HOME SHOPPING NETWORK INC, 10-Q, 1994-11-10

HOME SHOPPING NETWORK INC
10-Q, 1994-11-10
CATALOG & MAIL-ORDER HOUSES

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<PAGE> 1
[LOGO]
HOME
SHOPPING
NETWORK

FORM 10-Q

For the Quarter Ended
September 30, 1994
<PAGE> 2

- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------

FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994

/ / 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 1-9118
---------------

HOME SHOPPING NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 59-2649518
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

2501 118TH AVENUE NORTH, ST. PETERSBURG, FLORIDA 33716
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(813) 572-8585
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.

Total number of shares of outstanding stock (net of shares held in
treasury) as of November 1, 1994:

<TABLE>
<S> <C>
Common stock..................................... 74,418,629
Class B common stock............................. 20,000,000
</TABLE>

- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 3

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1994 1993 1994 1993
- - -------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET SALES..................................... $276,612 $260,462 $824,832 $750,147
Cost of sales................................. 178,992 170,340 533,410 510,944
-------- -------- -------- --------
Gross profit........................ 97,620 90,122 291,422 239,203
-------- -------- -------- --------
Operating expenses:
Selling and marketing....................... 36,529 34,729 113,775 98,765
Engineering and programming................. 24,721 23,453 73,754 68,874
General and administrative.................. 18,184 25,017 58,572 70,322
Depreciation and amortization............... 7,594 6,600 20,621 18,190
-------- -------- -------- --------
87,028 89,799 266,722 256,151
-------- -------- -------- --------
Operating profit (loss)............. 10,592 323 24,700 (16,948)
Other income (expense):
Interest income............................. 1,696 3,381 8,773 10,234
Interest expense............................ (779) (2,310) (4,955) (8,851)
Miscellaneous............................... 1,163 526 (1,089) (2,683)
-------- -------- -------- --------
2,080 1,597 2,729 (1,300)
-------- -------- -------- --------
Earnings (loss) before income taxes and
extraordinary item.......................... 12,672 1,920 27,429 (18,248)
Income tax expense (benefit).................. 5,323 805 11,521 (4,384)
-------- -------- -------- --------
Earnings (loss) before extraordinary item..... 7,349 1,115 15,908 (13,864)
Extraordinary item -- loss on early
extinguishment of long-term obligations, net
of taxes.................................... (924) -- (924) (7,242)
-------- -------- -------- --------
NET EARNINGS (LOSS)........................... $ 6,425 $ 1,115 $ 14,984 $(21,106)
======== ======== ======== ========
Earnings (loss) per common share:
Earnings (loss) before extraordinary item... $ .08 $ .01 $ .17 $ (.16)
Extraordinary item, net..................... (.01) -- (.01) (.08)
-------- -------- -------- --------
Net earnings (loss)......................... $ .07 $ .01 $ .16 $ (.24)
======== ======== ======== ========
Weighted average shares outstanding........... 95,053 94,769 95,094 90,401
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

1
<PAGE> 4

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer and broadcast equipment......................... 105,315 106,360 107,439
Buildings and leasehold improvements..................... 73,698 70,739 71,283
Furniture and other equipment............................ 43,115 47,714 48,091
-------- -------- ------------
222,128 224,813 226,813
Less accumulated depreciation and amortization......... 112,724 100,707 105,777
-------- -------- ------------
109,404 124,106 121,036
Land..................................................... 17,915 17,645 17,708
Construction in progress................................. 4,700 2,505 2,626
-------- -------- ------------
132,019 144,256 141,370
OTHER ASSETS
Note receivable from related party (net of current
maturity).............................................. -- 127,805 126,597
Cable distribution fees, net............................. 56,644 -- --
Long-term investment..................................... 10,000 7,764 10,000
Intangible assets, net................................... 7,706 2,571 2,658
Other assets............................................. 1,420 3,581 3,117
-------- -------- ------------
75,770 141,721 142,372
-------- -------- ------------
$450,278 $468,629 $501,143
======== ======== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

2
<PAGE> 5

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------- DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 1993
- - -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations.............. $ 1,710 $ 25,327 $ 25,345
Accounts payable......................................... 99,867 81,862 88,858
Accrued liabilities:
Cable distribution fees ($35,609 to related parties)... 40,218 -- --
Litigation settlements................................. 14,450 -- 16,000
Sales returns.......................................... 12,677 12,015 13,632
Sales taxes............................................ 6,709 9,013 9,481
Other.................................................. 40,265 41,272 40,446
Income taxes payable..................................... 5,705 10,674 15,586
-------- -------- ------------
Total current liabilities...................... 221,601 180,163 209,348
LONG-TERM OBLIGATIONS (net of current maturities)........ 2,706 87,166 86,927
DEFERRED INCOME TAXES.................................... 6,444 7,654 8,314
COMMITMENTS AND CONTINGENCIES............................ -- -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 500,000
shares, no shares issued and outstanding............... -- -- --
Common stock -- $.01 par value; authorized 150,000,000
shares, issued 77,515,329 and 72,289,106 shares at
September 30, 1994 and 1993, respectively, and
76,172,890 shares at December 31, 1993................. 775 723 762
Class B -- convertible common stock -- $.01 par value;
authorized, issued and outstanding, 20,000,000 and
24,159,456 shares at September 30, 1994 and 1993,
respectively, and 20,559,456 shares at December 31,
1993................................................... 200 242 206
Additional paid-in capital............................... 166,499 156,774 160,371
Retained earnings........................................ 67,767 54,458 52,783
Treasury stock -- 3,105,700 common shares, at cost....... (14,027) (14,027) (14,027)
Unearned compensation.................................... (1,687) (4,524) (3,541)
-------- -------- ------------
219,527 193,646 196,554
-------- -------- ------------
$450,278 $468,629 $501,143
======== ======== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

3
<PAGE> 6

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
CLASS B
CONVERTIBLE ADDITIONAL
COMMON COMMON PAID-IN RETAINED TREASURY UNEARNED
STOCK STOCK CAPITAL EARNINGS STOCK COMPENSATION TOTAL
- - ------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993..... $671 $ 242 $115,846 $ 75,564 $(14,027) $ (8,147) $170,149
Income tax benefit related to
executive stock award program
and stock options
exercised.................... -- -- 9,601 -- -- -- 9,601
Expense related to executive
stock award program.......... -- -- -- -- -- 4,632 4,632
Issuance of common stock upon
exercise of stock options.... 52 -- 30,303 -- -- -- 30,355
Unearned compensation related
to executive stock award
program...................... -- -- 1,009 -- -- (1,009) --
Issuance of common stock upon
conversion of debentures..... -- -- 15 -- -- -- 15
Net loss for the nine months
ended September 30, 1993..... -- -- -- (21,106) -- -- (21,106)
------ ----- ---------- --------- -------- ------------ --------
BALANCE AT SEPTEMBER 30,
1993......................... $723 $ 242 $156,774 $ 54,458 $(14,027) $ (4,524) $193,646
======== ========== ========= ========= ========= ============ =========

BALANCE AT JANUARY 1, 1994..... $762 $ 206 $160,371 $ 52,783 $(14,027) $ (3,541) $196,554
Income tax benefit related to
executive stock award program
and stock options
exercised.................... -- -- 1,840 -- -- -- 1,840
Expense related to executive
stock award program.......... -- -- -- -- -- 1,854 1,854
Issuance of common stock upon
exercise of stock options.... 7 -- 4,288 -- -- -- 4,295
Conversion of Class B common
stock to common stock........ 6 (6) -- -- -- -- --
Net earnings for the nine
months ended September 30,
1994......................... -- -- -- 14,984 -- -- 14,984
------ ----- ---------- --------- -------- ------------ --------
BALANCE AT SEPTEMBER 30,
1994......................... $775 $ 200 $166,499 $ 67,767 $(14,027) $ (1,687) $219,527
======== ========== ========= ========= ========= ============ =========
</TABLE>

The accompanying notes are an integral part of these statements.

