<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
========
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
February 26, 1996
-----------------
Date of Report (Date of earliest event reported)
Home Shopping Network, Inc.
---------------------------
(Exact name of Registrant as Specified in Charter)
Delaware 1-9118 59-2649518
-------- ------ ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
2501 118th Avenue North
St. Petersburg, Florida 33716
----------------------- -----
(Address of Principal (Zip Code)
Executive Offices)
(813) 572-8585
--------------
(Registrant's telephone number,
including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS
Home Shopping Network, Inc., (the "Company") is filing their
Consolidated Financial Statements, including Balance Sheets as of
December 31, 1995 and 1994, and the related Consolidated Statements of
Operations, Stockholders' Equity and Cash Flows for each of the years
in the three-year period ended December 31, 1995, accompanied by the
report of KPMG Peat Marwick LLP, dated February 21, 1996. This filing
is being made in connection with the Company's proposed private
placement of $100,000,000 of Convertible Subordinated Debentures,
which will not be registered under the Securities Act of 1993, as
amended. Any securities offered in such private placement may not be
offered or sold in the United States absent registration or an
exemption from applicable registration requirements.
If such financing is consummated, the Company intends to use the net
proceeds thereof to reduce the outstanding balance of borrowings under
the Company's secured revolving Credit Facility. See Notes C and P to
the Consolidated Financial Statements filed herewith. There can be no
assurance that such private placement will be consummated, or if
consummated, as to the amount of net proceeds to be realized from such
sale of debentures. In the event that such financing is consummated,
the Company will make the appropriate disclosure thereof.
The Company plans to file its Form 10-K on or before March 30,
1996.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule (for SEC use only).
99 Consolidated Financial Statements, including
Balance Sheets as of December 31, 1995 and
1994, and the related Consolidated Statements
of Operations, Stockholders' Equity and Cash
Flows for each of the years in the three year
period ended December 31, 1995, accompanied
by the report of KPMG Peat Marwick LLP, dated
February 21, 1996.
<PAGE> 4
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 hereunto duly authorized.
HOME SHOPPING NETWORK, INC.
Dated: February 26, 1996 By: /s/ Kevin J. McKeon
------------------------
Kevin J. McKeon
Executive Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial Officer)
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
27 Financial Data Schedule (for SEC use only)
99 Consolidated Financial Statements, including Balance Sheets
as of December 31, 1995 and 1994, and the related
Consolidated Statements of Operations, Stockholders' Equity
and Cash Flows for each of the years in the three year
period ended December 31, 1995, accompanied by the report
of KPMG Peat Marwick LLP, dated February 21, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS ON FORM 8-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,164
<SECURITIES> 0
<RECEIVABLES> 23,634
<ALLOWANCES> 0
<INVENTORY> 101,564
<CURRENT-ASSETS> 182,995
<PP&E> 227,484
<DEPRECIATION> 118,710
<TOTAL-ASSETS> 436,295
<CURRENT-LIABILITIES> 175,424
<BONDS> 135,810
0
0
<COMMON> 777
<OTHER-SE> 124,284
<TOTAL-LIABILITY-AND-EQUITY> 436,295
<SALES> 1,018,625
<TOTAL-REVENUES> 1,018,625
<CGS> 701,678
<TOTAL-COSTS> 701,678
<OTHER-EXPENSES> 397,227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,077
<INCOME-PRETAX> (95,205)
<INCOME-TAX> (33,322)
<INCOME-CONTINUING> (61,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,883)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
<PAGE> 1
EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
THE BOARD OF DIRECTORS
HOME SHOPPING NETWORK, INC.
We have audited the accompanying consolidated balance sheets of Home
Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home
Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
February 21, 1996
St. Petersburg, Florida
<PAGE> 2
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31,
-----------------------
ASSETS 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 25,164 $ 33,648
Accounts and notes receivable (net of an
allowance for doubtful accounts of
$1,685 and $1,738, respectively) . . . . . . . . . . . . . . . . . . . 23,634 43,657
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,564 118,801
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 24,484 22,108
Other current assets, net . . . . . . . . . . . . . . . . . . . . . . . 8,149 10,632
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 182,995 228,846
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment . . . . . . . . . . . . . . . . . . . 90,581 106,144
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . 69,843 74,514
Furniture and other equipment . . . . . . . . . . . . . . . . . . . . . 49,561 46,183
-------- --------
209,985 226,841
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . . 118,710 116,697
-------- --------
91,275 110,144
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,093 17,774
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . 406 3,182
-------- --------
108,774 131,100
OTHER ASSETS
Cable distribution fees, net ($34,803 and
$34,174, respectively, to related
parties) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,161 67,978
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 23,142 -
Long-term investments ($10,000 in a
related party) . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 10,000
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . 8,223 8,575
-------- --------
144,526 86,553
-------- --------
$436,295 $446,499
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
<PAGE> 3
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- -------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term
obligations.............................. $ 1,555 $ 1,690
Accounts payable.......................... 84,297 75,264
Accrued liabilities:
Programming fees ($2,260 and $26,591
respectively, to related parties).... 20,377 50,170
Sales returns.......................... 10,832 12,304
Litigation settlements................. 6,140 14,450
Treasury stock......................... - 13,109
Other.................................. 52,223 38,786
-------- --------
Total current liabilities.......... 175,424 205,773
LONG-TERM OBLIGATIONS (net of current
maturities).............................. 135,810 27,491
DEFERRED INCOME TAXES..................... - 6,792
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 77,718,379
and 77,553,329 at December 31, 1995 and
1994, respectively....................... 777 776
Class B - convertible common stock -
$.01 par value; authorized, issued
and outstanding 20,000,000 shares........ 200 200
Additional paid-in capital................ 169,057 167,463
Retained earnings......................... 7,677 69,560
Treasury stock - 6,986,000 and 4,440,700
common shares, at cost, at December 31,
1995 and 1994, respectively.............. (48,718) (27,136)
Unearned compensation..................... (3,932) (4,420)
-------- --------
125,061 206,443
-------- --------
$436,295 $446,499
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
<PAGE> 4
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
NET SALES.......................... $1,018,625 $1,126,514 $1,046,580
Cost of sales...................... 701,678 730,504 704,040
---------- ---------- ----------
Gross profit................ 316,947 396,010 342,540
---------- ---------- ----------
Operating expenses:
Selling and marketing........... 167,063 161,886 138,092
Engineering and programming..... 98,216 98,835 93,686
General and administrative...... 77,087 79,344 93,539
Depreciation and amortization... 38,854 29,066 24,172
Other charges................... 11,893 - -
Restructuring charges........... 4,114 - -
---------- ---------- ----------
397,227 369,131 349,489
---------- ---------- ----------
Operating profit (loss)..... (80,280) 26,879 (6,949)
Other income (expense):
Interest income................. 1,961 9,556 13,655
Interest expense................ (10,077) (5,512) (10,863)
Miscellaneous................... (426) (403) (2,410)
Litigation settlements.......... (6,383) - (13,000)
---------- ---------- ----------
(14,925) 3,641 (12,618)
---------- ---------- ----------
Earnings (loss) before income
taxes and extraordinary item...... (95,205) 30,520 (19,567)
Income tax expense (benefit)....... (33,322) 12,819 (4,028)
---------- ---------- ----------
Earnings (loss) before
extraordinary item................ (61,883) 17,701 (15,539)
Extraordinary item - loss on early
extinguishment of long-term
obligations (net of tax benefit
of $567 and $4,395 for the years
ended December 31, 1994 and 1993,
respectively)..................... - (924) (7,242)
---------- ---------- ----------
NET EARNINGS (LOSS)................ $ (61,883) $ 16,777 $ (22,781)
========== ========== ==========
Earnings (loss) per common share:
Earnings (loss) before
extraordinary item............. $ (.69) $ .19 $ (.18)
Extraordinary item, net......... - (.01) (.08)
---------- ---------- ----------
Net earnings (loss)............. $ (.69) $ .18 $ (.26)
========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
<PAGE> 5
