<PAGE> 1
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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 June 30, 1994
OR
/ / 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 August 1, 1994:
<TABLE>
<S> <C>
Common stock.............. 74,388,629
Class B common stock...... 20,000,000
</TABLE>
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1994 1993 1994 1993
- - -------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET SALES....................................... $274,005 $250,264 $548,220 $489,685
Cost of sales................................... 178,803 162,723 354,418 340,604
-------- -------- -------- --------
Gross profit............................... 95,202 87,541 193,802 149,081
-------- -------- -------- --------
Operating expenses:
Selling and marketing......................... 39,078 32,293 77,246 64,036
Engineering and programming................... 24,809 22,923 49,033 45,421
General and administrative.................... 20,134 23,872 40,388 45,305
Depreciation and amortization................. 6,932 5,887 13,027 11,590
-------- -------- -------- --------
90,953 84,975 179,694 166,352
-------- -------- -------- --------
Operating profit (loss).................... 4,249 2,566 14,108 (17,271)
Other income (expense):
Interest income............................... 3,628 3,397 7,077 6,853
Interest expense.............................. (2,089) (2,565) (4,176) (6,541)
Miscellaneous................................. (2,498) 55 (2,252) (3,209)
-------- -------- -------- --------
(959) 887 649 (2,897)
-------- -------- -------- --------
Earnings (loss) before income taxes and
extraordinary item............................ 3,290 3,453 14,757 (20,168)
Income tax expense (benefit).................... 1,382 1,452 6,198 (5,189)
-------- -------- -------- --------
Earnings (loss) before extraordinary item....... 1,908 2,001 8,559 (14,979)
Extraordinary item -- loss on early
extinguishment of long-term obligations, net
of taxes...................................... -- (399) -- (7,242)
-------- -------- -------- --------
NET EARNINGS (LOSS)............................. $ 1,908 $ 1,602 $ 8,559 $(22,221)
======== ======== ======== ========
Earnings (loss) per common share:
Earnings (loss) before extraordinary item..... $ .02 $ .02 $ .09 $ (.17)
Extraordinary item, net....................... -- -- -- (.08)
-------- -------- -------- --------
Net earnings (loss)........................... $ .02 $ .02 $ .09 $ (.25)
======== ======== ======== ========
Weighted average shares outstanding............. 94,949 92,129 95,008 89,122
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
1
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HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
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JUNE 30,
--------------------- DECEMBER 31,
ASSETS 1994 1993 1993
- - -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 28,852 $ 21,425 $ 35,566
Accounts receivable, net............................... 29,271 15,274 27,849
Note and interest receivable from related party........ 130,007 5,508 5,707
Inventories, net....................................... 102,421 105,265 110,930
Deferred income taxes.................................. 24,693 18,349 29,279
Other, net............................................. 10,523 9,452 8,070
-------- -------- ------------
Total current assets......................... 325,767 175,273 217,401
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer and broadcast equipment....................... 104,089 105,857 107,439
Buildings and leasehold improvements................... 72,810 70,193 71,283
Furniture and other equipment.......................... 42,467 46,660 48,091
-------- -------- ------------
219,366 222,710 226,813
Less accumulated depreciation and
amortization............................... 108,264 95,440 105,777
-------- -------- ------------
111,102 127,270 121,036
Land................................................... 17,695 16,617 17,708
Construction in progress............................... 3,321 4,032 2,626
-------- -------- ------------
132,118 147,919 141,370
OTHER ASSETS
Note receivable from related party (net of current
maturity)............................................ -- 128,986 126,597
Cable distribution fees, net........................... 32,535 -- --
Long-term investment................................... 10,000 7,589 10,000
Intangible assets, net................................. 2,691 2,565 2,658
Other assets and notes receivable...................... 2,555 4,044 3,117
-------- -------- ------------
47,781 143,184 142,372
-------- -------- ------------
$505,666 $466,376 $501,143
======== ======== ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
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JUNE 30,
--------------------- DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 1993
- - -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations............ $ 85,947 $ 25,325 $ 25,345
Accounts payable....................................... 84,992 80,919 88,858
Income taxes payable................................... 14,732 14,077 15,586
Accrued liabilities:
Cable distribution fees ($19,128 to related
parties).......................................... 24,368 -- --
Litigation settlements............................... 14,450 -- 16,000
Sales returns........................................ 11,638 11,552 13,632
Sales taxes.......................................... 5,791 7,652 9,481
Other................................................ 41,399 32,998 40,446
-------- -------- ------------
Total current liabilities.................... 283,317 172,523 209,348
LONG-TERM OBLIGATIONS (net of current maturities)...... 1,255 117,199 86,927