4
<PAGE> 7

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1994 1993
- - ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................. $ 14,984 $ (21,106)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization...................................... 18,630 18,190
Amortization of cable distribution fees............................ 1,991 --
Deferred income taxes.............................................. 4,157 (9,737)
Inventory carrying value adjustment................................ (3,155) 13,735
Loss on disposition of wholly-owned subsidiary..................... 2,854 --
Common stock and stock appreciation rights issued for services
provided........................................................ 691 5,455
Provision for losses on accounts and notes receivable.............. 227 (124)
(Gain) loss on sale of assets...................................... 102 (270)
Equity in (earnings) losses of unconsolidated affiliates........... (51) 567
Loss on retirement of long-term obligations........................ 1,491 11,637
Liquidation of joint venture operation............................. -- 722
Change in current assets and liabilities:
Increase in accounts receivable................................. (10,543) (1,931)
(Increase) decrease in interest receivable from related party... 1,039 (1,048)
Increase in inventories......................................... (3,621) (100)
Increase in other current assets................................ (5,837) (1,887)
Increase in accounts payable.................................... 11,009 19,687
Increase in accrued liabilities and income taxes payable........ 27,882 7,659
Increase in cable distribution fees................................ (58,635) --
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 3,215 41,449
--------- ---------
Cash flows from investing activities:
Proceeds from long-term notes receivable........................... 131,587 3,281
Capital expenditures............................................... (13,000) (12,825)
Increase in intangible assets...................................... (3,789) (1,505)
(Increase) decrease in notes receivable and other.................. (5,708) 393
Proceeds from sale of assets....................................... 2,259 506
Increase in long-term investment................................... -- (539)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........ 111,349 (10,689)
--------- ---------
Cash flows from financing activities:
Principal payments on and redemption of long-term obligations...... (110,759) (206,286)
Proceeds from issuance of common stock............................. 4,295 30,355
Proceeds from unsecured credit facility............................ -- 150,000
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES...................... (106,464) (25,931)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 8,100 4,829
Cash and cash equivalents at beginning of period..................... 35,566 19,421
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 43,666 $ 24,250
========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

5
<PAGE> 8

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A -- BASIS OF PRESENTATION

The interim Condensed Consolidated Financial Statements of Home Shopping
Network, Inc. and Subsidiaries (the "Company") are unaudited and should be read
in conjunction with the audited Consolidated Financial Statements and Notes
thereto for the year ended December 31, 1993, the four months ended December 31,
1992 and the year ended August 31, 1992. Certain amounts in the Condensed
Consolidated Financial Statements for the nine month period ended September 30,
1993 have been reclassified to conform to the 1994 presentation.

In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items and nonrecurring
items discussed in Notes I and K. Interim results are not necessarily indicative
of results for a full year. The interim Condensed Consolidated Financial
Statements and Notes thereto are presented as permitted by the Securities and
Exchange Commission ("SEC") and do not contain certain information included in
the Company's annual Consolidated Financial Statements and Notes thereto.

NOTE B -- ACCOUNTS AND NOTES RECEIVABLE, NET

On August 16, 1994, the Company loaned $5.0 million, the maximum available
under the terms of an unsecured line of credit agreement, dated July 31, 1992,
to its former wholly-owned subsidiary, Precision Systems, Inc. This amount,
together with accrued interest at the rate of 1% over prime, is due on July 31,
1995.

NOTE C -- NOTE AND INTEREST RECEIVABLE FROM RELATED PARTY

On August 1, 1994, Silver King Communications, Inc. ("SKC") repaid the
outstanding principal and accrued interest of $129.7 million on its obligation
to the Company. On the same date, the Company repaid the remaining $85.0 million
outstanding balance on its Senior Term Loans. The original terms of the loan to
SKC provided for principal repayments through December 2007 along with interest
at 9.5% per annum on any unpaid principal amounts.

NOTE D -- CABLE DISTRIBUTION FEES

During the nine months ended September 30, 1994, the Company committed to
long-term cable contracts which provide for payments of distribution fees to
cable system operators totaling $58.6 million, representing carriage to 12.8
million cable subscribers. These fees are amortized to expense, on a
straight-line basis, over the term of the respective contracts which range from
5 to 15 years. This amortization totaled $2.0 million for the nine months ended
September 30, 1994.

NOTE E -- LONG-TERM INVESTMENT

The Company has a $10.0 million investment consisting of 100,000 shares of
Series A non-voting preferred stock, $.01 par value, of The National Registry
Inc. ("NRI"); which is accounted for under the cost method. This investment is
convertible into 6.0 million shares of NRI common stock at the Company's option,
however, conversion to common stock is automatic in the event that cumulative
gross revenues for NRI reach $15.0 million. Two of the Company's executive
officers serve as directors of NRI. J. Anthony Forstmann, a director of the
Company, is Co-Chairman, President, Chief Executive Officer and principal owner
of NRI and had voting rights with respect to 62.1% of NRI's common stock as of
October 17, 1994.

NRI's management has recently indicated that it believes the adequacy of
cash resources and the ability to maintain and/or continue operations, will be
dependent upon NRI's ability to achieve sales and obtain additional capital to
continue, among other things, the development, testing and marketing of its
products.

6
<PAGE> 9

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Furthermore, NRI's management has indicated that there is no guarantee that such
additional funds will be available on terms acceptable to NRI, if at all.

An accurate valuation of the NRI investment is not readily determinable. At
certain times during the quarter, multiplying the trading price of the common
stock by the number of underlying common shares resulted in an amount that was
less than the cost of the Company's investment. Using this valuation method, at
November 8, 1994, the value of the investment exceeded cost by $3.3 million.
Because the Company's investment would convert to common shares, representing
23.3% of NRI's outstanding common stock, the Company might not be able to sell
its holdings without adversely affecting the market price of the common stock.
Therefore, the amount realized in the event of a sale by the Company may be less
than market value.

