<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 March 31, 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)
Delaware 59-2649518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 May 1, 1994:
Common stock.............. 74,094,560
Class B common stock...... 20,000,000
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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 MARCH
31,
-------------------------
1994 1993
- - ----------------------------------------------------------------------------------------------
(In thousands, except per
share data)
<S> <C> <C>
NET SALES.......................................................... $274,215 $239,421
Cost of sales...................................................... 175,615 177,881
-------- --------
Gross profit.................................................. 98,600 61,540
-------- --------
Operating expenses:
Selling and marketing............................................ 38,168 31,743
Engineering and programming...................................... 24,224 22,498
General and administrative....................................... 20,254 21,433
Depreciation and amortization.................................... 6,095 5,703
-------- --------
88,741 81,377
-------- --------
Operating profit (loss)....................................... 9,859 (19,837)
Other income (expense):
Interest income.................................................. 3,449 3,456
Interest expense................................................. (2,087) (3,976)
Miscellaneous.................................................... 246 (3,264)
-------- --------
1,608 (3,784)
-------- --------
Earnings (loss) before income taxes and extraordinary item......... 11,467 (23,621)
Income tax expense (benefit)....................................... 4,816 (6,641)
-------- --------
Earnings (loss) before extraordinary item.......................... 6,651 (16,980)
Extraordinary item -- loss on early extinguishment of long-term
obligations, net of taxes........................................ -- (6,843)
-------- --------
NET EARNINGS (LOSS)................................................ $ 6,651 $(23,823)
-------- --------
-------- --------
Earnings (loss) per common share:
Earnings (loss) before extraordinary item........................ $ .07 $ (.19)
Extraordinary item, net.......................................... -- (.08)
-------- --------
Net earnings (loss).............................................. $ .07 $ (.27)
-------- --------
-------- --------
Weighted average shares outstanding................................ 95,282 88,540
-------- --------
-------- --------
</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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MARCH 31,
--------------------- DECEMBER 31,
ASSETS 1994 1993 1993
- - -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 45,675 $ 23,780 $ 35,566
Accounts receivable, net............................... 29,407 16,818 27,849
Note and interest receivable from related party........ 5,810 5,520 5,707
Inventories, net....................................... 103,504 95,700 110,930
Deferred income taxes.................................. 29,093 15,748 29,279
Other, net............................................. 11,010 7,740 8,070
-------- -------- ------------
Total current assets......................... 224,499 165,306 217,401
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer and broadcast equipment....................... 107,638 107,068 107,439
Buildings and leasehold improvements................... 72,576 69,932 71,283
Furniture and other equipment.......................... 43,895 44,146 48,091
-------- -------- ------------
224,109 221,146 226,813
Less accumulated depreciation and
amortization............................... 107,215 90,185 105,777
-------- -------- ------------
116,894 130,961 121,036
Land................................................... 17,708 16,589 17,708
Construction in progress............................... 2,951 2,784 2,626
-------- -------- ------------
137,553 150,334 141,370
OTHER ASSETS
Note receivable from related party (net of current
maturity)............................................ 125,359 130,483 126,597
Long-term investment................................... 10,000 7,454 10,000
Intangible assets, net................................. 2,641 2,898 2,658
Other assets and notes receivable...................... 2,823 6,157 3,117
-------- -------- ------------
140,823 146,992 142,372
-------- -------- ------------
$502,875 $462,632 $501,143
-------- -------- ------------
-------- -------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
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HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
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MARCH 31,
--------------------- DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 1993
- - -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations............ $ 25,338 $ 20,486 $ 25,345
Accounts payable....................................... 77,882 73,995 88,858
Income taxes payable................................... 19,284 8,073 15,586
Accrued liabilities:
Litigation settlements............................... 14,450 -- 16,000
Sales returns........................................ 12,404 11,913 13,632
Sales taxes.......................................... 6,665 8,883 9,481
Interest............................................. 1,962 3,742 1,210
Other................................................ 42,746 31,572 39,236
-------- -------- ------------
Total current liabilities.................... 200,731 158,664 209,348
LONG-TERM OBLIGATIONS (net of current maturities)...... 86,900 142,237 86,927