DEFERRED INCOME TAXES.................................. 8,978 7,108 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 77,458,979 and 70,204,663 shares at
June 30, 1994 and 1993, respectively, and 76,172,890
shares at December 31, 1993.......................... 775 702 762
Class B -- convertible common stock -- $.01 par value;
authorized, issued and outstanding, 20,000,000 and
24,159,456 shares at June 30, 1994 and 1993,
respectively, and 20,559,456 shares at December 31,
1993................................................. 200 242 206
Additional paid-in capital............................. 166,108 135,656 160,371
Retained earnings...................................... 61,342 53,343 52,783
Treasury stock -- 3,105,700 common shares, at cost..... (14,027) (14,027) (14,027)
Unearned compensation.................................. (2,282) (6,370) (3,541)
-------- -------- ------------
212,116 169,546 196,554
-------- -------- ------------
$505,666 $466,376 $501,143
======== ======== ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
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CLASS B
CONVERTIBLE ADDITIONAL UNEARNED
COMMON COMMON PAID-IN RETAINED TREASURY COMPEN-
STOCK STOCK CAPITAL EARNINGS STOCK SATION 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............. -- -- 41 -- -- -- 41
Expense related to
executive stock award
program............... -- -- -- -- -- 2,720 2,720
Issuance of common stock
upon exercise of stock
options............... 31 -- 18,811 -- -- -- 18,842
Unearned compensation
related to executive
stock award program... -- -- 943 -- -- (943 ) --
Issuance of common stock
upon conversion of
debentures............ -- -- 15 -- -- -- 15
Net loss for the six
months ended June 30,
1993.................. -- -- -- (22,221 ) -- -- (22,221)
------ ----------- ---------- -------- -------- -------- --------
BALANCE AT JUNE 30,
1993.................. $702 $ 242 $135,656 $53,343 $(14,027) $(6,370 ) $169,546
======== ========== ========= ======== ======== ========= ========
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............. -- -- 1,763 -- -- -- 1,763
Expense related to
executive stock award
program............... -- -- -- -- -- 1,259 1,259
Issuance of common stock
upon exercise of stock
options............... 7 -- 3,974 -- -- -- 3,981
Conversion of Class B
common stock to common
stock................. 6 (6) -- -- -- -- --
Net earnings for the six
months ended June 30,
1994.................. -- -- -- 8,559 -- -- 8,559
------ ----------- ---------- -------- -------- -------- --------
BALANCE AT JUNE 30,
1994.................. $775 $ 200 $166,108 $61,342 $(14,027) $(2,282 ) $212,116
======== ========== ========= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------
1994 1993
- - ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................... $ 8,559 $ (22,221)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization.................................. 12,381 11,590
Amortization of cable distribution fees........................ 646 --
Deferred income taxes.......................................... 5,250 (4,378)
Increase (decrease) in inventory reserve....................... (3,427) 14,740
Loss on disposition of wholly-owned subsidiary................. 2,854 --
Common stock and stock appreciation rights issued for services
provided..................................................... 682 2,720
Provision for losses on accounts and notes receivable.......... 217 (101)
(Gain) loss on sale of assets.................................. 144 (7)
Equity in (earnings) losses of unconsolidated affiliates....... (93) 532
Loss on retirement of long-term obligations.................... -- 11,637
Liquidation of joint venture operation......................... -- 722
Change in current assets and liabilities:
Increase in accounts receivable.............................. (1,605) (2,744)
(Increase) decrease in interest receivable from related
party....................................................... 18 (1,056)
(Increase) decrease in inventories........................... 11,936 (952)
Increase in other current assets............................. (2,453) (2,557)
Increase (decrease) in accounts payable...................... (3,866) 18,744
Increase (decrease) in accrued liabilities and income taxes
payable..................................................... 19,573 (7,773)
Increase in cable distribution fees.......................... (33,181) --
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 17,635 18,896
-------- ---------
Cash flows from investing activities:
Capital expenditures.............................................. (7,404) (10,133)
Proceeds from long-term notes receivable.......................... 2,320 2,024
Proceeds from sale of assets...................................... 2,086 21
Increase in intangible assets..................................... (993) (954)
(Increase) decrease in notes receivable and other................. 731 (73)
Increase in long-term investment.................................. -- (364)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES..................... (3,260) (9,479)
-------- ---------
Cash flows from financing activities:
Principal payments on and redemption of long-term obligations..... (25,070) (166,255)
Proceeds from issuance of common stock............................ 3,981 18,842
Proceeds from unsecured credit facility........................... -- 140,000
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES..................... (21,089) (7,413)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ (6,714) 2,004
Cash and cash equivalents at beginning of period.................... 35,566 19,421
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 28,852 $ 21,425
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- 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.