Based upon information currently available, management is unable to form an
opinion as to whether the market decline, discussed above, was other than
temporary. As such, no valuation allowance has been provided in the accompanying
Condensed Consolidated Financial Statements. The maximum exposure on the NRI
investment is the $10.0 million carrying value. Management of the Company is
continuing to evaluate the carrying value of the NRI investment.

NOTE F -- BUSINESS COMBINATION

On September 1, 1994, a wholly-owned subsidiary of the Company purchased
all the outstanding shares of Internet Software, Inc. ("ISN") for a total of
$5.0 million consisting of cash and $2.9 million of notes payable. The purchase
method of accounting was used to account for this business combination. Goodwill
acquired in connection with this transaction is being amortized over three
years.

Operations include the results of ISN from its acquisition date. The
results of operations prior to the date of acquisition, were not significant to
the Company's consolidated results of operations and therefore pro forma effects
are not presented.

NOTE G -- RELATED PARTY TRANSACTIONS

Included in "Accrued liabilities -- Cable distribution fees" is $35.6
million payable to companies that are related to the Company through their
ownership interest, voting control, board members or common ownership. A total
of $8.3 million is payable in October 1994, and the remaining $27.3 million is
payable by April 1995. Under these agreements, the cable distribution fees at
September 30, 1994, of $39.1 million, are amortized over periods ranging from 10
to 15 years, and relate to carriage to 8.2 million cable subscribers.

On September 23, 1994, RMS Limited Partnership, a Nevada limited
partnership ("RMS"), and Liberty Media Corporation ("Liberty") entered into an
Option Amendment Agreement (the "Option Amendment") which amended the
irrevocable assignable option for Liberty to purchase from RMS 2.0 million
shares of Class B common stock of SKC for $2.0 million plus interest from
February 11, 1993. Under the Option Amendment, RMS agreed to extend the exercise
period of the option agreement to February 11, 1999. RMS and Liberty further
agreed to amend, among other terms, the exercise price to $1.25 per share
through February 11, 1995, with such exercise price increasing in the amount of
$.25 each year thereafter.

On August 4, 1994, Liberty and Tele-Communications, Inc. ("Old TCI")
consummated a business combination resulting in Old TCI and Liberty becoming
wholly-owned subsidiaries of a newly formed holding company, which has been
renamed Tele-Communications, Inc. ("New TCI"). Consequently, New TCI
beneficially owns 79.3% of the voting power of the Company.

7
<PAGE> 10

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE H -- COMMITMENTS AND CONTINGENCIES

1. Litigation

On December 27, 1990, a customer of Home Shopping Club, Inc. ("HSC") filed
an amended class action complaint against the Company styled Mauger v. Home
Shopping Network, Inc., in the Court of Common Pleas, Philadelphia County,
Pennsylvania. Plaintiff alleged violation of the Pennsylvania Unfair Trade
Practices and Consumer Protection Law in relation to the Company's pricing
practices with respect to diamond and imitation diamond jewelry. Plaintiff seeks
certification of the class, compensatory damages or $100 per class member,
treble damages, attorney's fees, costs, interest and other relief. Plaintiff
claims that the diamond ring she purchased from HSC was not of the same value
stated in the appraisal provided to the customer.

On June 22, 1991, another customer of HSC filed a class action complaint
against the Company, styled Powell v. Home Shopping Network, Inc., making
similar allegations concerning jewelry purchased from HSC and seeking similar
relief.

On April 19, 1993, the Mauger and Powell cases were consolidated in the
Court of Common Pleas of Bucks County, Pennsylvania (Case No. 91-6152-20-1). On
May 4, 1993, the Court entered an order granting the plaintiffs' motion for
class certification and declared the plaintiffs to be class representatives and
the class to be "all Pennsylvania residents who purchased any jewelry containing
diamonds or imitation diamonds from Home Shopping Network, Inc.'s subsidiary,
Home Shopping Club, Inc., between December 27, 1984 and May 20, 1991." On July
23, 1993, the court denied the Company's motion for interlocutory appeal of the
May 4, 1993 order. The Company believes that it has meritorious defenses and
intends to continue vigorously defending this action.

In 1993, the Company became aware that the SEC entered a formal order of
investigation involving matters relating to, among other things, certain of the
Company's SEC filings and other public disclosures. The Company has furnished
documents in connection with this investigation and is cooperating in the
investigation while maintaining its legal privileges, including the
attorney/client privilege. This is a nonpublic investigation and the scope of
the investigation is confidential. The Company has been advised that this
inquiry should not be construed as an indication by the SEC or its staff that
any violations of law have occurred, nor should it be considered a reflection
upon any person, entity or security.

The Company is a defendant in a number of other class action lawsuits. The
Company has agreed to settlements in these lawsuits, but they are subject to
certain contingencies, including court approval. In 1993, the Company recorded
$13.0 million in litigation expense to cover anticipated costs related to such
settlements.

The Company is also involved in various other lawsuits either as plaintiff
or defendant. In the opinion of management, the ultimate outcome of these other
lawsuits should not have a material impact on the Company's liquidity, results
of operations or financial condition.

2. Credit Facility

On August 30, 1994, the Company's revolving credit facility was amended and
increased from $40.0 million to $100.0 million expiring on August 30, 1997.
Borrowings under the credit facility may be used for general corporate purposes.
The interest rate on borrowings under the credit line is tied to LIBOR plus a
margin based on the Company's total debt to operating cash flow ratio.
Restrictions contained in the credit agreement include maintenance of various
financial covenants and ratios. At November 10, 1994, the entire $100.0 million
credit facility remained available.

8
<PAGE> 11

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE I -- OTHER INCOME (EXPENSE)

Miscellaneous expense for the nine month period ended September 30, 1994,
includes a $2.9 million loss on the sale of the common stock of the Company's
former wholly-owned subsidiary, HSN Mistix Corporation.

Miscellaneous expense for the nine month period ended September 30, 1993,
includes nonrecurring costs of $2.6 million for inventory contributed to charity
and additional costs totaling $1.2 million, relating to the curtailment of a
joint venture operation.

NOTE J -- INCOME TAXES

The Internal Revenue Service ("IRS") conducted examinations of the
Company's federal income tax returns for fiscal years 1986 through 1989 and
proposed various adjustments. On June 8, 1994, the Company and the IRS agreed to
settle all of the outstanding issues with the exception of the deductibility of
royalty payments made to a then related party. In August 1994, the Company paid
the assessments related to all the issues except royalty payments, totaling
$15.0 million including interest, covering all taxable periods through August
31, 1993. These assessments had previously been accrued.

On September 9, 1994, the IRS issued a statutory Notice of Deficiency for
fiscal years 1986 through 1989 related to the royalty payments issue. The
Company believes it has meritorious positions regarding the deductibility of
these payments and is currently studying its various alternatives, but has made
an adequate provision for this issue.

The Company's federal income tax returns for fiscal years 1990 and 1991 are
currently under examination by the IRS. No proposed adjustments relating to such
years, other than those discussed above, have been brought to management's
attention.