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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 DECEMBER 31, 1992............................. $671 $242 $115,846 $ 75,564 $(14,027) $(8,147) $170,149
Issuance of common stock upon exercise of stock options.. 55 - 31,796 - - - 31,851
Issuance of common stock upon conversion of debentures... - - 15 - - - 15
Unearned compensation related to executive stock award
program................................................ - - 1,009 - - (1,009) -
Income tax benefit related to executive stock award
program and stock options exercised.................... - - 11,705 - - - 11,705
Expense related to executive stock award program......... - - - - - 5,615 5,615
Conversion of Class B common stock to common stock....... 36 (36) - - - - -
Net loss for the year ended December 31, 1993............ - - - (22,781) - - (22,781)
---- ---- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1993............................. 762 206 160,371 52,783 (14,027) (3,541) 196,554
Issuance of common stock upon exercise of stock options.. 8 - 4,517 - - - 4,525
Unearned compensation related to employee equity partici-
pation plan............................................ - - - - - (3,736) (3,736)
Income tax benefit related to executive stock award
program and stock options exercised.................... - - 2,575 - - - 2,575
Expense related to executive stock award program......... - - - - - 2,047 2,047
Expense related to employee equity participation plan.... - - - - - 810 810
Purchases of treasury stock, at cost..................... - - - - (13,109) - (13,109)
Conversion of Class B common stock to common stock....... 6 (6) - - - - -
Net earnings for the year ended December 31, 1994........ - - - 16,777 - - 16,777
---- ---- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1994............................. 776 200 167,463 69,560 (27,136) (4,420) 206,443
Issuance of common stock upon exercise of stock options.. 1 - 902 - - - 903
Unearned compensation related to executive stock award
program and stock options granted...................... - - 96 - - (63) 33
Unearned compensation related to employee equity partici-
pation plan............................................ - - - - - (1,264) (1,264)
Income tax benefit related to executive stock award
program and stock options exercised.................... - - 596 - - - 596
Expense related to executive stock award program......... - - - - - 795 795
Expense related to employee equity participation plan.... - - - - - 1,020 1,020
Purchases of treasury stock, at cost..................... - - - - (21,582) - (21,582)
Net loss for the year ended December 31, 1995............ - - - (61,883) - - (61,883)
---- ---- -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1995............................. $777 $200 $169,057 $ 7,677 $(48,718) $(3,932) $125,061
==== ==== ======== ======== ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
<PAGE> 6
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................................... $(61,883) $ 16,777 $ (22,781)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 26,162 25,173 24,172
Amortization of cable distribution fees................................... 12,692 3,893 -
Inventory carrying value adjustment....................................... 14,468 (6,455) 12,179
Deferred income taxes..................................................... (32,310) 5,649 (14,102)
Loss on disposition of wholly-owned subsidiary............................ - 2,854 -
Loss on retirement of long-term obligations............................... - 1,491 11,637
Change in Stock Appreciation Rights ("SAR's") and common stock issued for
services provided........................................................ 1,911 1,310 8,449
Provision for losses on accounts and notes receivable..................... 440 377 (171)
Equity in (earnings) losses of unconsolidated affiliates.................. 302 (144) 589
(Gain) loss on sale of assets............................................. 6,040 106 (277)
Liquidation of joint venture operation.................................... - - 722
Change in current assets and liabilities:
(Increase) decrease in accounts receivable............................... 12,576 (10,698) (15,753)
(Increase) decrease in interest receivable from related party............ - 1,039 (1,039)
(Increase) decrease in inventories....................................... 1,635 (1,416) (4,056)
(Increase) decrease in other current assets.............................. 3,572 (3,313) (1,175)
Increase (decrease) in accounts payable.................................. 9,362 (13,594) 26,683
Increase (decrease) in accrued liabilities............................... (24,303) 24,687 29,923
Increase in cable distribution fees....................................... (43,874) (71,871) -
Stock purchases for employee equity participation plan ................... (1,264) (3,736) -
-------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...................... (74,474) (27,871) 55,000
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures.......................................................... (13,004) (18,602) (15,491)
Proceeds from sale of assets.................................................. 8,727 3,221 548
Increase in long-term investments............................................. (4,000) - (2,775)
Proceeds from long-term notes receivable...................................... 3,169 133,325 4,892
Increase in intangible assets................................................. (2,378) (4,338) (2,057)
(Increase) decrease in other non-current assets............................... (920) (6,185) 683
-------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...................... (8,406) 107,421 (14,200)
-------- --------- ---------
Cash flows from financing activities:
Borrowings from secured credit facility....................................... 120,000 - -
Payments for purchases of treasury stock...................................... (34,691) - -
Principal payments on and redemptions of long-term obligations................ (11,816) (110,993) (206,506)
Proceeds from issuance of common stock........................................ 903 4,525 31,851
Borrowings from unsecured credit facilities................................... - 25,000 150,000
-------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES...................... 74,396 (81,468) (24,655)
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (8,484) (1,918) 16,145
Cash and cash equivalents at beginning of year.................................. 33,648 35,566 19,421
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................ $ 25,164 $ 33,648 $ 35,566
======== ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
<PAGE> 7
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home Shopping Network, Inc. (the "Company" or "HSN") 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.
The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying
consolidated financial statements.
1. CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
2. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and short-term investments. Short-term investments consist primarily of U.S.
Treasury Securities, auction preferred shares, U.S. Government agencies and
certificates of deposit with original maturities of less than 91 days.
3. ACCOUNTS AND NOTES RECEIVABLE
HSN has a sales program with a deferred payment arrangement, "FlexPay", which
allows customers to charge their purchases to third party credit cards in
installments, generally over three consecutive months. FlexPay receivables
totaled $13,015,000 and $23,621,000 at December 31, 1995 and 1994,
respectively. At December 31, 1994 accounts and notes receivable included
$3,000,000 due from a former chairman of the Company's Board of Directors and a
$5,000,000 note receivable from a former wholly-owned subsidiary, Precision
Systems, Inc. ("PSi").
4. INVENTORIES, NET
Merchandise inventories are valued at the lower of cost or market, cost being
determined using the first-in, first-out method. Cost includes freight,
certain warehousing costs and other allocable overhead. Market is determined
on the basis of net realizable value, giving consideration to obsolescence and
other factors. Inventories are presented net of an inventory carrying
adjustment of $33,259,000 and $18,791,000 at December 31, 1995 and 1994,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including significant improvements, are recorded
at cost. Repairs and maintenance and any gains or losses on dispositions are
included in operations.
6
<PAGE> 8
Depreciation and amortization are provided on a straight-line basis to allocate
the cost of depreciable assets to operations over their estimated service lives
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DEPRECIATION/
ASSET CATEGORY AMORTIZATION PERIOD
- ---------------------------------------------------------------------------------
<S> <C>
Computer and broadcast equipment............. 3 to 10 Years
Buildings.................................... 30 to 40 Years
Leasehold improvements....................... 4 to 13 Years
Furniture and other equipment................ 3 to 10 Years
</TABLE>
Depreciation and amortization expense on property, plant and equipment was
$20,452,000, $22,540,000 and $21,911,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
For income tax purposes, certain assets are depreciated using allowable
accelerated methods which result in different depreciation amounts than would
be calculated for financial statement purposes.