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 5, 7 and 10. 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 2 -- CABLE DISTRIBUTION FEES
During the three months ended June 30, 1994, the Company committed to
long-term cable contracts which provide for payments of distribution fees to
cable system operators totaling $33.2 million, representing coverage to 9.2
million cable subscribers. These fees are amortized, over the term of the
respective contracts, on a straight-line basis over periods ranging from 5 to 15
years.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Included in "Accrued liabilities -- Cable distribution fees" is $19.1
million, payable by April 1995 to companies that are related to the Company
through their ownership interest, voting control, board members or common
ownership. The commitment at June 30, 1994, under these agreements, of $19.3
million, will be amortized over periods ranging from 10 to 15 years, and
represents coverage to 5.2 million cable subscribers.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
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
6
<PAGE> 8
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company accrued $13.0
million at December 31, 1993, to cover anticipated costs and expenses primarily
related to such settlements.
Effective May 2, 1994, the Company, Liberty Media Corporation ("Liberty"),
and Messrs. Roy M. Speer, Gerald F. Hogan and John M. Draper (the "Settling
Defendants") entered into a settlement agreement with Mr. Allen P. Allweiss
pursuant to which, on May 5, 1994, Mr. Allweiss dismissed all claims against the
Settling Defendants, and the Company dismissed its counterclaim against Mr.
Allweiss. The terms of the settlement are confidential and were reflected in the
Company's financial statements for the quarter ended March 31, 1994.
The Company has been informed that the federal grand jury investigation in
the Middle District of Florida, relating to the Company, has ended. The Company
had previously been advised by the federal government that the Company was not a
target of the grand jury investigation.
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 adverse impact on the Company's financial
condition.
NOTE 5 -- OTHER INCOME (EXPENSE)
Miscellaneous expense for the three and six month periods ended June 30,
1994, includes a $2.9 million loss on the proposed sale of the common stock of
the Company's wholly-owned subsidiary, HSN Mistix, Inc.
Miscellaneous expense for the six month period ended June 30, 1993,
includes nonrecurring costs of $2.6 million for inventory contributed to charity
as a result of the change in management's merchandising philosophy regarding the
types of merchandise sold on HSC and additional costs totaling $1.2 million,
relating to the curtailment of a joint venture operation.
NOTE 6 -- INCOME TAXES
The Internal Revenue Service ("IRS") has completed its examination of the
Company's federal income tax returns for fiscal years 1986 through 1989. The IRS
has proposed various adjustments, the most significant of which include the
Company's amortization of acquired Federal Communications Commission broadcast
licenses and other broadcasting related intangible assets and the deduction of
royalty payments to a related party.
The Company has protested all proposed adjustments to the Appellate
Division of the IRS. On April 19, 1994, the Company received a formal settlement
offer from the IRS relating to all issues under protest, excluding the royalty
payments to a related party. The Company accepted this offer on June 8, 1994,
and the net assessment (after considering the tax deductibility of interest) is
expected to be approximately $15.0 million, covering all periods through June
30, 1994. The Company has previously accrued sufficient amounts relating to
these issues.
The Company's federal income tax returns for fiscal years 1990 and 1991 are
currently under examination by the IRS. No additional proposed adjustments
relating to such years have been brought to management's attention.
7
<PAGE> 9
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM
OBLIGATIONS
There was no early extinguishment of long-term obligations during the three
or six month periods ended June 30, 1994. For the three and six month periods
ended June 30, 1993, the Company recognized extraordinary losses on the early
extinguishment of long-term obligations of $.4 million and $7.2 million, net of
taxes of $.3 million and $4.4 million, respectively.
NOTE 8 -- 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 six month periods
ended June 30, 1994 and the three month period ended June 30, 1993, also
includes 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 9 -- 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
commercial paper, auction preferred shares, money market funds, repurchase
agreements, and certificates of deposit with maturities of less than 91 days.
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
-------------------
1994 1993
--------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash paid for:
Interest......................................................... $4,640 $9,051
Income taxes..................................................... 39 2,803
</TABLE>
NOTE 10 -- SUBSEQUENT EVENTS
On August 1, 1994, Silver King Communications, Inc. 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. As a consequence, at June 30,
1994, the Company classified the remaining balance of the "Note receivable from
related party" as a current asset, and the remaining balance owed on the Senior
Term Loans as a current liability.
