Shop At Home Announces June 30 Results And Future Plans
NASHVILLE, Tenn.--(BUSINESS WIRE)--Sept. 14, 2001--Shop At Home, Inc. (Nasdaq:SATH), a nationally televised home shopping service and Internet retailer, today reported results for its fourth quarter and 2001 fiscal year ended June 30, 2001 and outlined the Company's general plans. The Company posted annual net revenues of $177.6 million and an EBITDA (consolidated earnings before interest, taxes, depreciation and amortization) loss of $29.3 million, both representing a decrease over fiscal year 2000 annual results of $201.6 million and a $3.0 million loss, respectively. Results for the fourth quarter were revenues of $39.9 million and an EBITDA loss of $12.0 million, compared to $45.6 million and an $8.1 million loss, respectively, for the same period last year. Net loss for the year was $10.2 million, or 51(cent) per share, compared to $13.5 million, or 44(cent) per share, for fiscal year 2000. The net loss for fiscal 2001 includes an extraordinary gain of $48.9 million from the March 2001 sale of its Houston television station. The gain was used primarily to offset the operating losses of the past year.
While operating performance for fiscal 2001 was poor, executive management changes have taken place in recent months which have resulted in a turnaround in operating efficiency. The Company expects to report a negative EBITDA result for the current quarter; however, it is anticipated that both financial operating results and key individual operating components for this quarter (first quarter, fiscal 2002) will show improvement and will reflect a turnaround of prior year trends. Fiscal 2002 July and August operating results have reflected this turnaround, and while the tragic events of September 11 will probably soften retail sales, the Company remains optimistic.
The Office of the Chairman new management structure has been established, and clear improvement mandates have been set for the Company. The Chief Executive Officer functions have been assumed by the new management team.
The changes in recent months have also brought a re-directed focus on the Company's primary assets, which include:
i) The core home shopping business
(ii) The distribution system for the carriage of home shopping
programming
(iii) The wireless spectrum opportunity with respect to television
channels 60 to 69 which exists for the Company's Boston and
Cleveland stations and the 50% interest the Company still
holds in the recently sold Houston station
(iv) The five owned and operated television stations in San
Francisco, Boston, Cleveland, Raleigh and Bridgeport, which
serves a portion of the New York market
(v) Website and related systems
(vi) Real estate, hard assets and information systems.
Regarding liquidity, the Company completed a $17.5 million credit facility with a major financial institution in August.
Shop At Home is now fulfilling approximately half of its orders from its new 43,000 square foot distribution center located four miles from the Company's corporate headquarters.
In recent months, there have been significant improvements in the cost economies of the Company's programming carriage distribution.
Furthermore, the Company recently announced that Tom Merrihew joined Shop At Home as the new Executive Vice President of Sales and Merchandising. Mr. Merrihew has previously worked with QVC and buy.com.
It is also expected that additional senior management with home shopping business experience will be joining the Company this month.
A copy of the Company's annual report on Form 10-K for the year ended June 30, 2001 has been filed with the Securities and Exchange Commission.
Results of Operations
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 sales through the television network accounted for 89.5% of net revenues. The remaining 10.5% of net revenues came 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 12.4% from 7.7%. Included in salaries and wages was severance compensation for the Company's CEO. Salaries and wages in the prior year were reduced by the capitalization of expenditures allocated to the website launch and the installation of an enterprise-wide computer system. Adjusting for the 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. Transponder and affiliate costs for the year ended June 30, 2001, were $35.5 million, an increase of $2.2 million or 6.5% compared to the year ended June 30, 2000. The increase was primarily due to the addition of new affiliates and homes reached.
Advertising. Advertising costs for the year ended June 30, 2001, were $5.3 million compared to $2.2 million on June 30, 2000 or an increase of 137.5%. Advertising costs are almost entirely related to the Company's affiliation agreements. Total transponder, affiliate and advertising expense rose to $40.8 million or an increase of 14.8% from the prior year. At the same time, however, average full-time equivalent homes reached grew 18.6%.
General and Administrative. General and administrative expenses for the year ended June 30, 2001, were $21.6 million, an increase of $1.8 million or 9.0% compared to the year ended June 30, 2000. As a percentage of revenues, this constituted an increase to 12.1% in 2001 from 9.8% 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 this year. The increased bad debt reserve reflects management's view that credit card collections are becoming more difficult as consumer indebtedness increases and the economy weakens.
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 is primarily due to a full valuation allowance provided against the Company's state net operating loss carry forwards.
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 decided to discontinue 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.
Cumulative Effect of Accounting Change. In accordance with SAB101, the Company has reduced revenue for the products which were shipped at the end of the period but not received by the customer by recording a cumulative effect of an accounting change of $1.4 million (net of a tax benefit of $0.8 million) for the effects through June 30, 2000.
Fiscal Year 2000 vs. Fiscal Year 1999
Net Revenues. Shop At Home's net revenues for the year ended June 30, 2000, were $201.6 million, an increase of 34.0% over net revenues of $150.4 million for the year ended June 30, 1999. The core business of sales through the television network accounted for 97.7% of net revenues. The remaining 2.3% of net revenues came from shopathometv.com.