6. CABLE DISTRIBUTION FEES, NET
The Company pays upfront fees for long-term cable contracts for
carriage of the Company's programming. These fees are amortized to expense on
a straight-line basis, over the terms of the respective contracts which range
from 5 to 15 years. Amortization expense for cable distribution fees for the
years ended December 31, 1995 and 1994 was $12,692,000 and $3,893,000,
respectively. Accumulated amortization as of December 31, 1995 and 1994 was
$16,585,000 and $3,893,000, respectively.
The Company periodically analyzes the value of its cable distribution fees to
determine if an impairment has occurred. The Company measures the potential
impairment of recorded cable distribution fees by the undiscounted value of
expected future operating cash flows in relation to its net capital investment.
Based on its analysis, the Company does not believe that an impairment of its
cable distribution fees has occurred.
7. OTHER NON-CURRENT ASSETS
Other non-current assets consists primarily of goodwill which is recorded at
cost and amortized on a straight-line basis over its economic life, primarily
three years. In connection with the purchase of Internet Software, Inc.
("ISN") during 1994, as discussed in Note E, goodwill increased by $5,239,000.
Amortization expense for other non-current assets was $5,710,000, $2,633,000
and $2,261,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The increase in amortization expense during 1995 was related to
the sale of name lists for Ortho-Vent, Inc. ("Ortho-Vent"), one of the
Company's mail order subsidiaries, as discussed below and in Note F.
Costs in connection with mailing lists developed for the Company's direct
response advertising business are amortized over a two year period. The total
amount of direct response advertising included in
7
<PAGE> 9
amortization expense for the years ended December 31, 1995, 1994, and 1993,
was $3,868,000, $1,982,000, and $1,988,000, respectively. Due to the sale of
the Ortho-Vent assets, the Company no longer incurs these costs and all
previously capitalized amounts were written-off in 1995. All non-direct
response advertising is expensed in the period incurred.
8. NET SALES
Revenues include merchandise sales and shipping and handling revenues, and are
reduced by incentive discounts and sales returns to arrive at net sales.
Revenues are recorded for credit card sales upon transaction authorization, and
for check sales upon receipt of customer payment, which does not vary
significantly from the time goods are shipped. The Company's sales policy
allows merchandise to be returned at the customer's discretion, generally up to
30 days. An allowance for returned merchandise is provided based upon past
experience.
9. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (Statement 109).
Under Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
10. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per common share is based on net earnings (loss)
divided by the weighted average number of common shares outstanding giving
effect to stock options and convertible debt, when dilutive. Fully diluted
earnings per share is not materially different from primary earnings per share
in any period presented.
The weighted average number of common shares outstanding was 90,782,000,
95,061,000 and 91,192,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
11. RECLASSIFICATIONS
Certain amounts in the prior year's consolidated financial statements have been
reclassified to conform to the 1995 presentation.
NOTE B - LONG-TERM INVESTMENTS
In July 1995, the Company paid $4,000,000 for a 20% interest in Body By Jake
Enterprises, L.L.C. ("BBJ"). This investment is accounted for under the cost
method. Simultaneously, the Company entered into a long-term joint marketing
agreement with BBJ to provide for the sale and promotion of merchandise
through HSC and other distribution channels.
The Company has a $10,000,000 investment consisting of 100,000 shares of Series
A non-voting preferred stock, $.01 par value, with a liquidation
8
<PAGE> 10
preference of $100 per share, in The National Registry Inc. ("NRI"); which is
accounted for under the cost method. This investment is convertible into
6,336,154 shares of NRI common stock at the Company's option, however,
conversion to common stock is automatic in the event that cumulative gross
revenues for NRI reach $15,000,000. At December 31, 1995, one of the Company's
executive officers served as a director of NRI. J. Anthony Forstmann, a
director of the Company, is Chairman of NRI and had voting rights with respect
to 28.3% of NRI's common stock as of December 31, 1995.
NOTE C - LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Secured $150,000,000 Revolving Credit Facility
as amended February 13, 1996, ("Credit Facility")
which expires April 1, 1997 (unsecured prior to
September 28, 1995). Borrowings can be used for
general corporate purposes. The interest rate
ranged from 6.25% to 8.81% and is tied to the
London Interbank Offered Rate ("LIBOR"), plus an
applicable margin based on the Company's total
debt to operating cash flow ratio............... $135,000 $25,000
Unsecured 7.5% note, plus accrued interest,
payable to related parties, in connection
with a business acquisition, due on September 1,
1996. See Note E............................... 1,325 2,903
Other long-term obligations....................... 1,040 1,278
-------- -------
Total long-term obligations....................... 137,365 29,181
Less current maturities........................... 1,555 1,690
-------- -------
Long-term obligations, net of current
maturities....................................... $135,810 $27,491
======== =======
</TABLE>
Aggregate contractual maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Years Ending December 31,
---------------------------------------------------------------------------------------
(In thousands)
<S> <C>
1996............................. $ 1,555
1997............................. 135,250
1998............................. 270
1999............................. 290
--------
$137,365
========
</TABLE>
The Company's Credit Facility was amended on September 28, 1995 and the
maximum borrowing availability was increased from $100,000,000 to $150,000,000
at that time. On that date, HSN pledged the stock of HSC and HSN Realty, Inc.
("Realty"), the guarantors of the Credit Facility, to secure the Company's
obligation under the Credit Facility. On February 13, 1996, the covenants in
the Credit Facility were further amended to include the effect of, among other
things, certain of the restructuring
9
<PAGE> 11
and other charges as discussed in Note F and to allow for additional
subordinated financing as discussed in Note P. The Credit Facility has
yearly extension options beyond April 1997, if requested by the Company,
subject to approval of the participating banks. Under the Credit
Facility, the interest rate on borrowings is tied to the LIBOR, Federal Funds
Rate, or Prime Rate, at the Company's option, plus an applicable margin.
Commitment fee payments relating to the Credit Facility totaled
$2,720,000 and $170,000, respectively, during 1995 and 1994. The unamortized
commitment fee balance of $1,170,000 at December 31, 1995 is being amortized
over the expected remaining life of the agreement.
Restrictions contained in the Credit Facility include, but are not
limited to, limitations on the encumbrance and disposition of assets, certain
restrictions on repurchases of the Company's common stock and the maintenance
of various financial covenants and ratios.
The Company also has a $25,000,000 committed bank credit line secured by the
capital stock of HSC and Realty. In addition, the Company has an uncommitted
unsecured bank credit line offered on a conditional basis. On February 13,
1996, the committed bank credit line was amended on the same terms as the
Credit Facility discussed above. These facilities back letters of credit, used
exclusively to facilitate the purchase of imported inventory. 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 are
limited to a total of $25,000,000 at any time, under the terms of the Credit
Facility. At December 31, 1995, outstanding letters of credit amounted to
$14,052,000 leaving $10,948,000 of these bank credit lines available.
The Company recognized extraordinary losses on the early extinguishment of its
long-term obligations as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------------
1994 1993
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Total extinguished..................... $85,000 $160,152
======= ========
Pre-tax loss net of discounts.......... $(1,491) $(11,637)
Income tax benefit..................... 567 4,395
------- --------
Extraordinary loss..................... $ (924) $ (7,242)
======= ========
</TABLE>
There was no early extinguishment of long-term obligations during the year
ended December 31, 1995.