In connection with the term loan repayment, the Company will recognize an
extraordinary loss on the early extinguishment of long-term obligations, of $.9
million, net of taxes, in the third quarter of 1994.
In August 1994, the Company received a commitment for a revolving credit
facility which will amend and increase the Company's current facility from $40.0
million to $100.0 million. Borrowings under the credit facility may be used for
general corporate purposes. The interest rate on borrowings under the credit
line is tied to the LIBOR plus a margin based on the total debt to operating
cash flow ratio. Restrictions contained in the credit agreement include
maintenance of various financial covenants and ratios.
On August 4, 1994, Liberty and Tele-Communications, Inc. ("Old TCI")
consummated a business combination transaction 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.
8
<PAGE> 10
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 second quarter
and first six 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 six month periods ended June 30, 1994, net sales for
the Company increased $23.7 million, or 9.5%, to $274.0 million from $250.3
million and $58.5 million, or 12.0%, to $548.2 million from $489.7 million,
respectively, compared to the same periods in 1993. Net sales of HSC increased
$21.8 million, or 9.5%, and $55.2 million, or 12.3%, for the quarter and six
months ended June 30, 1994. HSC's sales reflect increases of 28.9% and 20.1% in
the number of packages shipped for the quarter and six months ended June 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 six months ended June 30, 1994,
increased $1.8 million and $4.2 million, respectively, compared to the same
periods last year. The increases for the six months ended June 30, 1994 were
somewhat offset by a decline in sales attributable to the Company's mail order
subsidiary, HSN Mail Order, Inc., of $.8 million.
The sales increases in the quarter and six month periods ended June 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 six months ended June 30, 1993, were
down $7.2 million, or 2.8%, and $43.3 million, or 8.1%, 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. Additional ongoing
programs to increase sales include the "FlexPay" program, which allows customers
to pay for purchases in several equal installments, changes in show host
training and scheduling, enhanced use of promotional selling events, sales
incentives, and the recent introduction of a private label credit card which
offers customer incentives. Sales increases from ongoing programs were partially
offset by increases in cash discounts, which have increased to 2.9% and 2.6% of
HSC sales for the quarter and six months ended June 30, 1994, respectively, from
1.4% and 1.8% compared to the same periods in 1993.
9
<PAGE> 11
For the quarter and six month periods ended June 30, 1994, the merchandise
return percentage remained constant at 21.0% and decreased to 21.9% from 23.8%,
respectively, compared to the same periods in 1993. The decrease in the
merchandise return percentage during the first six months of 1994 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 with varying original
terms. The Company seeks to increase the number of cable television systems and
broadcast television stations that televise HSC programming while evaluating the
expected profitability of each contract. During the twelve months ended June 30,
1994, cable television households capable of receiving HSC programming increased
by 7.2 million, or 25.2%, to 35.6 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
the "must carry" provisions of the cable re-regulation law 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 5.3 million, or
17.7%, to 24.4 million households. This decrease was primarily attributable to
the shift in classification of 6.4 million households from broadcast to cable.
This decrease was offset, in part, by an increase of .8 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 June 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 and, with proper notice, with the exception of affiliated broadcast
television stations owned and operated by Silver King Communications, Inc.
("SKC"), are generally cancelable or provide for adjustments in the hourly rate
paid, at HSC's or the affiliated station's option. 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 10 to the Condensed Consolidated
Financial Statements, included herein, and in "Financial Position, Liquidity and
Capital Resources" SKC repaid the outstanding principal and accrued interest
owed to the Company with proceeds from a bank financing. The terms of SKC's bank
financing contain restrictive covenants with regard to amendment or modification
of material contracts. SKC's loan agreement further provides that cancellation,
suspension or termination of any affiliation agreement is an event of default.
HSN is not a party to such loan agreements and, therefore, would not be entitled
to enforce such restrictive provisions.
During the remainder of 1994, 1.3 million cable subscribers, or 3.8% 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 is optimistic that a majority of the
contracts will be renewed.
During the six months ended June 30, 1994, the Company continued several
incentive programs designed to increase the total number of cable subscribers
able to receive HSC programming and to increase penetration in both cable and
broadcast television markets. Overall, as a result of these incentive programs
the Company has successfully, on a long-term basis, renewed expiring contracts,
contracted a majority of the "must carry" households and secured contracts for
new cable carriage exclusive of "must carry." During this period, however,
market penetration levels weakened somewhat. Management believes that one reason
for the
10
<PAGE> 12
weakened market penetration is that it typically lags behind increases in
program carriage. As most of the increase in program carriage levels occurred in
the latter part of 1993 and early 1994, management expects some improvement in
market penetration during the remainder of 1994.