NOTE K -- EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM
OBLIGATIONS

For the quarter and nine month periods ended September 30, 1994, the
Company recognized an extraordinary loss of $.9 million, net of an income tax
benefit of $.6 million, on the early extinguishment of the entire $85.0 million
outstanding balance of senior unsecured term loans, which had original
maturities through January 1998.

There was no early extinguishment of long-term obligations during the three
month period ended September 30, 1993. For the nine month period ended September
30, 1993, the Company recognized an extraordinary loss, totaling $7.2 million,
net of an income tax benefit of $4.4 million, on the early extinguishment of
$160.2 million of long-term obligations.

NOTE L -- EARNINGS (LOSS) PER COMMON SHARE

The computation of primary earnings (loss) per common share is based on the
weighted average number of outstanding shares of common stock for all periods
presented. Primary earnings per common share for the three and nine month
periods ended September 30, 1994 and the three month period ended September 30,
1993, also include common stock equivalents based on the weighted average
balance outstanding. Fully diluted earnings (loss) per common share did not
differ significantly from primary earnings (loss) per common share in any
period.

NOTE M -- STATEMENTS OF CASH FLOWS

For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
auction preferred shares, money market funds and repurchase agreements with
maturities of less than 91 days.

9
<PAGE> 12

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Supplemental disclosures of cash flow information:

During the quarter ended September 30, 1994 the Company issued notes
payable in connection with a business combination, as discussed in Note F.

10
<PAGE> 13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES

GENERAL

Home Shopping Network, Inc. (the "Company") is a holding company, the
subsidiaries of which conduct the day-to-day operations of the Company's various
business activities. The Company's primary business is electronic retailing
conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the
Company.

A. CONSOLIDATED RESULTS OF OPERATIONS

The following discussion presents the material changes in the consolidated
results of operations of the Company which have occurred in the third quarter
and first nine months of 1994, compared with the same periods in 1993. Reference
should also be made to the Condensed Consolidated Financial Statements included
herein.

All tables and discussion included herein calculate the percentage changes
using actual dollar amounts, versus rounded dollar amounts.

NET SALES

HSC's retail sales programs are transmitted twenty-four hours a day, seven
days a week, via satellite to cable television systems, affiliated broadcast
television stations and satellite dish receivers. HSC produces three separate
retail sales programs, HSN 1, HSN 2, and HSN Spree. HSN 1 is carried by cable
television systems throughout the country and is the original HSC programming
network. HSN 2 is carried by independent broadcast television stations. HSN 2 is
also carried by cable television systems which primarily retransmit the
broadcast television signal of one of the broadcast television stations carrying
HSN 2. HSN Spree is carried primarily on a part-time basis by both cable
television systems and broadcast television stations.

For the quarter and nine month periods ended September 30, 1994, net sales
for the Company increased $16.1 million, or 6.2%, to $276.6 million from $260.5
million and $74.7 million, or 10.0%, to $824.8 million from $750.1 million,
respectively, compared to the same periods in 1993. Net sales of HSC increased
$18.1 million, or 7.5%, and $73.3 million, or 10.6%, for the quarter and nine
months ended September 30, 1994. HSC's sales reflect increases of 29.6% and
23.2% in the number of packages shipped for the quarter and nine months ended
September 30, 1994, respectively, while the average price per unit sold
decreased in both 1994 periods compared to the same periods in 1993. In
addition, sales through the Company's retail outlets for the quarter and nine
months ended September 30, 1994, increased $1.7 million and $5.9 million,
respectively, compared to the same periods last year. The increases for the
quarter and nine months ended September 30, 1994 were primarily offset by
declines in sales of $4.4 million and $6.2 million, respectively, attributable
to the sale in the second quarter of 1994 of the Company's former wholly-owned
subsidiary, HSN Mistix Corporation ("Mistix"). The sale of Mistix should not
have a significant impact on the Company's net sales or results of operations in
future periods.

The sales increases in the quarter and nine month periods ended September
30, 1994, compared to the same periods last year are the continuation of a trend
that began in the latter part of the third quarter of 1993. However, it should
be noted that sales for the quarter and nine months ended September 30, 1993,
were down $1.2 million, or .5%, and $44.5 million, or 5.6%, respectively, from
the comparable 1992 periods. Nonetheless, management believes that 1994 sales
levels have been positively affected by several factors, most significantly the
addition of new cable subscribers beginning in September 1993 as a result of the
"must carry" provisions of the cable re-regulation law, as further discussed
below. An additional factor is the improvements initiated during 1993 in the
merchandising management and sales philosophy of HSC. Ongoing programs to
increase sales include the "FlexPay" program, which allows customers to pay for
purchases in several equal

11
<PAGE> 14

installments, changes in show host training and scheduling, enhanced use of
sales promotions and a private label credit card which offers customer
incentives. Sales increases from ongoing programs were partially offset by
higher sales discounts, which increased to 2.7% and 2.6% of HSC sales for the
quarter and nine months ended September 30, 1994, respectively, from 1.4% and
1.7% compared to the same periods in 1993.

The Company is taking other steps which are designed to improve sales and
gross profit margins and to reduce merchandise return rates. Since June 30, 1994
the Company has appointed new senior management personnel with expertise in
merchandising. The Company is also evaluating new product sources and programs
to boost customer loyalty including a greater variety of products and exclusive
brands.

For the quarter ended September 30, 1994, the merchandise return percentage
increased to 22.9% from 21.0%, compared to the same period in 1993. In addition,
the merchandise return percentage for the quarter ended September 30, 1994,
increased from 21.0% for the second quarter of 1994, reflecting a trend of
increased returns in recent months in jewelry and electronics merchandise
categories which typically experience higher rates of return than other
merchandise categories. Management is evaluating the product mix and is taking
other steps in the area of merchandising, as discussed above, in an attempt to
reduce the merchandise return rate. However, a change in product mix and
merchandising, if and when implemented, could also have an effect on sales
volume and gross profit. For the nine month period ended September 30, 1994, the
merchandise return percentage decreased to 22.2% from 22.5%, compared to the
same period in 1993. This decrease is primarily attributable to an unusually
high merchandise return percentage experienced in the first quarter of 1993.

The Company believes that future levels of net sales of HSC will be
dependent, in large part, on increases in program carriage, market penetration
and further improvements in merchandising management. Program carriage is
defined as the number of cable systems and broadcast television stations that
carry HSC programming. Market penetration represents the level of active
purchasers within a market.

Cable television systems and affiliated broadcast television stations
broadcast HSC programming under affiliation agreements. The Company seeks to
increase the number of cable systems and broadcast television stations that
televise HSC programming while evaluating the expected profitability of each
contract.