NOTE D - INCOME TAXES
A reconciliation of total income tax expense (benefit) to the amounts computed
by applying the statutory federal income tax rate to earnings (loss) before
income tax expense (benefit) and extraordinary item is shown as follows:
10
<PAGE> 12
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at the federal statutory rate
of 35% (effect of rate change in 1993 to 35% was $(196)).... $(33,322) $10,682 $(6,848)
Amortization and write-off of goodwill and other acquired
intangibles and interest on adjustments proposed by the
Internal Revenue Service ("IRS")............................ 1,629 2,145 1,582
State income tax expense (benefit), net of effect of fed-
eral taxes.................................................. (1,778) 803 71
Executive compensation in excess of $1 million............... (688) - 688
Sale of wholly-owned subsidiary.............................. - (920) -
Other, net................................................... 837 109 479
-------- ------- -------
$(33,322) $12,819 $(4,028)
======== ======= =======
</TABLE>
The Company's effective tax expense (benefit) rate was (35.0)% for 1995, 42.0%
for 1994; and (20.6)% for 1993.
The components of income tax expense (benefit) attributable to operations are
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT INCOME TAXES :
Federal.................................................... $(1,023) $ 4,791 $ 8,753
State...................................................... 11 584 870
------- -------- -------
(1,012) 5,375 9,623
------- -------- -------
DEFERRED INCOME TAXES:
Net operating loss carry over.............................. (23,489) - -
Depreciation for tax in excess of (less than) financial
statements................................................ (2,207) 683 55
Sales returns ............................................. 382 493 (471)
Amortization of acquired intangible assets................. - (1,622) 47
Provision for accrued liabilities.......................... (1,407) 956 (1,363)
Inventory costing.......................................... (4,421) 1,330 (4,057)
Litigation settlements..................................... 1,859 542 (4,550)
Deferred compensation...................................... 662 275 (907)
State income taxes......................................... (1,786) 325 (618)
IRS settlement............................................. - 1,794 -
Amortization of long-term obligation issue costs........... - - (718)
Sales tax accrual.......................................... 294 771 24
Provision for uncollectible amounts........................ (6) 2,585 (351)
Amortization of cable distribution fees.................... (1,775) (530) -
Charitable contribution carryover.......................... (48) 244 (910)
Valuation allowance........................................ 240 116 135
Other, net................................................. (608) (518) 33
-------- -------- --------
(32,310) 7,444 (13,651)
-------- -------- --------
$(33,322) $ 12,819 $ (4,028)
======== ======== ========
</TABLE>
During the years ended December 31, 1994 and 1993, the Company recorded an
extraordinary item, loss on early extinguishment of long-term obligations, net
of the income tax effect. See Note C.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
11
<PAGE> 13
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DECEMBER 31,
-----------------------
1995 1994
- ------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT
Deferred tax assets:
Inventory costing................................................... $10,339 $ 5,918
Provision for accrued liabilities................................... 5,182 3,775
Sales returns ...................................................... 3,794 4,176
Litigation settlements.............................................. 2,149 4,008
Provision for uncollectible amounts................................. 614 608
Deferred compensation............................................... 1,163 1,825
Sales tax accrual................................................... 484 778
Charitable contribution carryover................................... 714 666
Other............................................................... 45 354
-------- -------
Net deferred tax assets........................................... $24,484 $22,108
======= =======
NON-CURRENT
Deferred tax liabilities (assets):
Net operating loss carry over....................................... $(23,489) $ -
State income taxes.................................................. (2,419) (633)
Cable distribution fees............................................. (2,305) (530)
Investment in unconsolidated subsidiaries........................... - (238)
Installment sale.................................................... - (182)
Other............................................................... (1,759) (915)
-------- -------
(29,972) (2,498)
Less valuation allowance............................................ 1,235 995
-------- -------
(28,737) (1,503)
Depreciation for tax in excess of financial statements.............. 5,409 7,616
Capitalized costs of mailing lists.................................. - 539
Other............................................................... 186 140
-------- -------
Net deferred tax liabilities (assets)............................. $(23,142) $ 6,792
======== =======
</TABLE>
The Company had taxable income (loss) and pre-tax book income (loss) for the
periods presented as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Taxable income (loss)................ $(72,849) $ 5,200 $ 8,207
Pre-tax book income (loss)........... $(95,205) $29,029 $(31,204)
</TABLE>
The primary differences between taxable income (loss) and pre-tax book income
(loss) are the gross effects of the deferred income taxes, exclusive of the net
operating loss carry over as detailed above. In addition to these reconciling
items, the Company recognized income tax deductions relating to the issuance of
common stock pursuant to the Company's executive stock award program and the
exercise of stock options ("Common Stock Deductions"), the income tax benefit
of which was recorded as an increase to additional paid-in capital. During the
years ended December 31, 1995, 1994 and 1993, the Company incurred Common Stock
Deductions of $1,445,000, $7,308,000 and $31,697,000, respectively.
Except for the effects of the reversal of net deductible temporary differences
and the effects of future Common Stock Deductions, the Company is not currently
aware of any factors which would cause any significant differences between
taxable income and pre-tax book income in future years. There can be no
assurances that there will not be significant differences in the future between
taxable income and pre-tax book income if circumstances change (for example,
changes in tax laws or the Company's financial condition or performance).
During 1995, the Company incurred a tax loss of $72,849,000. The Company will
carryback $8,900,000 to prior taxable years to obtain an income tax refund.
The remaining tax loss of $63,949,000 will be
12
<PAGE> 14
carried forward and will expire on December 31, 2010. Management believes that
it will generate future taxable income sufficient to realize this tax benefit
prior to its expiration. New management, which has substantial experience in
the television retail business, has been appointed and is establishing a new
direction for the Company intended to reverse operating losses experienced in
1995. The Company's plans are to provide a proper inventory mix with respect
to product assortment and price point that attracts both first-time buyers and
active buyers, and improved inventory management.
Management of the Company believes that through minimal growth in net sales,
calculated at cost of living increases of 3.5%, cost reduction measures
implemented during late 1995 and early 1996, and further anticipated
reductions resulting from expected capital expenditures, that both the net
operating loss carryforward of $63,949,000 and a substantial portion of other
deferred tax assets presented above will be recovered within a three-year
period. Accordingly, the Company has recognized an asset related to these
carryforward and no valuation allowance has been provided. There can be no
assurance, however, that the Company will generate any earnings or any specific
level of continuing earnings in order to allow the Company to realize the
benefits of the net operating loss carryforward or other deferred tax assets.
During 1994, the IRS completed its examination of the Company's federal income
tax returns for fiscal years 1986 through 1989 and proposed various
adjustments. The Company and the IRS agreed to settle all of the outstanding
issues with the exception of the deductibility of royalty payments made to a
then related party. The Company paid the assessments, totaling $15,000,000
including interest, related to all the issues except the royalty payments
covering all taxable periods through August 31, 1993. These assessments had
previously been accrued.
Also in 1994, the IRS issued a statutory Notice of Deficiency for fiscal years
1986 through 1989 related to the royalty payments issue. The Company paid the
assessments, totaling $4,600,000 including interest, which had previously been
accrued. The Company continues to maintain that it has meritorious positions
regarding the deductibility of these payments and will file a refund claim with
the IRS during 1996.