Management believes that providing incentive compensation to cable
operators is a factor in securing program carriage. HSC has, in certain markets,
guaranteed a minimum level of commissions to cable operators which agree to
carry HSC programming or offered additional performance bonus commissions based
upon the sales levels of HSC programming in the cable operator's franchise area.
In addition, beginning in April 1994, the Company signed agreements with certain
cable system operators wherein the Company agreed to make payments of cable
distribution fees in exchange for the cable system operators' commitments to
carry HSC's programming for a period of up to fifteen years. Such payments are
being amortized, on a straight-line basis, over the lives of the contracts. See
"Depreciation and Amortization" and "Financial Position, Liquidity and Capital
Resources." Another form of incentive compensation is the purchase of cable
advertising time, which has resulted in an increase in marketing payments for
the six months ended June 30, 1994 compared to the same period in 1993. These
are further discussed in "Selling and Marketing." Programs to increase market
penetration included buyer incentives which provide Club Members with discounts
on merchandise purchased from HSC. For example, the Company targets existing
Club Members through the "Bargaineer" magazine which, among other features,
offers discounts on HSC purchases and provides a schedule of HSC's retail sales
television programs.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). The signal
carriage or "must-carry" provisions of the 1992 Cable Act require cable
operators to carry the signals of local commercial and noncommercial 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 distributed by HSC. Litigation
has been initiated challenging, among other matters, the constitutionality of
the mandatory broadcast signal carriage requirements of the new law. On April 8,
1993, a special three-judge panel of the federal district court for the District
of Columbia issued a decision upholding the constitutional validity of the
mandatory signal carriage requirements of the 1992 Cable Act. In a multi-opinion
decision released on June 27, 1994, the Supreme Court declined to rule on the
constitutionality of the "must-carry" rules. Instead, the Court remanded the
case to the District Court to permit development of a full, factual record
concerning the need for these rules. The Court is expected to resolve the rules'
constitutionality after this record is complete.
The Company is considering a variety of strategies to further increase
carriage of HSC programming and continues to evaluate the impact of the "must
carry" provisions on its broadcast relationships. The cable re-regulation law
and its interpretation, which is still forthcoming, will have a broad impact
upon the Company and its ability to contract new program carriage. The Company
is aggressively pursuing new contracts for program carriage in the event "must
carry" is ruled unconstitutional and, as of June 30, 1994, the Company had
executed contracts with cable operators covering 6.5 million "must carry"
households. As of the same date, there were 2.2 million "must carry" households
not under contract, but management believes the Company will be able to secure
contracts for the continued carriage of a majority of these remaining
households, in the event "must carry" is reversed.
Recently, the Company announced the formation of two ventures, one an
infomercial company which will produce and air infomercials worldwide, and the
other which will test a new television shopping program in conjunction with
another cable television programmer. 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
11
<PAGE> 13
business. Accordingly, it will continue to discuss various business
opportunities with media, cable programming, broadcast television, cable
television, retail and entertainment entities.
COST OF SALES
For the quarter and six month periods ended June 30, 1994, cost of sales
increased $16.1 million, or 9.9%, to $178.8 million from $162.7 million and
$13.8 million, or 4.1%, to $354.4 million from $340.6 million, respectively,
compared to the same periods in 1993. As a percentage of net sales, cost of
sales increased to 65.3% from 65.0% and decreased to 64.6% from 69.6% for the
quarter and six months ended June 30, 1994, respectively, compared to the same
periods in 1993.
Cost of sales of HSC increased $16.0 million and $14.8 million, for the
quarter and six months ended June 30, 1994, respectively. As a percentage of HSC
sales, cost of sales remained relatively constant for the quarter ended June 30,
1994 and decreased to 66.3% from 71.2% for the six months ended June 30, 1994,
compared to the same periods in 1993.
For the quarter ended June 30, 1994, the increase in the consolidated cost
of sales percentage was primarily attributable to the liquidation of merchandise
and increased sales through the Company's retail outlets, which were partially
offset by an inventory reserve reduction of $4.9 million. The decreases in
consolidated and HSC's cost of sales percentages for the six months ended June
30, 1994 relate primarily to an additional provision of $20.1 million made to
HSC's inventory reserve in the quarter ended March 31, 1993, in connection with
the change in management's merchandising philosophy.
The remaining change in cost of sales for the six months ended June 30,
1994, compared to the six months ended June 30, 1993, is attributable to other
subsidiary operations.