DEFERRED INCOME TAXES.................................. 8,094 9,505 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 77,163,260 and 67,926,743 shares at
March 31, 1994 and 1993, respectively, and 76,172,890
shares at December 31, 1993.......................... 772 679 762
Class B -- convertible common stock -- $.01 par value;
authorized, issued and outstanding, 20,000,000 and
24,159,456 shares at March 31, 1994 and 1993,
respectively, and 20,559,456 shares at December 31,
1993................................................. 200 242 206
Additional paid-in capital............................. 163,691 120,204 160,371
Retained earnings...................................... 59,434 51,741 52,783
Treasury stock -- 3,105,700 common shares, at cost..... (14,027) (14,027) (14,027)
Unearned compensation.................................. (2,920) (6,613) (3,541)
-------- -------- ------------
207,150 152,226 196,554
-------- -------- ------------
$502,875 $462,632 $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
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(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
Expense related to
executive stock
award program...... -- -- -- -- -- 1,534 1,534
Issuance of common
stock upon exercise
of stock options... 8 -- 4,358 -- -- -- 4,366
Net loss for the
three months ended
March 31, 1993..... -- -- -- (23,823 ) -- -- (23,823)
------ ----------- ---------- -------- -------- -------- --------
BALANCE AT MARCH 31,
1993............... $679 $ 242 $120,204 $51,741 $(14,027) $(6,613 ) $152,226
------ ----------- ---------- -------- -------- -------- --------
------ ----------- ---------- -------- -------- -------- --------
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.......... -- -- 1,148 -- -- -- 1,148
Expense related to
executive stock
award program...... -- -- -- -- -- 621 621
Issuance of common
stock upon exercise
of stock options... 4 -- 2,172 -- -- -- 2,176
Conversion of Class B
common stock to
common stock....... 6 (6) -- -- -- -- --
Net earnings for the
three months ended
March 31, 1994..... -- -- -- 6,651 -- -- 6,651
------ ----------- ---------- -------- -------- -------- --------
BALANCE AT MARCH 31,
1994............... $772 $ 200 $163,691 $59,434 $(14,027) $(2,920 ) $207,150
------ ----------- ---------- -------- -------- -------- --------
------ ----------- ---------- -------- -------- -------- --------
</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>
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THREE MONTHS ENDED
MARCH 31,
------------------------
1994 1993
- - ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................... $ 6,651 $ (23,823)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization.................................. 6,095 5,703
Provision for losses on accounts and notes receivable.......... 177 (320)
(Gain) loss on sale of assets.................................. 121 (7)
Loss on retirement of long-term obligations.................... -- 10,949
Inventory reserve.............................................. 1,299 23,078
Deferred income taxes.......................................... (34) 620
Common stock issued for services provided...................... 266 1,534
Liquidation of joint venture operation......................... -- 722
Equity in (earnings) losses of unconsolidated affiliates....... (114) 502
Change in current assets and liabilities:
Increase in accounts receivable.............................. (1,677) (4,152)
(Increase) decrease in interest receivable from related
party....................................................... 9 (1,516)
Decrease in inventories...................................... 6,127 275
Increase in other current assets............................. (2,940) (845)
Increase (decrease) in accounts payable...................... (10,976) 11,820
Increase (decrease) in accrued liabilities and income taxes
payable..................................................... 3,870 (9,910)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 8,874 14,630
-------- ---------
Cash flows from investing activities:
Capital expenditures.............................................. (3,814) (8,945)
Proceeds from sale of assets...................................... 1,894 21
Increase in intangible assets..................................... (463) (378)
(Increase) decrease in notes receivable and other................. 334 (226)
Proceeds from long-term notes receivable.......................... 1,142 881
Increase in long-term investment.................................. -- (229)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES..................... (907) (8,876)
-------- ---------
Cash flows from financing activities:
Proceeds from unsecured credit facility........................... -- 100,000
Principal payments on and redemption of long-term obligations..... (34) (105,761)
Proceeds from issuance of common stock............................ 2,176 4,366
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... 2,142 (1,395)
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 10,109 4,359
Cash and cash equivalents at beginning of period.................... 35,566 19,421
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 45,675 $ 23,780
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
5
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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. 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 -- 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.
The Company has been informed that the SEC has 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. The Company accrued $13,000,000
at December 31, 1993, to cover anticipated costs and expenses primarily related
to such settlements.
Effective May 2, 1994, the Company, Liberty Media Corporation, and Messrs.