On May 12, 1995, the IRS completed its examination of the Company's federal
income tax returns for fiscal years 1990 and 1991, and proposed adjustments
resulting in income tax and interest deficiencies of $4,200,000, primarily
related to the royalty payments issue. On October 31, 1995, the Company and
the IRS agreed to settle all of the outstanding issues, except the royalty
payments issue, and the Company paid the resulting assessment of $1,100,000,
including interest. These assessments had previously been accrued. The
Company has not yet received a Statutory Notice of Deficiency relating to the
royalty payments issue. The Company will protest such assessment when
received.
The Company also made such royalty payments during fiscal years 1992 through
1993. The deductibility of these payments will also be challenged by the IRS
upon audit. The Company has made adequate provision for this issue for these
years.
The Company's federal income tax returns for fiscal years 1992, 1993 and 1994
are currently under examination by the IRS. No proposed material adjustments
relating to such years, other than those discussed above, have been brought to
management's attention.
13
<PAGE> 15
NOTE E - BUSINESS COMBINATION
On September 1, 1994, a wholly-owned subsidiary of the Company purchased all
the outstanding shares of ISN for cash of $2,097,000 and notes payable of
$2,903,000, see Note C, for a total of $5,000,000. The purchase method of
accounting was used to account for this business combination. Goodwill
acquired in connection with this transaction is being amortized over three
years.
Consolidated results of operations for the year ended December 31, 1994 include
the results of ISN from its acquisition date. The results of operations prior
to the date of acquisition, were not significant to the Company's consolidated
results of operations and therefore pro forma effects are not presented.
NOTE F - OTHER CHARGES AND RESTRUCTURING CHARGES
During 1995, the Company recorded $42,340,000 in pre-tax special charges.
In connection with new management's sales and merchandising philosophy an
overall analysis of the Company's inventory was conducted and determined that
certain merchandise was not compatible with this new philosophy. As a
result, such merchandise will be liquidated through other than the Company's
normal retailing channels. Accordingly, management increased the Company's
inventory carrying value adjustment by $12,077,000 to $33,259,000 at December
31, 1995 to reflect the net realizable value of the Company's inventory.
During 1995, the Company recorded $11,893,000 in "Other Charges." These
consisted of severance pay of $3,978,000 related to a reduction in work force,
$4,800,000 of payments to certain executives as provided for under their
employment agreements in connection with the termination of their employment
and the write-off of certain equipment maintenance and contractual fees
totaling $1,812,000 related to service contracts which the Company will no
longer utilize. In addition, the Company recorded a write-down of inventory
totaling $1,303,000 to net realizable value based on the disposition of
Ortho-Vent's assets. An additional $2,400,000, related to name lists of
Ortho-Vent were written off and included in "Depreciation and Amortization."
During 1995 the Company recorded restructuring charges of $4,114,000 covering
employee and other costs related to the closing of its fulfillment center in
Reno, Nevada. The facility was closed by June 30, 1995. During 1995, payments
totaling $1,214,000 were made related to this charge leaving $2,900,000 accrued
for future charges, at December 31, 1995.
Interest expense includes $773,000 of bank fees related to the Company's
Credit Facility which have been amortized based on the Company's intent
to seek refinancing of this debt prior to its contractual maturity.
Miscellaneous expense includes the write-down of computer equipment no longer
in use with a net book value of $4,700,000.
14
<PAGE> 16
Estimated costs related to pending and settled litigation for the year ended
December 31, 1995 totaled $6,383,000.
NOTE G - EMPLOYEE BENEFIT PLANS
The Company offers a plan pursuant to Section 401(k) of the Internal Revenue
Code covering substantially all full-time employees. Matching employer
contributions are set at the discretion of the Board of Directors. The
Company's contributions for the years ended December 31, 1995, 1994 and 1993
were $864,000, $824,000 and $667,000, respectively.
On December 28, 1994, the Board of Directors adopted the Home Shopping Network,
Inc. Employee Equity Participation Plan (the "Equity Plan"), effective December
31, 1994. In January 1996, the Company received a favorable determination
letter stating that the Equity Plan is a qualified plan for IRS purposes.
The Equity Plan covers all employees who have completed one year of service, at
least 1,000 hours of service during that year, are at least 21 years of age, are
not highly compensated, and do not hold options to purchase shares of HSN
common stock.
The Company contributed $5,000,000 which was used to purchase a total of
499,000 shares of common stock in 1994 and 1995 to fund the Equity Plan.
Employees who met the eligibility requirements on December 31, 1994 and June
30, 1995, will receive grants under the Equity Plan. The stock vests ratably
at 20% a year with the first vesting being effective as of the calendar year in
which the eligible employee has worked at least 1,000 hours. The Board of
Directors have not made the decision regarding any additional grants for any
period subsequent to June 30, 1995. The common stock in the Equity Plan is
included in the weighted average number of shares for the Company's earnings
per share calculation.
The common stock when purchased was recorded as unearned compensation. For the
years ended December 31, 1995 and 1994, $1,020,000 and $810,000, respectively,
has been charged to expense based on the shares authorized for granting and the
vesting schedule discussed above. The fair value of the shares which were
unvested and as yet not authorized for grants at December 31, 1995 is
$2,858,000. Any future contributions to the Equity Plan will be subject to the
Board of Directors' approval.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases satellite transponders, computers, warehouse and office
space used in connection with its operations under various operating leases.
15
<PAGE> 17
Future minimum payments under non-cancellable operating leases are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------
(In thousands)
<S> <C>
1996.................................. $13,541
1997.................................. 12,862
1998.................................. 7,981
1999.................................. 7,203
2000.................................. 6,959
Thereafter............................ 30,352
-------
$78,898
=======
</TABLE>
Rent and lease expenses charged to operations were $13,263,000, $13,978,000 and
$15,185,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
During June 1995, in connection with the restructuring of its programming the
Company discontinued use of a satellite transponder which is under a
non-cancellable operating lease calling for monthly payments ranging from
$140,000 to $150,000 through February 2007. The Company subleased this
satellite transponder to a related party during 1995, as discussed in Note M.
The sublease expired on February 15, 1996, and the Company is currently seeking
to sublease the transponder or to sell its rights with respect to this
satellite transponder. The Company does not expect any material adverse
financial impact in connection with the lease.
On December 28, 1992, HSC entered into affiliation agreements with Silver King
Communications, Inc. ("SKC") which provide for SKC's broadcast television
stations to air HSC programming on a full-time basis. The agreements have an
original term of five years, and are renewable for two successive five year
terms at SKC's sole option. The affiliation agreements are cancelable by SKC
with eighteen months' written notice prior to the end of any scheduled term.
The notice period of non-renewal of the first term is scheduled to end on June
28, 1996, but is being extended by mutual agreement between SKC and the Company
to December 28, 1996. HSC pays an affiliation fee to SKC based on hourly rates
and, upon reaching certain sales levels, commissions on net sales. Expense
related to affiliation agreements with SKC for the years ended December 31,
1995, 1994 and 1993, was $41,332,000, $42,415,000 and $41,135,000,
respectively, of which $778,000, $1,865,000 and $996,000, respectively,
represents commissions.
In December 1995, the Company entered into a four-year employment agreement
with the Company's Executive Vice President of Administration, which is
automatically renewable for successive one-year terms unless either party
provides at least 180 days' written notice. The employment agreement provides
for an annual base salary of $235,000 per annum until December 1999, a signing
bonus of $50,000, and options to purchase 50,000 shares of the Company's common
stock at $8.50 per share. These options were granted under the terms of the
1996 Stock Option Plan for Employees ("1996 Employee Plan"), which plan is
subject to shareholder approval. See Note L.