OPERATING EXPENSES
For the quarter and six month periods ended June 30, 1994, operating
expenses increased $6.0 million, or 7.0%, to $91.0 million from $85.0 million
and $13.3 million, or 8.0%, to $179.7 million from $166.4 million, respectively,
compared to the same periods in 1993. As a percentage of net sales, these
expenses decreased to 33.2% from 34.0% and to 32.8% from 34.0% for the quarter
and six month periods ended June 30, 1994, respectively, compared to the same
periods in 1993.
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 six month periods ended June 30,
1994, compared to the same periods in 1993:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGES IN OPERATING EXPENSES
---------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1994 JUNE 30, 1994
----------------- -----------------
$ % $ %
CHANGE CHANGE CHANGE CHANGE
<CAPTION>
-------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C>
Selling and marketing....................... $ 6.8 21.0 % $13.2 20.6 %
Engineering and programming................. 1.9 8.2 3.6 8.0
General and administrative.................. (3.7 ) (15.7 ) (4.9 ) (10.9 )
Depreciation and amortization............... 1.0 17.8 1.4 12.4
------ ------
$ 6.0 $13.3
======= =======
</TABLE>
SELLING AND MARKETING
For the quarter and six month periods ended June 30, 1994, selling and
marketing expenses increased $6.8 million, or 21.0%, to $39.1 million from $32.3
million, and $13.2 million, or 20.6%, to $77.2 million from $64.0 million,
respectively, compared to the same periods in 1993. As a percentage of net
sales, these expenses increased to 14.3% from 12.9% and to 14.1% from 13.1%,
respectively, compared to the same periods in 1993.
12
<PAGE> 14
The changes in the major components of selling and marketing expenses are
detailed below in dollar and percentage terms for the quarter and six month
periods ended June 30, 1994, compared to the same periods in 1993:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
CHANGES IN CERTAIN SELLING
AND MARKETING EXPENSES
---------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1994 JUNE 30, 1994
----------------- -----------------
$ % $ %
CHANGE CHANGE CHANGE CHANGE
-------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C>
Telephone, operator and customer service.... $2.9 26.9% $4.3 19.8%
Commissions to cable system operators....... 3.5 45.6 6.5 42.7
Marketing payments for cable advertising.... -- -- .8 5.3
</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
six month periods ended June 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 six month periods ended June 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 compensation is expected to increase 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
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.
Although marketing payments for cable advertising increased for the six
months ended June 30, 1994, these expenses remained constant for the quarter
ended June 30, 1994, compared to the same periods in 1993, as cable advertising
purchases primarily relate to previous contractual commitments. As 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 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 six month periods ended June 30, 1994, engineering and
programming expenses increased $1.9 million, or 8.2%, to $24.8 million from
$22.9 million and $3.6 million, or 8.0%, to $49.0 million
13
<PAGE> 15
from $45.4 million, respectively, compared to the same periods in 1993. As a
percentage of net sales, these expenses decreased to 9.1% from 9.2% and to 8.9%
from 9.3%, respectively, compared to the same periods in 1993.
Increases in expense related to additional broadcast affiliates totaled
$1.0 million and $2.3 million, respectively, compared with the quarter and six
months ended June 30, 1993. In addition, under affiliation agreements with SKC,
based on sales within their markets for the quarter and six months ended June
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 six month periods ended June 30, 1994, general and
administrative expenses decreased $3.7 million, or 15.7%, to $20.1 million from
$23.9 million and $4.9 million, or 10.9%, to $40.4 million from $45.3 million,
respectively, compared to the same periods in 1993. As a percentage of net
sales, these expenses decreased to 7.3% from 9.5% and to 7.4% from 9.3%,
respectively, compared to the same periods in 1993.
For the quarter and six month periods ended June 30, 1994, consulting and
stockholder relations expenses decreased $.2 million and $3.2 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 $4.4 million and $7.0 million for the
quarter and six month periods ended June 30, 1994, respectively, compared to the
same periods in 1993. The above decreases were partially offset by increases for
the quarter and six month periods ended June 30, 1994 totaling $.7 million and
$2.1 million, respectively, in payroll expense and settlement of litigation.
Management expects general and administrative expenses to remain at these
lower levels during the remainder of 1994 compared to the same period in 1993.
DEPRECIATION AND AMORTIZATION
For the quarter and six month periods ended June 30, 1994, depreciation and
amortization increased $1.0 million, or 17.8%, to $6.9 million from $5.9 million
and $1.4 million or 12.4% to $13.0 million from $11.6 million, respectively,
compared to the same periods in 1993. The increases were primarily attributable
to the amortization of cable distribution fees, which totaled $.7 million for
both the quarter and six months ended June 30, 1994, and which are expected to
total approximately $1.0 million per quarter for the remainder of 1994. The
balance of the increases was attributable to capital asset additions during the
twelve months ended June 30, 1994. Accordingly, depreciation and amortization
will be higher for the remainder of 1994 compared to the same period in 1993.