Roy M. Speer, Gerald F. Hogan and John M. Draper (the "Settling Defendants")
entered into a settlement agreement with
6
<PAGE> 8
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 3 -- OTHER INCOME (EXPENSE)
Miscellaneous expense for the quarter ended March 31, 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 4 -- 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.
Management believes that the Company has valid positions relating to its
exposure and is vigorously defending its interests. The Company has protested
all proposed adjustments to the Appellate Division of the IRS. The Company has
accrued amounts that reflect management's estimate of the potential liability,
through March 31, 1994, which relate to all proposed adjustments, including the
amortization of acquired intangibles.
On February 9, 1994, the IRS announced a comprehensive settlement
initiative covering most of the intangibles issues currently being contested by
taxpayers. Pursuant to this initiative, the Company has received a formal
settlement offer from the IRS relating to the intangibles issues currently being
protested and has until July 18, 1994, to accept the offer. If the offer is
accepted by the Company, the resulting assessment is expected to be $17.0
million, covering all periods through March 31, 1994, and such amount has been
previously provided for in the Company's financial statements.
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
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HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM
OBLIGATIONS
The Company recognized an extraordinary loss on the early extinguishment of
long-term obligations as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1993
----------------------------------------------------------------------------------
(In thousands)
<S> <C>
Total long-term obligations extinguished...................... $143,252
------------------
------------------
Pre-tax loss, net of discounts................................ $ 10,949
Income tax benefit............................................ 4,106
------------------
Extraordinary item............................................ $ 6,843
------------------
------------------
</TABLE>
There were no early extinguishments of long-term obligations during the
quarter ended March 31, 1994.
NOTE 6 -- 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 quarter ended March 31,
1994, 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 7 -- 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>
------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------
1994 1993
------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash paid for:
Interest....................................................... $1,334 $4,453
Income taxes................................................... 4 2,686
</TABLE>
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 quarter ended
March 31, 1994, compared with the quarter ended March 31, 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 ended March 31, 1994, net sales increased $34.8 million, or
14.5%, to $274.2 million from $239.4 million for the quarter ended March 31,
1993. Net sales of HSC increased $33.4 million, or 15.1%, for the quarter ended
March 31, 1994. The increase reflected a 14.8% increase in the number of
packages shipped while the average price per unit sold decreased slightly
compared to the quarter ended March 31, 1993. In addition, sales through the
Company's retail outlets for the quarter ended March 31, 1994, increased $2.3
million compared to the same period last year. These increases 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 increase in the quarter ended March 31, 1994, compared to the
same period last year is 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 ended March 31, 1993, were down from the comparable 1992 period.
Nonetheless, management believes that recent 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. Although there can be no assurance that
this trend will continue, management is maintaining its efforts to stimulate
sales through ongoing programs which include increased availability of the
"FlexPay" program to customers, changes in show host training and scheduling,
enhanced use of promotional selling events, and the recent introduction of a
private label credit card which offers customer incentives.
For the quarter ended March 31, 1994, the merchandise return percentage
decreased to 22.8% from 25.6%, compared to the quarter ended March 31, 1993.
Although the merchandise return percentage decreased during the first quarter,
it is compared to a 1993 period that experienced an unusually high merchandise
return percentage. In comparison to the merchandise return percentage for the
year ended December 31, 1993, of 22.4%, the return percentage for the quarter
ended March 31, 1994, increased slightly,
9
<PAGE> 11
and continues to reflect increased sales in higher priced jewelry and
electronics merchandise categories which typically experience higher rates of
return than other merchandise categories. Management is continuing to evaluate
the product mix in an attempt to reduce the merchandise return rate. However,
changes in product mix, if and when implemented, could also have an effect on
sales volume.
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 March
31, 1994, cable television households capable of receiving HSC programming
increased by 6.6 million, or 23.6%, to 34.5 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 of 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 4.9 million, or 16.4%, to 25.0
million households. This decrease was primarily attributable to the shift in
classification of 5.8 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. 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 18 months written notice is given prior to the expiration date.
This is further discussed in "Financial Position, Liquidity and Capital
Resources." In addition, as of March 31, 1994, HSC's programming was available
to 3.1 million households with satellite dish receivers.
During the remainder of 1994, 3.9 million cable subscribers, or 11.3% 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 quarter ended March 31, 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
and the "must carry" provisions of the cable re-regulation law, as discussed
below, program carriage levels increased during the latter part of 1993 and
first quarter of 1994, however, market penetration levels weakened somewhat.