16
<PAGE> 18
In November 1995, the Company entered into a four-year employment agreement
with the Company's President, which is automatically renewable for successive
one-year terms unless either party provides at least 180 days' written notice.
The employment agreement provides for an annual base salary of not less than
$500,000 and a $1,000,000 loan, evidenced by a note, bearing interest at 5.00%
per annum, with only interest, payable monthly. The loan will be used for the
purchase or renovation of a residence and will be secured by this property.
The note, which has not yet been drawn against, will be due upon the first
anniversary of the termination of the President. The employment agreement also
provides options to purchase 2,500,000 shares of the Company's common stock at
$8.50 per share. These options were granted under the terms of the 1996
Employee Plan, which plan is subject to shareholder approval. See Note L.
In September 1994, the Company entered into a three-year employment agreement
with its General Counsel which is automatically renewable for sucessive
one-year terms unless either party provides written notice by April 30 in any
year. The agreement calls for an annual base salary of at least $225,000 per
year until August 1997 and options to purchase 100,000 shares of the Company's
common stock at $11.75 per share under the terms of the 1986 Stock Option Plan
for Employees.
Termination of the above employment agreements by the Company other than for
cause will result in payment of the annual base salary amounts that would have
been payable had employment continued until the expiration of the employment
terms plus any annual bonus for the year of termination. In addition,
termination of employment following a change in control of the Company may
result in entitlement to all unpaid compensation and other benefits through the
term of the contracts.
On August 11, 1993 a former Chairman of the Board of the Company, upon his
resignation, commenced a five-year consultancy and non-competition arrangement
with the Company during which period he receives $500,000 per year.
The Company has entered into an amended five year agreement for inbound 800
service usage with MCI Telecommunications Corporation ("MCI") ending in August
2000 which requires minimum annual payments of $9,600,000. If the Company
terminates the agreement for reasons other than cause, payment of 50% of the
aggregate of the minimum amounts for the remainder of the unexpired term will
be due 30 days after the termination. The Company's payments to MCI for phone
services during the years ended December 31, 1995 and 1994 substantially
exceeded the above mentioned minimum.
In addition, the Company has entered into an agreement with MCI covering
equipment maintenance for a term from April 1, 1996 through April 1, 2001,
requiring minimum annual payments of $2,676,000. Upon payment of $13,380,000
under the terms of the contract, the Company is no longer required to pay any
fees for these services. The Company will receive a credit for any annual fees
over $3,211,000.
NOTE I - LITIGATION
The Company has reached an agreement to settle a consolidated class action
pending in the Court of Common Pleas of Bucks County, Pennsylvania, relating to
the Company's pricing practices with respect to diamond and imitation jewelry
sold to Pennsylvania residents between
17
<PAGE> 19
December 27, 1984 and May 20, 1991. Under the proposed settlement, customers
who present adequate proof of purchase of cubic zirconia or diamond jewelry
during the class period will have the option of receiving a cash payment or a
discount certificate usable for the purchase of HSN merchandise during the
following twelve months. The maximum cash payment required from the Company
with respect to all costs relating to the settlement is $2,500,000. The
Company will be entitled to a refund of any balance not used for these
purposes. If certificates representing a maximum discount of more than
$5,200,000 would be issuable under the settlement, the Company has the right to
require that the certificates be pro-rated among those who elect to receive
them. The settlement is subject to approval by the Court after notice and
hearing.
The Company believes it has accrued a balance sufficient to cover anticipated
costs in connection with the resolution of this and other pending litigation.
During 1995, the Company paid $14,450,000 relating to litigation settlements
accrued in 1993.
The Company is also involved in various other lawsuits either as plaintiff or
defendant. In the opinion of management, the ultimate outcome of these various
lawsuits should not have a material impact on the Company's liquidity, results
of operations or financial condition.
NOTE J - STOCKHOLDERS' EQUITY
The holders of both classes of the Company's common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available for the payment of dividends. In the
event of the liquidation, dissolution or winding up of the Company, the holders
of both classes of common stock are entitled to share ratably in all assets of
the Company remaining after provision for payment of liabilities. Shares of
Class B common stock are convertible at the option of the sole holder, Liberty
Media Corporation ("Liberty"), a wholly-owned subsidiary of
Tele-Communications, Inc. ("TCI"), into shares of common stock of the Company
on a share-for-share basis. In the event of conversion of the Class B common
stock, the Class B shares so converted will be retired and not subject to
reissue.
The holder of the Class B common stock votes together with the holders of
common stock on all matters submitted to stockholders, except that it has no
vote in the election of 25% of the Board of Directors. The holder of the Class
B common stock is entitled to cast ten votes per share on all other matters.
As of December 31, 1995, Liberty's beneficial ownership and voting rights were
41.4% and 80.4%, respectively.
NOTE K - ANTICIPATED CHANGE IN CONTROL
In November 1995, Liberty and the new Chairman of the Company's Board of
Directors (the "Chairman"), entered into an agreement, which related to, among
other things, SKC's acquisition of control of the Company through the transfer
to SKC of the common stock and Class B common stock owned by Liberty ("Company
Shares"). Pursuant to the agreement between
18
<PAGE> 20
the Chairman and Liberty and certain other agreements entered into at such
time, SKC would acquire the Company Shares (which shares represent a
majority of the voting power of the outstanding equity securities of the
Company) in exchange for additional shares of SKC's common stock and Class B
stock. If such transactions are consummated, the Chairman, who became Chairman
of the Board and Chief Executive Officer of SKC in August 1995 and acquired a
significant number of options to acquire SKC common stock at such time, would
also control securities of SKC representing a majority of the outstanding
voting power of that entity. In addition, in connection with such transfer of
the Company Shares, TCI would acquire beneficial ownership of a substantial
additional equity interest in SKC and, through such ownership of SKC
securities, would continue to have a substantial equity interest in the
Company.
The consummation of each of the foregoing transactions is subject to the
satisfaction of certain conditions, including, but not limited to, receipt of
FCC approval, and approval of transaction in which it is to acquire the Company
Shares by the stockholders of SKC. In addition, SKC's acquisition of control
of the Company referred to above, will constitute a "change in control" of the
Company which will require an amendment to the Credit Facility. See Note P.
There can be no assurance that the transactions described above will be
consummated.
NOTE L - STOCK OPTIONS AND AWARDS
The Company has granted options to purchase common stock under option plans as
follows:
The Board of Directors authorized the issuance of a total of 18,700,000 shares
for the 1996 Employee Plan and the 1996 Stock Option Plan for Directors ("1996
Director Plan"), subject to shareholder approval at the Company's annual
meeting of shareholders.
The 1996 Employee Plan provides for the grant of options to purchase common
stock at fair market value, subject to the discretion of the
Compensation/Benefits Commitee of the Board of Directors, as of the date of
grant. The options vest annually and equally over five years, unless otherwise
specified by the Compensation/Benefits Committee of the Board of Directors,
beginning one year from the date of grant, and expire ten years from the date
of grant. During 1995, the Company granted options for 15,950,000 shares which
vests over a four year period of which 13,400,000 were to the Chairman of the
Board, 2,500,000 were to the new President and Chief Executive Officer, and
50,000 were to the Executive Vice President of Administration, all at $8.50 per
share.