On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). The mandatory
broadcast signal carriage or "must carry" provisions of the 1992 Cable Act
require cable system operators to carry the signals of local commercial and
noncommercial broadcast television stations. The Federal Communications
Commission (the "FCC") adopted rules to implement these "must carry" provisions
and, on July 2, 1993, the FCC extended "must carry" eligibility to television
stations that are predominantly utilized for the transmission of sales
presentations or program length commercials, which would include shop-at-home
programs such as those transmitted by HSC. Litigation has been initiated
challenging, among other matters, the constitutionality of the mandatory
broadcast signal carriage requirements of the 1992 Cable Act. On April 8, 1993,
the federal district court for the District of Columbia upheld the
constitutionality of the mandatory signal carriage requirements of the 1992
Cable Act. In a multi-opinion decision released on June 27, 1994, the U.S.
Supreme Court declined to rule on the constitutionality of the "must carry"
rules. Instead, the Supreme Court remanded the case to the District Court to
permit development of a full, factual record concerning the need for these
rules. Pending judicial resolution, the "must carry" rules remain in effect.
Therefore, the HSN 2 programming carried by HSC's broadcast affiliates is being
retransmitted by cable operators located within the broadcast markets.

During the nine months ended September 30, 1994, due to the possibility of
"must carry" being found unconstitutional, the Company embarked on an aggressive
campaign to bring the "must carry" households under contract, by volunteering to
pay commissions to cable operators retransmitting HSN 2. As an additional
contract incentive, the Company offered to make payments of cable distribution
fees, primarily consisting of up-front payments, based on the number of
subscribers committed to the contract by the cable operator. In exchange for
these payments, the Company required significant long-term commitments of up to
fifteen years, with an average term of ten years, for the current programming
carriage and additional carriage of HSC's HSN 1 programming. Such payments are
being amortized, on a straight-line basis, over the lives of the

12
<PAGE> 15

contracts. See "Depreciation and Amortization" and "Financial Position,
Liquidity and Capital Resources." Most of this new carriage will be in place by
year end.

Management believes that providing incentive compensation to cable
operators, such as that described above, has been a factor in securing program
carriage. HSC has, in certain markets, also guaranteed a minimum level of
commissions or performance bonus commissions based upon the sales levels of HSC
programming in the cable operator's franchise area.

During the twelve months ended September 30, 1994, cable television
households capable of receiving HSC programming increased by 6.2 million, or
19.5%, to 38.0 million unduplicated cable households. This growth was achieved
primarily through increased cable system carriage of signals transmitted by the
Company's broadcast affiliates due to the implementation of "must carry"
beginning in September 1993. As a result, the number of homes classified as
cable television households increased and the number classified as broadcast
households declined. Because HSC programming is now on a cable channel line-up,
these former broadcast households can now more easily access the HSC
programming.

During the same period, broadcast television households, in areas
unduplicated by HSC cable television households, decreased by 3.3 million, or
12.2%, to 23.9 million households. This decrease was primarily attributable to
the shift in classification of 4.6 million households from broadcast to cable.
This decrease was offset, in part, by an increase of 1.0 million broadcast
television households due to changes in the composition of HSC's affiliated
broadcast television station group, and an increase of .3 million households in
the updated Nielsen household counts in the areas in which HSC broadcasts. In
addition, as of September 30, 1994, HSC's programming was available to 3.8
million households with satellite dish receivers.

Broadcast affiliation agreements generally call for fixed hourly payments
to stations for broadcasting HSC's programming. With the exception of the
agreements with broadcast television stations owned and operated by Silver King
Communications, Inc. ("SKC"), HSC may, with proper notice, raise or lower the
hourly rate, however, the affiliated station may cancel the agreement upon such
a change. The affiliation agreements with SKC expire in December 1997 but are
automatically renewable at SKC's option for a five-year term, unless written
notice is given at least 18 months prior to the expiration date. As discussed in
Note C to the Condensed Consolidated Financial Statements, included herein, and
in "Financial Position, Liquidity and Capital Resources," SKC repaid its loan
from the Company with proceeds from a bank loan. SKC's bank loan agreement
provides that cancellation, suspension or termination of any affiliation
agreement is an event of default. The Company is not a party to such loan
agreement and, therefore, would not be entitled to enforce such restrictive
provisions.

During the remainder of 1994, 1.2 million cable subscribers, or 3.2% of the
total number of unduplicated cable households receiving HSC programming,
exclusive of "must carry" subscribers, are subject to termination or renewal.
The Company is pursuing both renewals and additional cable television system
contracts, but channel availability, competition, cost of carriage and cable
re-regulation are some of the factors affecting the negotiations for cable
television system contracts. Although management cannot determine the percentage
of expiring contracts that will be renewed or the number of households that will
be added through new contracts, management believes that a majority of the
contracts will be renewed.

Market penetration typically lags behind increases in carriage. As a result
of the increase in carriage in 1993, the Company has seen a slight improvement
of market penetration. As the new households mature, the Company expects market
penetration to improve, but there can be no assurance that this will occur.

The Company is evaluating new marketing programs aimed at increasing
consumer awareness of HSC programming to further improve market penetration.

In the quarter ended September 30, 1994, the Company announced the
commencement of two ventures: one, HSN Direct Joint Venture, is producing and
airing infomercials, and the other is testing a new television shopping program
in conjunction with another cable programmer. Also in the quarter ended
September 30, 1994, the Company expanded its role in computer on-line
interactive shopping through the acquisition of Internet Software, Inc. ("ISN")
which markets merchandise over the Internet. The Company intends to expand this
service. In addition, in October 1994, the Company launched two on-line stores
over interactive

13
<PAGE> 16

on-line computer services. Recently, the Company determined that it would delay
the launch of its new shopping service, Television Shopping Mall, until mid to
late 1995. The Company is also engaged in discussions with various entities to
explore other new business opportunities. The pursuit of these potential
business opportunities may include the creation of new business entities,
development and distribution of broadcast and cable television programming,
changes in the Company's broadcast relationships and/or expansion in the
carriage of the Company's programming by operators of cable television systems.
There can be no assurance that the Company will be able to reach agreements with
the necessary parties to pursue these business opportunities. As in the past,
the Company intends to continue to explore ways to develop and enhance its
business. Accordingly, it will continue to discuss various business
opportunities with media, cable programming, broadcast television, cable
television, retail and entertainment entities and continue to take steps it
believes will enhance its core business. However, the impact of these actions on
the Company's business cannot be determined.

COST OF SALES

For the quarter and nine month periods ended September 30, 1994, cost of
sales increased $8.7 million, or 5.1%, to $179.0 million from $170.3 million and
$22.5 million, or 4.4%, to $533.4 million from $510.9 million, respectively,
compared to the same periods in 1993. As a percentage of net sales, cost of
sales decreased to 64.7% from 65.4% and to 64.7% from 68.1% for the quarter and
nine months ended September 30, 1994, respectively, compared to the same periods
in 1993.

Cost of sales of HSC increased $10.0 million and $24.8 million, for the
quarter and nine months ended September 30, 1994, respectively. As a percentage
of HSC sales, cost of sales decreased to 66.5% from 67.3% and to 66.4% from
69.8% for the quarter and nine month periods ended September 30, 1994, compared
to the same periods in 1993.