Management believes that one reason for the weakened market penetration is that
market penetration typically lags behind increases in program carriage. As most
of the increase in program carriage levels occurred since the latter part of
1993, management expects some improvement in market penetration during the
remainder of 1994.
Programs to increase carriage included the placement of advertising with
cable operators. Management believes that providing advertising revenue or other
forms of incentive compensation to cable operators is a factor in securing
program carriage. The purchases of cable advertising time resulted in an
increase in
10
<PAGE> 12
marketing payments for the quarter ended March 31, 1994, compared to the quarter
ended March 31, 1993. To further promote cable carriage of HSC programming, HSC
has, in certain markets, guaranteed a minimum level of commissions to cable
operators which agree to carry HSC programming or offered additional performance
compensation based upon the sales levels of HSC programming in the cable
operator's franchise area. Beginning in April 1994, the Company signed
agreements with certain cable system operators wherein the Company agreed to
make one time payments in exchange for the cable system operators' commitments
to carry HSC's programming for a period of up to ten years. Such payments will
be amortized over the lives of the contracts. See "Financial Position, Liquidity
and Capital Resources." 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 a cable re-regulation law which, among
other things, contains "must carry" provisions which mandate that cable
companies within a broadcast television station's reach, retransmit its signal.
The new law was challenged in the courts, and the United States Supreme Court
has heard arguments but has not yet ruled on the constitutionality of the law.
On July 2, 1993, the Federal Communications Commission voted to extend "must
carry" rules to broadcast television stations with shop-at-home formats. "Must
carry" requirements went into effect on October 6, 1993, and the Company has
experienced growth in carriage, as previously discussed.
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. Management believes the Company will be able
to secure contracts for the continued carriage of a majority of the "must carry"
households, in the event "must carry" is reversed.
The Company is engaged in discussions with programming and cable 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.
COST OF SALES
For the quarter ended March 31, 1994, cost of sales decreased $2.3 million,
or 1.3%, to $175.6 million from $177.9 million for the quarter ended March 31,
1993. As a percentage of net sales, cost of sales decreased to 64.0% from 74.3%
for the quarter ended March 31, 1994, compared to the quarter ended March 31,
1993. Cost of sales of HSC decreased $1.2 million for the quarter ended March
31, 1994. The decreases in consolidated and HSC's cost of sales and cost of
sales percentage 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. Management
also expects improvements in the gross profit percentage in the second and third
quarters of 1994 compared to the same periods in 1993. The remaining change in
cost of sales for the quarter ended March 31, 1994, compared to the quarter
ended March 31, 1993, is attributable to other subsidiary operations.
11
<PAGE> 13
OPERATING EXPENSES
For the quarter ended March 31, 1994, operating expenses increased $7.4
million, or 9.0%, to $88.7 million from $81.3 million for the quarter ended
March 31, 1993. As a percentage of net sales, these expenses decreased to 32.4%
from 34.0% compared to the quarter ended March 31, 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 ended March 31, 1994, compared to the
quarter ended March 31, 1993:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
OPERATING EXPENSES
THREE MONTHS ENDED MARCH 31,
----------------------------------
$ %
1994 1993 CHANGE CHANGE
-------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C>
Selling and marketing........................... $38.2 $31.7 $ 6.5 20.2%
Engineering and programming..................... 24.2 22.5 1.7 7.7
General and administrative...................... 20.2 21.4 (1.2 ) (5.5)
Depreciation and amortization................... 6.1 5.7 .4 6.9
----- ----- ------
$88.7 $81.3 $ 7.4
----- ----- ------
----- ----- ------
</TABLE>
"Must carry" legislation, as discussed in "Net Sales", has and is expected
to continue to result in increases in certain operating expenses related to
cable and broadcast carriage.
SELLING AND MARKETING
For the quarter ended March 31, 1994, selling and marketing expenses
increased $6.5 million, or 20.2%, to $38.2 million from $31.7 million for the
quarter ended March 31, 1993. As a percentage of net sales, these expenses
increased to 13.9% from 13.3% compared to the quarter ended March 31, 1993.