The 1996 Director Plan provides for issuance of options to outside directors.
Options for 5,000 shares of common stock are automatically granted upon
appointment to the Board of Directors, and options for an additional 5,000
shares are granted annually thereafter. Options provide for purchase at fair
market value on the date of grant, vest over three years, and expire five years
from the date of vesting.
The 1987 Cable Operators Stock Option Plan, as amended, provided for the
issuance of options to purchase common stock at or above the fair market value
at the date of grant in exchange for entering into affiliation agreements to
carry the Company's programming for up to seven years. All outstanding options
were exercised or cancelled on or before June 1, 1994. The price of these
options ranged between $5.56 and $6.49.
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<PAGE> 21
The 1986 Stock Option Plan for Employees, as amended, provides for the grant
of options to purchase common stock at the fair market value at date of grant.
The options generally vest annually and equally over five years beginning one
year from the date of grant, and expire ten years from the date of grant.
The 1986 Stock Option Plan for Outside Directors, as amended, provides for the
grant of options to purchase common stock at fair market value as of the date
of grant. The options vest equally over two years beginning on the date of
grant and expire five years from the date they vest. During 1992, the Board of
Directors and shareholders approved certain amendments to the plan. The
amendments provide for additional option grants after five years of service
and, in addition, the number of shares of common stock subject to option under
the plan was increased to 1,630,000 shares.
A summary of changes in outstanding options under the stock option plans
except for the 1996 Employee Plan and the 1996 Director Plan, which are subject
to shareholder approval, as discussed above, is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
STOCK OPTION PLANS
---------------------------------------------------------------------------------
CABLE
OPERATORS EMPLOYEES OUTSIDE DIRECTORS
--------- ---------------------- -----------------------
PRICE PRICE TOTAL
OPTIONS OPTIONS RANGE OPTIONS RANGE OPTIONS
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except price range)
<S> <C> <C> <C> <C> <C> <C>
Total authorized................. 27,500 10,000 1,630 39,130
====== ====== ====== ======
Outstanding - December 31, 1992.. 4,325 2,934 $ 3.25- 8.23 300 $ 3.36- 6.61 7,559
Granted........................ 49 1,063 $ 8.50-14.63 180 $14.75-14.75 1,292
Exercised...................... (3,305) (1,781) $ 3.25- 6.96 (216) $ 3.36- 6.61 (5,302)
Canceled....................... (524) (115) $ 4.41- 9.88 (54) $ 4.98- 4.98 (693)
------ ------ ------ ------
Outstanding - December 31, 1993 545 2,101 $ 3.25-14.63 210 $ 5.45-14.75 2,856
Granted........................ - 3,316 $10.25-12.25 - - 3,316
Exercised...................... (336) (335) $ 3.71- 9.88 (30) $ 5.45- 5.45 (701)
Canceled....................... (209) (419) $ 4.41-14.63 - - (628)
------ ------ ------ ------
Outstanding - December 31, 1994.. - 4,663 $ 3.25-14.63 180 $14.75-14.75 4,843
Granted........................ - 195 $ 6.75- 9.00 90 $10.38-10.38 285
Exercised...................... - (165) $ 3.25- 8.50 - - (165)
Canceled....................... - (755) $ 4.41-14.63 - - (755)
------ ------ ------ ------
Outstanding - December 31, 1995.. - 3,938 $ 3.25-14.63 270 $10.38-14.75 4,208
====== ====== ====== ======
Options exercisable.............. - 2,425 $ 3.25-14.63 210 $10.38-14.75 2,635
====== ====== ====== ======
Available for grant.............. - 2,978 724 3,702
====== ====== ====== ======
</TABLE>
During the year ended December 31, 1995, 165,050 shares of common stock were
issued in connection with the exercise of stock options for which the Company
received $903,000 in cash.
In October 1990, the Company adopted the 1990 Executive Stock Award Program
(the "Program") pursuant to which 2,990,000 shares of common stock were granted
to certain key employees and consultants. The Program was funded exclusively
by the contribution of shares of common stock owned by a former chairman of the
board and a former president of the Company. The Company did not issue any
additional shares of stock in connection with the Program. The shares granted
under the Program are distributed in five equal annual installments commencing
one year from the grant date. Participants in the Program are entitled to
20
<PAGE> 22
receive dividends, if declared, on their unvested shares and certain officers
are entitled to voting rights with respect to their unvested shares.
Forfeitures are reissued at the discretion of the Compensation/Benefits
Committee of the Board of Directors.
Under this Program and another award of stock, the amount amortized and
expensed relating to the compensation earned was $795,000, $2,047,000, and
$5,615,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
In 1993, the former president and chief executive officer of HSN received SAR's
with respect to 984,876 shares of the Company's common stock at an exercise
price of $8.25 per share. The SAR's vested upon termination of his employment
and were exercised during September 1995, at $10.13 per share. Compensation
expense (benefit) recognized by the Company for the SAR's during the years
ended December 31, 1995, 1994 and 1993 was ($758,000), ($1,547,000) and
$2,834,000, respectively. In addition, $1,345,000 of expense related to the
exercise of these SAR's is included in "Other Charges."
NOTE M - RELATED PARTY TRANSACTIONS
Currently, the Company is involved in several agreements with related parties
and has made payments to those related parties as follows.
Effective August 25, 1995 the Chairman and Chief Executive Officer of SKC was
appointed to the Company's board of directors and was appointed Chairman of the
Company's Board of Directors effective November 27, 1995. The Company has
affiliation agreements with SKC for which the Company paid $42,651,000 in 1995.
See Note H.
HSC has entered into affiliation agreements with cable operators which are
wholly or partially owned by TCI. In addition, certain officers of Liberty and
TCI served, or continue to serve, on the Company's Board of Directors. The
managing general partner of certain cable systems which carry the Company's
programming, was appointed to HSN's Board of Directors in July 1993. TCI also
has an ownership interest in these cable systems. Payments to the above
related parties for cable commissions and advertising were $7,150,000,
$7,269,000, and $4,300,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Cable distribution fees paid to related parties were
$28,715,000 and $8,673,000 for the years ended December 31, 1995 and 1994,
respectively. Additional commitments for cable distribution fees to related
parties totaled $1,630,000 at December 31, 1995. In addition, the Company
received $896,000 in payments for rental of a satellite transponder during 1995
from a wholly owned subsidiary of TCI.
On April 28, 1992, the Company purchased 100,000 shares of Series A Preferred
Stock of NRI. Pursuant to the purchase of these shares, HSN provides office
space to NRI beginning in 1993. The Company charged NRI $68,000 and $65,000,
respectively, for rent during the years ended December 31, 1995 and 1994. The
Chairman and Chief Executive Officer of NRI was appointed to the Board of
Directors of the Company on April 30, 1992. At December 31, 1995, one of the
Company's executive officers served as a director of NRI. See Notes B and Q.
Prior to 1994, the Company received a variety of products and services from
entities related through common ownership and management with the
21
<PAGE> 23
former Chairman of the Company's Board of Directors and his immediate family
members. These transactions were considered related party transactions until
the resignation of the former Chairman of the Company's Board of Directors in
August 1993. Subsequent to his resignation, these transactions are no longer
considered related party, but are included for disclosure purposes for periods
prior to January 1, 1994. Transactions with these entities are summarized as
follows:
1. COMPUTER SOFTWARE LICENSE AGREEMENT: In 1985, the Company entered into
a license agreement for computer software with Pioneer Data Processing, Inc.,
which provided for continuing monthly payments of 1% of HSC's gross profit, as
defined. The amount expensed in connection with this agreement was $297,000
for the year ended December 31, 1993.