OTHER INCOME (EXPENSE)
For the quarter and six month periods ended June 30, 1994, the Company had
net other expense of $(1.0) million and net other income of $.6 million,
respectively, compared to net other income of $.9 million and net other expense
of $(2.9) million for the same periods in 1993.
Interest income did not change significantly for the quarter and six months
ended June 30, 1994 compared to the same periods in 1993. However, as discussed
in "Financial Position, Liquidity and Capital Resources," subsequent to June 30,
1994, SKC repaid its indebtedness to the Company. Accordingly, interest income
is expected to decline significantly in future periods.
14
<PAGE> 16
Interest expense decreased $.5 million and $2.4 million for the quarter and
six months ended June 30, 1994, primarily relating to the redemption and
refinancing of the Company's 11 3/4% Senior Notes (the "Senior Notes") in 1993.
As discussed in "Financial Position, Liquidity and Capital Resources," on June
15, 1994, the Company made a scheduled repayment of $25.0 million on a term loan
and subsequent to June 30, 1994, the Company repaid its remaining $85.0 million
term loan balance. Accordingly, interest expense will decline significantly in
future periods unless the Company utilizes existing financing arrangements or
obtains new financing.
For the quarter and six months ended June 30, 1994, net miscellaneous
expense includes a $(2.9) million loss on the proposed sale of the common stock
of the Company's wholly-owned subsidiary, HSN Mistix, Inc. ("Mistix"). The sale
of Mistix should not have a significant impact on the Company's statement of
operations in future periods. Net miscellaneous expense for the six months ended
June 30, 1993 includes nonrecurring costs totaling $3.8 million. See Note 5 to
the Condensed Consolidated Financial Statements included herein.
INCOME TAXES
The Company's effective tax rate was 42.0% for the quarters ended June 30,
1994 and 1993 and for the six months ended June 30, 1994, and a benefit of
(25.7%) for the six months ended June 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, as discussed in Note 6
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.
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS
The Company refinanced and retired the remaining $143.3 million of its
Senior Notes in the six months ended June 30, 1993. In addition, the Company
retired the remaining $16.9 million of its 5 1/2% Convertible Subordinated
Debentures in the quarter ended June 30, 1993. These transactions resulted in an
extraordinary item -- loss on early extinguishment of long-term obligations, net
of taxes for the quarter and six months ended June 30, 1993, as discussed in
Note 7 to the Condensed Consolidated Financial Statements included herein.
NET EARNINGS (LOSS)
The Company had net earnings of $1.9 million, or $.02 per share, for the
quarter ended June 30, 1994, compared to a net earnings of $1.6 million, or $.02
per share, for the same quarter in 1993. For the six month period ended June 30,
1994, the Company had net earnings of $8.6 million, or $.09 per share, compared
to a net loss of $(22.2) million, or $(.25) per share, in the same period in
1993. The increases in net earnings for the quarter and six months ended June
30, 1994, were primarily attributable to increases in net sales of $23.7 million
and $58.5 million, respectively, and increases in gross profit of $7.7 million
and $44.7 million, respectively, compared to the same periods in 1993. As
discussed in "Cost of Sales," the results for the six months ended June 30,
1993, include an increase in the inventory reserve, which affected "Cost of
Sales" and "Other Income (Expense)." As previously discussed, the Company has
recorded the loss on the proposed sale of the common stock of Mistix. Included
in the results for the quarter and six months ended June 30, 1994, are pre-tax
losses for Mistix of $(.4) million and $(1.4) million, respectively. In
addition, for the quarter and six months ended June 30, 1993, the consolidated
results include extraordinary losses, net of taxes, of $(.4) million, with no
per share effect, and $(7.2) million, or $(.08) per share.
SEASONALITY
The Company believes that seasonality does impact its business but not to
the same extent it impacts the retail industry in general.