The major components of selling and marketing expenses are detailed below,
including the dollar and percentage changes for the quarter ended March 31,
1994, compared to the quarter ended March 31, 1993:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
CERTAIN SELLING
AND MARKETING EXPENSES
THREE MONTHS ENDED MARCH 31,
----------------------------------
$ %
1994 1993 CHANGE CHANGE
-------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C>
Telephone, operator and customer service........ $13.1 $11.8 $1.3 10.4%
Commissions to cable system operators........... 10.5 7.5 3.0 40.2
Marketing payments for cable advertising........ 7.6 6.8 .8 11.2
</TABLE>
Telephone, operator and customer service expenses are typically related to
sales and order volume, and for the quarter ended March 31, 1994, compared to
the same period last year, these expenses increased as a result of the increase
in order volume. These expenses are expected to fluctuate in relation to sales
and order volume in future periods.
For the quarter ended March 31, 1994, commissions to cable system operators
increased primarily as a result of higher sales volume, compared to the quarter
ended March 31, 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 compensation 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
12
<PAGE> 14
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," the number of HSN 2
cable households for which HSC pays commissions to cable operators has increased
significantly. As a result of the above factors, cable carriage expense is
expected to remain at higher levels in future periods.
Marketing payments for cable advertising increased for the quarter ended
March 31, 1994, due to previous contractual commitments for cable advertising
purchases in conjunction with the Company's attempt to increase cable carriage.
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 ended March 31, 1994, engineering and programming expenses
increased $1.7 million, or 7.7%, to $24.2 million from $22.5 million for the
quarter ended March 31, 1993. As a percentage of net sales, these expenses
decreased to 8.8% from 9.4% compared to the quarter ended March 31, 1993.
The increase was attributable to additional broadcast affiliation expenses
compared with the quarter ended March 31, 1993. New affiliated broadcast
television stations accounted for $.9 million of the increase. In addition,
based on sales for the quarter ended March 31, 1994, the Company has accrued
additional broadcast commission expense, totaling $.8 million, under affiliation
agreements with SKC. The payment of this additional amount is dependent on sales
levels for the remainder of 1994 in the markets covered by SKC . Accordingly,
broadcast costs will continue 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, these expenses are expected to increase in future periods.
GENERAL AND ADMINISTRATIVE
For the quarter ended March 31, 1994, general and administrative expenses
decreased $1.2 million, or 5.5%, to $20.2 million from $21.4 million for the
quarter ended March 31, 1993. As a percentage of net sales, these expenses
decreased to 7.4% from 9.0% compared to the quarter ended March 31, 1993.
For the quarter ended March 31, 1994, consulting and stockholder relations
expenses decreased $3.0 million due to additional expenses incurred in the
quarter ended March 31, 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,
and equipment rental decreased $3.7 million compared to the quarter ended March
31, 1993. The above decreases were partially offset by increases totaling $5.5
million in payroll, repairs and maintenance, the Allweiss settlement, as
discussed in Note 2 to the Condensed Consolidated Financial Statements included
herein, and legal expense.
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 ended March 31, 1994, depreciation and amortization
increased $.4 million, or 6.9%, to $6.1 million from $5.7 million for the
quarter ended March 31, 1993. The increase was primarily attributable to capital
asset additions during the twelve months ended March 31, 1994. Depreciation and
amortization is expected to be somewhat higher for the remainder of 1994
compared to the same period in 1993.
13
<PAGE> 15
OTHER INCOME (EXPENSE)
For the quarter ended March 31, 1994, the Company had net other income of
$1.6 million compared to net other expense of $3.8 million for the quarter ended
March 31, 1993.
Interest expense decreased $1.9 million for the quarter ended March 31,
1994, primarily relating to the redemption and refinancing of the Company's
11 3/4% Senior Notes (the "Senior Notes") in 1993, and is expected to remain at
this lower level in 1994 and in subsequent years, subject to interest rate
fluctuations.
For the quarter ended March 31, 1994, the Company had miscellaneous income
of $.2 million compared to miscellaneous expense of $3.3 million for the quarter
ended March 31, 1993, due to nonrecurring costs totaling $3.8 million in the
quarter ended March 31, 1993, as discussed in Note 3 to the Condensed
Consolidated Financial Statements included herein.
INCOME TAXES
The Company's effective tax rate was 42.0% for the quarter ended March 31,
1994, and a benefit of (28.1%) for the quarter ended March 31, 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 4 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, primarily for the above mentioned
reasons.