For the quarter ended September 30, 1994, the decrease in the consolidated
and HSC's cost of sales percentages was primarily attributable to a change in
product mix that included higher gross margin items. The decreases in
consolidated and HSC's cost of sales percentages for the nine months ended
September 30, 1994 relate primarily to an additional adjustment of $20.1 million
made to HSC's inventory carrying amount in the quarter ended March 31, 1993, in
connection with the change in management's merchandising philosophy. In
addition, cost of sales for the Company's retail outlets for the quarter and
nine month periods ended September 30, 1994, increased $.9 million and $2.7
million, respectively, compared to the same periods last year.

The remaining decreases in cost of sales for the quarter and nine month
periods ended September 30, 1994, compared to the same periods in 1993, are
primarily attributable to the sale of Mistix, as discussed in "Net Sales."

OPERATING EXPENSES

For the quarter and nine month periods ended September 30, 1994, operating
expenses decreased $2.8 million, or 3.1%, to $87.0 million from $89.8 million,
and increased $10.5 million, or 4.1%, to $266.7 million from $256.2 million,
respectively, compared to the same periods in 1993. As a percentage of net
sales, these expenses decreased to 31.5% from 34.5% and to 32.3% from 34.1% for
the quarter and nine month periods ended September 30, 1994, respectively,
compared to the same periods in 1993.

14
<PAGE> 17

The following table highlights the operating expense section from the
Company's Condensed Consolidated Statements of Operations, including the dollar
and percentage changes for the quarter and nine month periods ended September
30, 1994, compared to the same periods in 1993:

<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
-------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1994
---------------------------- ----------------------------
$ $ % $ $ %
AMOUNT CHANGE CHANGE AMOUNT CHANGE CHANGE
- - -----------------------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing................. $36.5 $ 1.8 5.2 % $113.8 $ 15.0 15.2 %
Engineering and programming........... 24.7 1.2 5.4 73.8 4.9 7.1
General and administrative............ 18.2 (6.8 ) (27.3) 58.5 (11.8) (16.7)
Depreciation and amortization......... 7.6 1.0 15.1 20.6 2.4 13.4
------ ------ ------ ------
$87.0 $(2.8 ) $266.7 $ 10.5
====== ===== ====== ======
</TABLE>

SELLING AND MARKETING

For the quarter and nine month periods ended September 30, 1994, selling
and marketing expenses increased $1.8 million, or 5.2%, to $36.5 million from
$34.7 million, and $15.0 million, or 15.2%, to $113.8 million from $98.8
million, respectively, compared to the same periods in 1993. As a percentage of
net sales, these expenses decreased to 13.2% from 13.3% and increased to 13.8%
from 13.2%, for the quarter and nine month periods ended September 30, 1994,
respectively, compared to the same periods in 1993.

The major components of selling and marketing expenses are detailed below,
including the dollar and percentage changes for the quarter and nine month
periods ended September 30, 1994, compared to the same periods in 1993:

<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
CERTAIN SELLING AND MARKETING EXPENSES
-------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1994
---------------------------- ----------------------------
$ $ % $ $ %
AMOUNT CHANGE CHANGE AMOUNT CHANGE CHANGE
- - -----------------------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C> <C> <C>
Telephone, operator and customer
service............................. $12.9 $ 2.3 20.2 % $39.7 $ 6.7 20.2 %
Commissions to cable system
operators........................... 12.9 4.2 48.6 34.4 10.7 44.9
Marketing payments for cable
advertising......................... 3.7 (4.6 ) (55.6 ) 19.2 (3.8 ) (16.5 )
</TABLE>

Telephone, operator and customer service expenses are typically related to
sales, call volume and the number of packages shipped, and for the quarter and
nine month periods ended September 30, 1994, compared to the same periods last
year, these expenses increased as a result of these factors. These expenses are
expected to fluctuate in relation to sales, call volume and package volume in
future periods.

For the quarter and nine month periods ended September 30, 1994,
commissions to cable system operators increased primarily as a result of higher
sales volume, compared to the same periods in 1993. However, commissions to
cable system operators increased at a higher rate than sales as a result of
increased cable system carriage of signals transmitted by the Company's
broadcast affiliates due to the implementation of the "must carry" provisions of
the cable re-regulation law, and due to additional performance bonus commissions
based upon the sales levels of HSC programming in the cable operator's franchise
area, as discussed in "Net Sales." Such sales performance bonus commissions are
expected to remain at these levels in future periods. In addition, cable
operators which have executed affiliation agreements to carry HSN 2 are
compensated for all sales of HSN 2 within their franchise areas, regardless of
whether a customer's order results from watching the program via cable,
satellite dish, or on a broadcast television station. Thus, with the advent of
"must carry," HSC is paying commissions to cable operators in addition to the
hourly affiliation payments made to broadcast television stations resulting in
higher commission expense and higher total

15
<PAGE> 18

operating expenses. As a result of the above factors, cable carriage expense is
expected to remain at higher levels in future periods. As discussed in "Net
Sales," management believes that because HSC programming is now available on a
cable channel line-up, these former broadcast households can more easily access
the HSC programming.

Marketing payments for cable advertising, primarily related to previous
contractual commitments, decreased for the quarter and nine month periods ended
September 30, 1994, compared to the same periods in 1993. As older agreements
expire or are renegotiated and new cable carriage agreements are executed,
contractual commitments to purchase cable advertising are being replaced by
other forms of incentive compensation to cable operators. These include payment
of cable distribution fees, as discussed in "Depreciation and Amortization," and
performance bonus commissions, as discussed above. Accordingly, marketing
payments are expected to continue to decrease and depreciation and amortization
is expected to increase in future periods.

The remaining net increase in selling and marketing expenses is
attributable to other advertising and promotional expenses and the Company's
other subsidiary operations. Management believes that total selling and
marketing expenses in future periods will be at higher levels as the Company
maintains its efforts to increase the number of cable systems carrying HSC
programming, increase market penetration and develop new electronic retailing
opportunities.

ENGINEERING AND PROGRAMMING

For the quarter and nine month periods ended September 30, 1994,
engineering and programming expenses increased $1.2 million, or 5.4%, to $24.7
million from $23.5 million, and $4.9 million, or 7.1%, to $73.8 million from
$68.9 million, respectively, compared to the same periods in 1993. As a
percentage of net sales, these expenses decreased to 8.9% from 9.0% and to 8.9%
from 9.2%, respectively, compared to the same periods in 1993.

Increases in expense related to additional broadcast affiliates totaled
$1.1 million and $3.4 million, respectively, compared with the quarter and nine
months ended September 30, 1993. In addition, under affiliation agreements with
SKC, based on sales within their markets for the quarter and nine months ended
September 30, 1994, the Company has accrued additional broadcast commission
expense. The payment of this additional amount, however, is dependent on sales
levels for the remainder of 1994.

Broadcast costs are expected to be at these higher levels for the remainder
of 1994. Moreover, as the Company develops new programming and telemarketing
opportunities and attempts to expand its broadcast television reach for existing
programming, overall engineering and programming expenses are expected to
increase in future periods.