15
<PAGE> 17
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>
----------------------------------------------------------------------------------------
JUNE 30, JUNE 30, DECEMBER 31,
1994 1993 1993
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital (millions).......................... $ 42.5 $ 2.8 $ 8.1
Current ratio....................................... 1.15:1 1.02:1 1.04:1
Accounts receivable, net (millions)................. $ 29.3 $ 15.3 $ 27.8
Inventories, net (millions)......................... $102.4 $105.3 $110.9
Inventory turnover for quarter
(annualized for June periods only)................ 6.95 6.48 6.12
Inventory turnover for six months
(annualized for June periods only)................ 6.64 6.07 6.12
</TABLE>
The increase in working capital from June 30, 1993, to June 30, 1994,
primarily relates to net earnings, adjusted for non-cash items, of $53.9
million, proceeds from the issuance of Common Stock upon the exercise of
employee and cable operator stock options of $17.0 million and a $128.8 million
net decrease in long-term notes receivable and other assets, which were offset
by a net reduction of $115.9 million in long-term obligations, and capital
expenditures and increases in cable distribution fees and intangible assets of
$48.0 million. The increase in working capital from December 31, 1993, to June
30, 1994, primarily relates to net earnings adjusted for non-cash items of $27.5
million, proceeds from the issuance of Common Stock upon the exercise of
employee and cable operator stock options of $4.0 million and a $127.4 million
net decrease in long-term notes receivable and other assets, which were offset
by a net reduction of $85.7 million in long-term obligations, and capital
expenditures and increases in cable distribution fees and intangible assets of
$41.6 million.
Accounts receivable increased to $29.3 million at June 30, 1994, from $15.3
million at June 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 $17.9 million at June 30, 1994, compared to $4.8 million and
$15.3 million at June 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 interest income and interest expense are expected to
decline in future periods and its cash position has been significantly improved.
Under terms of affiliation agreements with SKC, the broadcast stations are still
obligated to carry the Company's programming until December 1997. See "Net
Sales."
Inventories decreased to $102.4 million at June 30, 1994, from $105.3
million at June 30, 1993, and from $110.9 million at December 31, 1993. The
inventory balance is net of a reserve of $21.8 million at June 30, 1994, which
represents a decrease from $27.8 million at June 30, 1993, and from $25.2
million at December 31, 1993. The reserve decrease from June 30, 1993 and
December 31, 1993 to June 30, 1994, relates primarily to the liquidation of
merchandise, as discussed in "Cost of Sales." The decreases in the gross
inventory balance at June 30, 1994, from June 30, 1993, and December 31, 1993,
were $8.9 million and $11.9 million, respectively. Inventory levels are expected
to remain relatively constant with last year's levels.
Capital expenditures for the quarter ended June 30, 1994, were $3.6
million. These expenditures were primarily for additional telecommunications
equipment, technological upgrades and development of
16
<PAGE> 18
telemarketing opportunities. The Company estimates capital expenditures will
range between $6.4 and $8.4 million for the remainder of 1994.
The Company's working capital needs and capital expenditure requirements
for the quarter ended June 30, 1994, were met from funds provided by operations.
Surplus funds were invested in short-term investments.
As of July 31, 1994, the Company had $35.0 million of bank credit lines
which back letters of credit and are used exclusively to facilitate inventory
importation. 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 $26.3 million at July 31, 1994,
leaving $8.7 million available.
The Company believes that its recurring working capital needs and capital
expenditure requirements will continue to be met primarily through internally
generated funds.
On June 15, 1994, the Company repaid a $25.0 million term loan using
available cash. During the remainder of 1994 and early 1995, management expects
to pay the Company's portion of litigation settlements, the IRS settlement, as
discussed in Note 6 to the Condensed Consolidated Financial Statements included
herein, and cable distribution fees relating to current and potential future
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. As discussed above, the repayment by SKC of
its indebtedness to the Company and the repayment by the Company of the balance
of its Senior Term Loans generated $44.0 million in additional available cash
subsequent to June 30, 1994.
In August 1994, the Company received a commitment for a $100.0 million
revolving credit facility which will amend the Company's existing bank facility.
Once finalized, the new bank facility would expire three years from the
effective date.
For the quarter ended June 30, 1994, the Company did not pay any cash
dividends and does not anticipate paying cash dividends in the immediate future.
As previously discussed, the Company recorded the proposed sale of the
common stock of Mistix. As of June 30, 1994, Mistix assets accounted for less
than 2% of consolidated total assets. The proposed sale will not have a
significant impact on the financial position of the Company.
At July 31, 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.
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<PAGE> 19
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.
<TABLE>
<S> <C>
HOME SHOPPING NETWORK, INC.
-------------------------------------------
(Registrant)
Dated August 11, 1994 /s/ GERALD F. HOGAN
----------------- -------------------------------------------
Gerald F. Hogan
President and
Chief Executive Officer
Dated August 11, 1994 /s/ KEVIN J. McKEON
----------------- -------------------------------------------
Kevin J. McKeon
Senior Vice President,
Accounting & Finance
and Treasurer
(Principal Financial and
Accounting Officer)
</TABLE>
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