Cost of Goods Sold. Cost of goods sold represents the purchase price of merchandise and freight. For the year ended June 30, 2000, the cost of goods sold as a percentage of net revenues increased to 66.4% from 62.1% for the year ended June 30, 1999. This increase is mainly due to a greater percentage of sales of lower-margin product categories and the decline of the collectible toy market (a high margin item). Margins were also negatively affected by an increase in credit card fraud.
Salaries and Wages. Salaries and wages for the year ended June 30, 2000, were $15.4 million, an increase of 53% compared to the year ended June 30, 1999. Salaries and wages as a percent of revenues increased to 7.7% from 6.7%. This increase was associated with the start-up of shopathometv.com and increased customer staffing needs due to greater sales volume.
Transponder and Affiliate. Transponder and affiliate costs for the year ended June 30, 2000, were $33.3 million, an increase of $7.0 million or 26.6% compared to the year ended June 30, 1999. The increase was primarily due to the addition of new affiliates and homes reached.
Advertising. Advertising costs for the year ended June 30, 2000, were $2.2 million, an increase of $1.7 million or 389.6% compared to the year ended June 30, 1999. The advertising is primarily paid to affiliates as part of their carriage agreement. Total transponder, affiliate and advertising expense rose to $35.5 million or an increase of 32.8%. At the same time, however, average full-time equivalent homes reached grew 33.1%
General and Administrative. General and administrative expenses for the year ended June 30, 2000, were $19.8 million, an increase of $7.1 million or 56.2% compared with the year ended June 30, 1999. As a percentage of revenues, this constituted an increase to 9.8% in 2000 from 9.1% in 1999. This increase was primarily due to the start-up costs associated with shopathometv.com and the enterprise-wide information system.
Depreciation and Amortization. Depreciation and amortization for the year ended June 30, 2000, was $8.4 million, an increase of $4.2 million or 99.3% compared to the year ended June 30, 1999. The primary components of this increase were the full year of amortization expense of the Bridgeport, Connecticut, station's FCC license acquired in June 1999, depreciation of Company's headquarters facilities acquired in September 1998 and depreciation of the enterprise-wide information system which became functional in October 1999.
Interest Expense. Interest expense for the year ended June 30, 2000, was $9.7 million, an increase of $0.7 million over the year ended June 30, 1999. The increase was due primarily to the interest on the Company's senior bank facility.
Interest Income. Interest income, from cash and cash equivalents, for the year ended June 30, 2000, was $0.7 million compared to $0.6 million in 1999. Average cash balances were similar year to year.
Income Tax (Benefit) Expense. Income tax (benefit) for the year ended June 30, 2000 was provided at an effective tax rate of 38%.
Liquidity and Capital Resources
The Company had $19.6 million of cash on hand at June 30, 2001. In addition, during August 2001, the Company executed and drew down a $17.5 million senior bank credit facility. This credit facility restricts the Company from issuing dividends on its common stock and has annual EBITDA requirements. Management believes that the facility, when combined with its cash position at June 30, 2001, is sufficient to fund the Company's operations during its turnaround period.
Nevertheless, during fiscal 2001, the Company experienced a large loss from operations of $43.2 million. If the Company is unable to reduce its operating losses significantly during fiscal 2002 and beyond, additional financing or asset sales will be required. However, there can be no assurance that the Company could obtain additional financing or that asset sales could be consummated. Also, some or all of the proceeds generated by asset sales could be required to repay the Company's indebtedness.
The Office of the Chairman has formulated a comprehensive turnaround plan for fiscal 2002. Significant reductions in affiliate charges have already been achieved since June 30, 2001. Payroll continues to be reduced. The turnaround plan, however, emphasizes multiple sales initiatives with the common goals of increasing shipped volume, reducing returns and improving margin (lowering cost of goods sold). The Company's merchandise mix, on-air presentation, customer service and vendor relationships are changing, and will continue to evolve during 2002, as management seeks revenue growth comparable to that of the competition. The Company has hired a new Executive Vice President of Sales and Merchandising who has substantial experience in similar positions with its largest competitor.
The Office of the Chairman believes its turnaround plan is sound and attainable. However, there can be no assurance that the Company will successfully implement its turnaround plan or that its plan is adequate.
If the Company fails to make sufficient progress in improving net revenues and gross profit before operating expenses, the latter may be reduced further. Also, the Company may be required to seek to amend certain operating performance covenants in its senior bank facility if its financial performance does not meet targets established in the turnaround plan. If the Company were unable to obtain waivers or amend its senior bank facility, then the lender could require repayment of the $17.5 million as well as put the Company in default, pursuant to cross default provisions, under its $75.0 million of Senior Secured Notes. The Company believes that it would be able to either obtain waivers or amendments to its senior bank facility or obtain additional sources of funding. However, there can be no assurance that the Company will be able to obtain waivers or amendments or obtain additional funding.
Capital Expenditures
The Company anticipates that its capital expenditure needs during fiscal 2002 will be moderate, consisting primarily of approximately $4.0 million for the build-out of the five owned television stations' digital transmission facilities. |