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS
The Company refinanced and retired $100.0 million and committed to
refinancing and retiring $43.3 million of the outstanding balance of the Senior
Notes in the quarter ended March 31, 1993. These transactions resulted in an
extraordinary item -- loss on early extinguishment of long-term obligations, net
of taxes for the quarter ended March 31, 1993, as discussed in Note 5 to the
Condensed Consolidated Financial Statements included herein.
NET EARNINGS (LOSS)
The Company had net earnings of $6.7 million, or $.07 per share, for the
quarter ended March 31, 1994, compared to a net loss of $(23.8) million, or
$(.27) per share, for the quarter ended March 31, 1993. The net earnings for the
quarter ended March 31, 1994, was primarily attributable to increases in net
sales and gross profit of $34.8 million and $37.1 million, respectively, in the
quarter ended March 31, 1994, compared to the quarter ended March 31, 1993. As
discussed in "Cost of Sales," the results for the quarter ended March 31, 1993,
include an increase in the inventory reserve, which affected Cost of Sales and
Other Income (Expense). For the quarter ended March 31, 1993, the results
include an extraordinary loss of $(6.8) 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.
14
<PAGE> 16
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>
-------------------------------------------------------------------------------------
MARCH 31, MARCH 31, DECEMBER 31,
1994 1993 1993
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital (millions)..................... $ 23.8 $ 6.6 $ 8.1
Current ratio.................................. 1.12:1 1.04:1 1.04:1
Accounts receivable, net (millions)............ $ 29.4 $ 16.8 $ 27.8
Inventories, net (millions).................... $ 103.5 $ 95.7 $ 110.9
Inventory turnover (annualized for March
periods only)................................ 6.55 6.63 6.12
</TABLE>
The increase in working capital from March 31, 1993, to March 31, 1994,
primarily relates to net earnings, adjusted for non-cash items, of $50.3
million, proceeds from the issuance of Common Stock upon the exercise of
employee and cable operator stock options of $29.7 million and a $3.9 million
net decrease in long-term notes receivable and other assets, which were offset
by a net reduction of $55.6 million in long-term obligations, and capital
expenditures and increases in intangible assets of $12.5 million. The increase
in working capital from December 31, 1993, to March 31, 1994, primarily relates
to net earnings adjusted for non-cash items of $14.5 million, proceeds from the
issuance of Common Stock upon the exercise of employee and cable operator stock
options of $2.2 million and a $1.5 million net decrease in long-term notes
receivable and other assets, which were offset by capital expenditures and
increases in intangible assets of $4.3 million.
Accounts receivable increased to $29.4 million at March 31, 1994, from
$16.8 million at March 31, 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 $17.1 million at March 31, 1994, compared to $8.9
million and $15.3 million at March 31, 1993, and December 31, 1993,
respectively. The Company's financing of "FlexPay" accounts receivable has not
had a significant impact on its liquidity position.
Customer purchases on the Company's private label credit card have been
sold to a third party under a non-recourse financing arrangement. When compared
to customer purchases on other third party cards, this financing arrangement
does not impact the Company's financial position or liquidity.
Subsequent to March 31, 1994, SKC announced that it is attempting to
arrange financing for the purpose of repaying its indebtedness to the Company.
The Company's note receivable from SKC bears interest at 9.5% and had a
principal balance of $130.1 million at March 31, 1994. If such financing is
obtained by SKC and the note is repaid, the Company is obligated, under the
provisions of its term loan agreements, to repay the $110.0 million outstanding
balance in its entirety. Based on the potential SKC repayment and current
interest rates, the Company's interest income and expense may decline and its
cash position may be significantly improved. Should SKC repay the above note,
the broadcast stations are still obligated to carry the Company's programming
until December 1997. See "Net Sales."
Inventories increased to $103.5 million at March 31, 1994, from $95.7
million at March 31, 1993, and decreased from $110.9 million at December 31,
1993. The inventory balance is net of a reserve of $26.7 million at March 31,
1994, which represents a decrease from $36.1 million at March 31, 1993, and an
increase from $25.2 million at December 31, 1993. The reserve decrease from
March 31, 1993, to March 31, 1994, relates primarily to the liquidation of
merchandise for which a reserve was established in February 1993 in connection
with the change in management's sales and merchandising philosophy as discussed
in "Cost of Sales." The reserve increase from December 31, 1993, to March 31,
1994, relates primarily to the increase in inventory at the Company's retail and
liquidation outlets. The decreases in the gross inventory balance at March 31,
1994, from March 31, 1993, and December 31, 1993, were $1.6 million and $4.3
million, respectively. Inventory levels are expected to remain relatively
constant with last year's levels.
