Summit America Television,
Inc. (the "Company") on Form 10-Q for the period beginning April 1, 2003, and
ending June 30, 2003, as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, George R. Ditomassi, Chief Executive Officer
and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge:
1. The Report fully complies with the requirements of 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: August 12, 2003
/s/ George R. Ditomassi
George R. Ditomassi
Chief Executive Officer and
Principal Financial Officer
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to Summit America
Television, Inc. and will be retained by Summit America Television, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.