GENERAL AND ADMINISTRATIVE

For the quarter and nine month periods ended September 30, 1994, general
and administrative expenses decreased $6.8 million, or 27.3%, to $18.2 million
from $25.0 million and $11.8 million, or 16.7%, to $58.5 million from $70.3
million, respectively, compared to the same periods in 1993. As a percentage of
net sales, these expenses decreased to 6.6% from 9.6% and to 7.1% from 9.4%,
respectively, compared to the same periods in 1993.

For the quarter and nine month periods ended September 30, 1994, consulting
and stockholder relations expenses decreased $1.4 million and $4.7 million,
respectively, due to expenses incurred in the same periods in 1993, in
connection with a merger proposal by Liberty Media Corporation ("Liberty")
following the acquisition, in February 1993, of a controlling interest in the
Company by a wholly-owned subsidiary of Liberty. Expenses in connection with the
Company's executive stock award program, stock appreciation rights granted in
1993, reserves for potential sales tax issues, legal expense, repairs and
maintenance and equipment rental decreased $4.7 million and $8.5 million for the
quarter and nine month periods ended September 30, 1994, respectively, compared
to the same periods in 1993. The above decreases were partially offset by

16
<PAGE> 19

increases for the quarter and nine month periods ended September 30, 1994,
totaling $.2 million and $2.3 million, respectively, in payroll expense and
settlement of litigation.

Based on present circumstances, management expects general and
administrative expenses to remain at these lower levels in future periods.

DEPRECIATION AND AMORTIZATION

For the quarter and nine month periods ended September 30, 1994,
depreciation and amortization increased $1.0 million, or 15.1%, to $7.6 million
from $6.6 million and $2.4 million or 13.4% to $20.6 million from $18.2 million,
respectively, compared to the same periods in 1993. The increases were primarily
attributable to the amortization of cable distribution fees, which totaled $1.3
million and $2.0 million for the quarter and nine months ended September 30,
1994, respectively, and which are expected to total approximately $2.0 million
per quarter in 1995 based on existing agreements. This amortization could
increase if additional up-front payments are made in connection with new
long-term cable system contracts. The balance of the increase in depreciation
and amortization for the nine months ended September 30, 1994, is attributable
to capital asset additions during the twelve months ended September 30, 1994.
Accordingly, depreciation and amortization will be higher in future periods.

OTHER INCOME (EXPENSE)

For the quarter and nine month periods ended September 30, 1994, the
Company had net other income of $2.1 million and $2.7 million, respectively,
compared to net other income of $1.6 million and net other expense of $(1.3)
million for the same periods in 1993.

Interest income decreased $1.7 million and $1.5 million for the quarter and
nine months ended September 30, 1994, respectively, compared to the same periods
in 1993, due to the repayment by SKC, in August 1994, of its indebtedness to the
Company, as discussed in "Financial Position, Liquidity and Capital Resources."
Accordingly, interest income is expected to remain at these lower levels in
future periods.

Interest expense decreased $1.5 million and $3.9 million for the quarter
and nine months ended September 30, 1994, primarily relating to the repayment by
the Company, in August 1994, of its remaining term loan balance, as discussed in
"Financial Position, Liquidity and Capital Resources." Accordingly, interest
expense will remain at these lower levels in future periods unless the Company
utilizes its existing credit facility.

For the quarter ended September 30, 1994, net miscellaneous income
increased compared to the same period in 1993 primarily due to the receipt of
proceeds from a lawsuit settlement totaling $.8 million. An additional $.7
million is expected to be received in the fourth quarter of 1994. For the nine
months ended September 30, 1994, net miscellaneous expense includes a $(2.9)
million loss on the sale of Mistix. The sale of Mistix should not have a
significant impact on the Company's operating results in future periods. Net
miscellaneous expense for the nine months ended September 30, 1993 includes
nonrecurring costs totaling $3.8 million. See Note I to the Condensed
Consolidated Financial Statements included herein.

INCOME TAXES

The Company's effective tax rate was 42.0% for the quarters ended September
30, 1994 and 1993 and for the nine months ended September 30, 1994, and a
benefit of (24.0)% for the nine months ended September 30, 1993. The Company's
effective tax rate for these periods differed from the statutory rate due
primarily to the amortization of goodwill and other acquired intangible assets
relating to acquisitions from prior years, state income taxes and the provision
for interest on adjustments proposed by the Internal Revenue Service ("IRS"), as
discussed in Note J to the Condensed Consolidated Financial Statements included
herein. The Company's effective tax rate is expected to vary from the statutory
rate for the remainder of 1994. In 1995, the Company anticipates a decrease in
its effective tax rate.

17
<PAGE> 20

EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS

In the quarter ended September 30, 1994, the Company repaid the remaining
$85.0 million outstanding balance on its Senior Term Loans. In the nine months
ended September 30, 1993, the Company refinanced and retired the remaining
$143.3 million of its Senior Notes and retired the remaining $16.9 million of
its 5 1/2% Convertible Subordinated Debentures. These transactions resulted in
extraordinary items -- loss on early extinguishment of long-term obligations,
net of taxes for the quarter and nine month periods ended September 30, 1994,
and the nine month period ended September 30, 1993, as discussed in Note K to
the Condensed Consolidated Financial Statements included herein.

NET EARNINGS (LOSS)

The Company had net earnings of $6.4 million, or $.07 per share, for the
quarter ended September 30, 1994, compared to net earnings of $1.1 million, or
$.01 per share, for the same quarter in 1993. For the nine month period ended
September 30, 1994, the Company had net earnings of $15.0 million, or $.16 per
share, compared to a net loss of $(21.1) million, or $(.24) per share, in the
same period in 1993. The increases in net earnings for the quarter and nine
months ended September 30, 1994, were primarily attributable to increases in net
sales of $16.1 million and $74.7 million, respectively, and increases in gross
profit of $7.5 million and $52.2 million, respectively, compared to the same
periods in 1993. As discussed in "Cost of Sales," the results for the nine
months ended September 30, 1993, include an additional adjustment in the
inventory carrying amount, which affected "Cost of Sales" and "Other Income
(Expense)." As previously discussed, the Company has recorded the loss on the
sale of the common stock of Mistix. Included in the results for the nine months
ended September 30, 1994, is a pre-tax loss for Mistix of $(1.6) million. In
addition, the consolidated results include extraordinary losses, net of taxes,
of $(.9) million, or $(.01) per share, for both the quarter and nine month
periods ended September 30, 1994, and $(7.2) million, or $(.08) per share, for
the nine month period ended September 30, 1993.

SEASONALITY

The Company believes that seasonality does impact its business but not to
the same extent it impacts the retail industry in general.