Capital expenditures for the quarter ended March 31, 1994, were $3.8
million. These expenditures were primarily for additional telecommunications
equipment, technological upgrades and development of
15
<PAGE> 17
telemarketing opportunities. The Company estimates capital expenditures will
range between $10.0 and $12.0 million for the remainder of 1994.
The Company's working capital needs and capital expenditure requirements
for the quarter ended March 31, 1994, were met from funds provided by
operations. Surplus funds were invested in short-term investments.
As of April 30, 1994, the Company had $25.0 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 $11.9 million at April 30, 1994,
leaving $13.1 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.
During 1994, management expects to pay the Company's portion of litigation
settlements, the IRS settlement, if accepted, as discussed in Note 4 to the
Condensed Consolidated Financial Statements included herein, one time payments
to cable system operators for commitments to carry HSC programming, and the
$25.0 million term loan due June 15, 1994. The Company intends to use available
cash, internally generated funds, or its bank facility to meet these
obligations.
At April 30, 1994, the Company had available a $40.0 million unsecured bank
facility, which expires in December 1995.
For the quarter ended March 31, 1994, the Company did not pay any cash
dividends and does not anticipate paying cash dividends in the immediate future.
At April 30, 1994, 1.0 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 $5.9
million to the Company. Options to purchase .4 million shares of the Company's
common stock, accounting for a potential cash inflow of $2.2 million, will
expire if not exercised by June 1, 1994.
16
<PAGE> 18
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On April 1, 1993, Mr. Allen P. Allweiss, a former executive vice president
and general counsel of the Company, filed a lawsuit styled Allweiss v. HSN,
et.al., in the Circuit Court of the Sixth Judicial Circuit of the State of
Florida for Pinellas County, Case No. 93-1176CI13, against the Company, Roy M.
Speer, Francis Santangelo, Liberty, Gerald F. Hogan and John M. Draper
complaining about, among other things, his February 24, 1993, termination from
the Company (the "Allweiss Suit").
The Allweiss Suit asserted that the defendants violated certain provisions
of Florida law relating to stock options and restricted stock (the "Stock
Rights") issued to Mr. Allweiss under the Company's 1986 Stock Option Plan for
Employees (the "Employee Plan") and the Company's 1990 Executive Stock Award
Program (the "Award Program"). Additional allegations against one or more of the
defendants relating to Mr. Allweiss' Stock Rights include securities fraud, an
alleged fraudulent scheme to deprive him of the value of such rights, theft,
conversion, breach of contract, interference with a business or contractual
relationship and deprivation of unpaid wages. In addition, Mr. Allweiss alleged
that his discharge was in retaliation for bringing to the attention of the
Company certain alleged improprieties by Mr. Speer, Mr. Santangelo and certain
former officers and directors of the Company. The Allweiss Suit sought an
unspecified amount of damages for losses associated with his Stock Rights and
lost benefits and wages, treble damages against the Company, Speer and
Santangelo for an alleged pattern of criminal activities that allegedly injured
Mr. Allweiss and relief for intentional infliction of emotional distress. During
his tenure with the Company, Mr. Allweiss was granted certain stock options and
restricted stock under the Company's Employee Plan and the Award Program.
Following his dismissal, the Company notified Mr. Allweiss that all of the
options granted under the Employee Plan had vested and were exercisable at
$8.229 per share, the exercise price set upon the initial grant of the options.
Mr. Allweiss maintains that the exercise price had been amended following the
initial grant date and that the correct exercise price is $4.753 per share. The
Award Program provides that nonvested shares of stock are forfeited upon the
termination of a participant's employment with the Company unless such
termination results from a change in control of the Company. Mr. Allweiss
alleges that the Company has violated certain of his rights by failing to notify
him of the status of the stock granted to him under the Award Program. In
addition to the counts relating to the Stock Rights, the Allweiss Suit refers to
a variety of allegedly improper transactions and purportedly inaccurate or
incomplete disclosures involving (i) the severance arrangements between the
Company, Mr. Speer and Lowell Paxson, the Company's former president, and Nando
DiFilippo, former general counsel and executive vice president; (ii)
transactions between the Company and Pioneer Data Processing, Inc. ("Pioneer")
and Western Hemisphere, Inc. ("Western") ; (iii) the failure of the Company's
Audit Committee to approve certain related party transactions; (iv) disclosures
to the IRS relating to payments to Pioneer and a proposed reorganization of
Western; (v) the independence of a former member of the Audit Committee of the
Board of Directors; (vi) disclosures contained in certain documents filed with
the FCC; (vii) transactions between the Company and Mr. Santangelo; and (viii)
certain additional matters. The Allweiss Suit maintains, among other things,
that Mr. Allweiss' efforts to disclose or rectify these matters caused him to be
dismissed.
On August 30, 1993, Mr. Allweiss filed an amended complaint (the "Amended
Complaint") in the Circuit Court of the Sixth Judicial Circuit of the State of
Florida for Pinellas County, Case No. 93-1176CI13. The Amended Complaint
restates several of the causes of action in the original complaint and contains
essentially the same allegations of purported wrongdoing as the original
complaint but no longer includes several counts including the claims for
securities fraud, common law fraud, deprivation for unpaid wages, and
intentional infliction of emotional distress. The Amended Complaint also
includes a claim for civil remedies for alleged criminal practices against the
Company, Mr. Speer and Mr. Santangelo, along with a claim for interference with
business and contractual relations against Mr. Santangelo only. On October 26,
1993, the court denied the defendants' motions to dismiss the Amended Complaint
except that the court dismissed the retaliatory discharge count with prejudice
as to all of the defendants except the Company. Plaintiff also filed on August
30, 1993, a notice of appeal as to those claims dismissed without leave to amend
by the court's July 29, 1993, order in the Allweiss Suit. The appeal was
dismissed on October 15, 1993, as premature. On
17
<PAGE> 19
December 2, 1993, the Company filed a counterclaim against Mr. Allweiss alleging
breach of fiduciary duties, legal malpractice and breach of a confidentiality
agreement.
Effective May 2, 1994, the Company, Liberty, and Messrs. Speer, Hogan and
Draper (the "Settling Defendants") entered into a settlement agreement with Mr.
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.
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.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 4, 1994, the annual meeting of stockholders of HSN was held.
Stockholders present in person or by proxy, representing 20,000,000 shares of
Class B Common Stock and 63,992,544 shares of Common Stock, voted on the
following matters:
The stockholders elected the following six directors of the Company to hold
office until the next annual meeting of stockholders or until their successors
have been duly elected:
Elected by holders of Common Stock voting as a separate class:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES FOR WHICH
CAST IN FAVOR AUTHORITY WITHHELD
---------------- ------------------
<S> <C> <C>
J. Anthony Forstmann................................ 63,862,132 130,412
George C. McNamee................................... 63,869,620 122,924
</TABLE>
Elected by holders of Common Stock and Class B Common Stock voting as a
single class:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES FOR WHICH
CAST IN FAVOR AUTHORITY WITHHELD
---------------- ------------------
<S> <C> <C>
Robert R. Bennett................................... 83,864,855 127,689
John M. Draper...................................... 83,867,091 125,453
Leo J. Hindery, Jr.................................. 83,830,379 162,165
Gerald F. Hogan..................................... 83,874,350 118,194
</TABLE>
The stockholders of both the Common Stock and Class B Common Stock voting
as a single class also ratified the appointment of KPMG Peat Marwick as the
Company's independent auditors for 1994 as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING
-------------------------- -------------------------- --------------------------
<S> <C> <C>
83,833,362 76,158 83,024
</TABLE>
The stockholders of both the Common Stock and Class B Common Stock voting
as a single class also approved the implementation of the Employee Stock
Purchase Plan as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
CAST IN FAVOR CAST AGAINST ABSTAINING
-------------------------- -------------------------- --------------------------
<S> <C> <C>
83,447,211 456,643 88,690
</TABLE>
18
<PAGE> 20
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: May 12, 1994 /s/ GERALD F. HOGAN
-------------------------------------------
Gerald F. Hogan
President and
Chief Executive Officer
Dated: May 12, 1994 /s/ KEVIN J. McKEON
-------------------------------------------
Kevin J. McKeon
Senior Vice President,
Accounting & Finance
and Treasurer
(Principal Financial and
Accounting Officer)
</TABLE>
19