B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The following table highlights various balances and ratios from the
Condensed Consolidated Financial Statements included herein:

<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
SEPTEMBER 30,
----------------- DECEMBER 31,
1994 1993 1993
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital (millions)................................... $ 20.9 $ 2.5 $ 8.1
Current ratio................................................ 1.09:1 1.01:1 1.04:1
Accounts receivable, net (millions).......................... $ 44.7 $ 14.3 $ 27.8
Inventories, net (millions).................................. $117.7 $105.4 $110.9
Inventory turnover for quarter
(annualized for September periods only).................... 6.51 6.47 6.12
Inventory turnover for nine months
(annualized for September periods only).................... 6.22 6.07 6.12
</TABLE>

The increase in working capital from September 30, 1993, to September 30,
1994, primarily relates to net earnings, adjusted for non-cash items, of $51.1
million, proceeds from the issuance of common stock upon the exercise of
employee and cable operator stock options of $5.8 million and a $130.1 million
net decrease in long-term notes receivable and other assets, which were offset
by a net reduction of $87.4 million in long-term obligations, and capital
expenditures and increases in cable distribution fees and intangible assets of
$78.6 million. The increase in working capital from December 31, 1993, to
September 30, 1994, primarily relates to

18
<PAGE> 21

net earnings adjusted for non-cash items of $43.7 million, proceeds from the
issuance of common stock upon the exercise of employee and cable operator stock
options of $4.3 million and a $130.5 million net decrease in long-term notes
receivable and other assets, which were offset by a net reduction of $87.1
million in long-term obligations, and capital expenditures and increases in
cable distribution fees and intangible assets of $75.4 million.

Accounts receivable increased to $44.7 million at September 30, 1994, from
$14.3 million at September 30, 1993, and from $27.8 million at December 31,
1993. The primary reason for the increase is "FlexPay" sales which resulted in
accounts receivable totaling $25.8 million at September 30, 1994, compared to
$3.0 million and $15.3 million at September 30, 1993, and December 31, 1993,
respectively. The Company's financing of "FlexPay" accounts receivable has not
had a significant impact on its liquidity position.

Receivables from customer sales using the Company's private label credit
card are sold to a third party under a non-recourse financing arrangement. The
financial impact of this financing arrangement is similar to customer purchases
on other third party cards.

On August 1, 1994, SKC repaid the outstanding principal and accrued
interest of $129.7 million on its obligation to the Company, which bore interest
at 9.5%. On the same date, the Company repaid the remaining $85.0 million
outstanding balance on its Senior Term Loans. As a result of the above
repayments, the Company's cash position significantly improved and interest
income and interest expense declined for the quarter and nine month periods
ended September 30, 1994, and are expected to remain at current levels in future
periods. Under terms of affiliation agreements with SKC, the broadcast stations
are obligated to carry the Company's programming until December 1997. See "Net
Sales."

Inventories increased to $117.7 million at September 30, 1994, from $105.4
million at September 30, 1993, and from $110.9 million at December 31, 1993. The
inventory balance is net of a carrying adjustment of $22.1 million at September
30, 1994, which represents a decrease from $26.8 million at September 30, 1993,
and from $25.2 million at December 31, 1993. The carrying adjustment decrease
from September 30, 1993 and December 31, 1993 to September 30, 1994, relates
primarily to the liquidation of merchandise. The increases in the gross
inventory balance at September 30, 1994, from September 30, 1993, and December
31, 1993, were $7.6 million and $3.7 million, respectively, and represent
increased purchases in anticipation of the holiday season. Inventory levels are
expected to increase in line with sales increases.

Capital expenditures for the quarter ended September 30, 1994, were $5.5
million. These expenditures were primarily for additional telecommunications
equipment, technological upgrades and development of telemarketing
opportunities. The Company estimates capital expenditures will range between
$5.0 and $6.0 million for the remainder of 1994, and between $14.0 and $16.0
million for 1995.

The Company's working capital needs and capital expenditure requirements
for the quarter ended September 30, 1994, were met from funds provided by
operations. Surplus funds were invested in short-term investments.

In August 1994, the Company paid $15.0 million, including interest, to the
IRS relating to the audit settlement, as discussed in Note J to the Condensed
Consolidated Financial Statements included herein, using available cash. During
the remainder of 1994 and in early 1995, management expects to pay the Company's
portion of certain litigation settlements, totaling $9.6 million, and cable
distribution fees, currently totaling $40.2 million, relating to contracts with
cable system operators to carry HSC programming. The Company intends to use
available cash, internally generated funds, or its amended bank facility to meet
these obligations.

On August 30, 1994, the Company's $40.0 million revolving credit facility
was amended and increased to $100.0 million, as discussed in Note H to the
Condensed Consolidated Financial Statements included herein.

As of October 31, 1994, the Company had $65.0 million of bank credit lines
which back letters of credit and are used exclusively to facilitate inventory
imports. Presentation of letters of credit by vendors results in an immediate
charge to the Company's account with no interest charges incurred. Outstanding
letters of credit amounted to $16.7 million at October 31, 1994, leaving $48.3
million available.

19
<PAGE> 22

For the quarter ended September 30, 1994, the Company did not pay any cash
dividends and does not anticipate paying cash dividends in the immediate future.

On September 1, 1994, a wholly-owned subsidiary of the Company purchased
all the outstanding shares of ISN for a total of $5.0 million consisting of cash
and $2.9 million of notes payable.

At November 7, 1994, .7 million options to purchase the Company's common
stock were outstanding and exercisable at prices ranging between $3.25 and
$14.75. The exercise of such stock options would result in a cash inflow of $3.2
million to the Company.

20
<PAGE> 23

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.

HOME SHOPPING NETWORK, INC.
(Registrant)

Dated November 10, 1994 /s/ KEVIN J. MCKEON
---------------------------- -----------------------------------------------
Kevin J. McKeon
Senior Vice President, Accounting & Finance
and Treasurer
(Duly Authorized Officer)

Dated November 10, 1994 /s/ BRIAN J. FELDMAN
---------------------------- -----------------------------------------------
Brian J. Feldman
Controller
(Chief Accounting Officer)
</TABLE>

21
<PAGE> 24
[LOGO]
HOME
SHOPPING
NETWORK
<PAGE> 25
INDEX TO EXHIBITS

Exhibit
Number Description
- - ------ -----------

EX-27 Financial Data Schedule
(for SEC use only)

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS CONDENSED CONSOLIDATED FINANCIAL DATA FROM THE FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 43,666
<SECURITIES> 0
<RECEIVABLES> 44,709
<ALLOWANCES> 0
<INVENTORY> 117,706
<CURRENT-ASSETS> 242,489
<PP&E> 244,743
<DEPRECIATION> 112,724
<TOTAL-ASSETS> 450,278
<CURRENT-LIABILITIES> 221,601
<BONDS> 2,706
<COMMON> 775
0
0
<OTHER-SE> 218,752
<TOTAL-LIABILITY-AND-EQUITY> 450,278
<SALES> 824,832
<TOTAL-REVENUES> 824,832
<CGS> 533,410
<TOTAL-COSTS> 533,410
<OTHER-EXPENSES> 266,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,955
<INCOME-PRETAX> 27,429
<INCOME-TAX> 11,521
<INCOME-CONTINUING> 15,908
<DISCONTINUED> 0
<EXTRAORDINARY> 924
<CHANGES> 0
<NET-INCOME> 14,984
<EPS-PRIMARY> .16
<EPS-DILUTED> .16

</TABLE>