2. COMMISSIONS ON INVENTORY: Certain inventory in the form of returned
merchandise, rejects and small lot saleable inventory were disposed of through
Western Hemisphere, Inc. ("Western") for a 15% commission. Sales by the
related party were less than 1% of total sales. The Company also provided
certain equipment and space located at or in close proximity to each of the
Company's four fulfillment centers, free of charge. The Company terminated
this arrangement in 1993. Commissions were $561,000 for the year ended
December 31, 1993.
As of December 31, 1994 and 1993, the Company had a $4,500,000 liability
recorded to Western which was paid during 1995. This amount related to
cancellation of the computer software license agreement pursuant to which
Western provided certain liquidation and related services, as noted above, and
all other existing agreements and arrangements excluding certain assignment,
secrecy and non-compete agreements. In connection with this and other
litigation settlements, the former chairman of the Company's board of directors
paid HSN $3,000,000 during 1995. This amount was recorded in accounts and
notes receivable, as of December 31, 1994.
The Company purchased certain equipment from PSi and paid license and system
maintenance fees related to this equipment of $1,316,000 and $3,545,000,
respectively, for the year ended December 31, 1993. The former chairman of HSN
owns a controlling position in PSi's outstanding stock. Until August 1993,
HSN and PSi also shared a common board member, and officer. Subsequent to
August 11, 1993, PSi is no longer considered a related party due to the
resignation of certain members of PSi's board of directors, and the resignation
of a former chairman of the board of the Company.
22
<PAGE> 24
NOTE N - CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest...................... $ 6,896 $ 5,899 $13,872
Income taxes.................. 1,707 25,922 2,815
CASH RECEIVED FOR:
Income tax refund............. 11,258 3,492 2,300
</TABLE>
Supplemental information of non-cash investing and financing activities:
o During 1995 and 1994, the Company purchased 1,335,000 and 2,545,000
shares, respectively, of treasury stock for which the Company paid
$34,691,000 in 1995.
o During the year ended December 31, 1993, $15,000 of the Company's 5 1/2%
Convertible Subordinated Debentures were converted into 2,293 shares of
common stock.
o As discussed in Note E, in connection with the purchase of ISN, the
Company issued notes payable totaling $2,903,000.
o During the year ended December 31, 1994 and 1993, RMS converted 559,456 and
3,600,000 shares, respectively, of Class B common stock into shares of
common stock.
o On March 27, 1995, PSi repaid $2,700,000, plus accrued interest, of its
$5,000,000 loan from the Company. Under an agreement between the Company
and PSi, the remaining principal balance of the loan was recorded as a
prepayment of future monthly software maintenance payments through December
1995.
NOTE O - QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Table in thousands, except per share data)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Net sales..................................... $243,610 $246,659 $239,894 $288,462
Gross profit.................................. 81,675 80,503 77,583 77,186 c
Net loss...................................... (8,799) a (9,736) (17,701) b (25,647) d
Loss per common share......................... (.10) (.11) (.20) (.28)
YEAR ENDED DECEMBER 31, 1994
Net sales..................................... $274,215 $274,005 $276,612 $301,682
Gross profit.................................. 98,600 95,202 97,620 104,588
Earnings before extraordinary item............ 6,651 1,908 7,349 1,793
Net earnings ................................. 6,651 1,908 6,425 1,793
Earnings per common share:
Before extraordinary item.................... .07 .02 .08 e .02
Net earnings ................................ .07 .02 .07 e .02
</TABLE>
a The quarter ended March 31, 1995 included $2,041,000 of "Restructuring
Charges".
b During the quarter ended September 30, 1995, the Company recorded "Other
Charges" of $5,427,000, litigation expense of $3,200,000, and $2,400,000
of additional "Depreciation and Amortization".
c During the quarter ended December 1995, cost of sales included an
additional inventory carrying value adjustment of $12,077,000.
23
<PAGE> 25
d The fourth quarter of 1995 included $6,466,000 of "Other Charges",
$2,073,000 in additional "Restructuring Charges," and $8,656,000 of other
expense items, including $3,183,000 of litigation expense.
e The difference between earnings before extraordinary item and net earnings
for the quarter ended September 30, 1994 represents a loss from the early
extinguishment of long-term obligations.
The Company believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
NOTE P - SUBSEQUENT EVENT
On February 15, 1996, the Company announced it was seeking $100,000,000 of
additional financing through a proposed private placement of convertible
subordinated debentures that will not be registered under the Securities Act of
1933.
On February 13, 1996, the Company amended its Credit Facility, as discussed in
Note C, and agreed that upon consummation of the sale of the subordinated
debentures the amount available for borrowing under the Credit Facility would
be reduced by 30% of the principal amount of subordinated debentures sold. In
addition, the covenants were amended to give consent to the anticipated change
in control, as discusssed in Note K, subject to the Company obtaining at least
$50,000,000 in net proceeds from the sale of the subordinated debentures.
There can be no assurance that such private placement can be completed on
terms satisfactory to the Company.
NOTE Q - FINANCIAL INSTRUMENTS
The additional disclosure below of the estimated fair value of financial
instruments was made in accordance with the requirements of Statements of
Financial Accounting Standards No. 107. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies, when available.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents..... $25,164 $25,164 $33,648 $33,648
Other non-current assets...... 4,290 4,290 1,309 1,309
Long-term investments......... 14,000 21,424 10,000 7,875
Long-term obligations......... (137,365) (137,365) (29,181) (29,181)
</TABLE>
The carrying value of cash and cash equivalents and other non-current assets
are a reasonable estimate of their fair value.
There are no available current market prices for the $4,000,000 long-term
investment in Body by Jake Enterprises LLC as the investment is in a private
company. The Company has no reason to believe there has been a deterioration
in the investment value below its cost basis, and as such a total of $4,000,000
is included in the 1995 Fair Value table above.
The amount set out in the table above as the fair value of long-term investment
in NRI at December 31, 1995 and 1994 has been determined using the trading
price of NRI's common stock on those dates. Management is of the opinion,
however, that the fair value of this investment is not readily determinable.
The Company's investment is in the preferred stock of NRI which is not
publicly traded and, therefore, does not have an established market price. In
addition, if the Company were to convert its investment to common stock, its
investment would represent 20.7% of NRI's outstanding common stock at December
31, 1995. It is not anticipated that the Company would be able to sell its
holdings without adversely affecting the market price of the NRI common stock
and the amount realized in the event of a sale.
In early 1995, NRI indicated that it believes the adequacy of cash resources
and the ability to continue operations is dependent upon achieving sales and
24
<PAGE> 26
obtaining additional capital to continue, among other things, the development,
testing and marketing of its products. On March 15, 1995, NRI sold 4,000,000
shares of common stock to a third party investor for $4,000,000. In addition,
on January 30, 1996 NRI completed an equity financing pursuant to which certain
investors purchased from NRI 800 shares of NRI Series B Preferred Stock for a
gross cash purchase price of $8,000,000, before commissions and expenses.
Based in part on these capital infusions, which provided NRI funds to continue
the development, testing and marketing of its products, management believes
that continuing to carry the Company's investment in NRI at cost is
appropriate. The Company's maximum exposure on the NRI investment is the
$10,000,000 carrying value.
The fair value of the Company's long-term obligations at December 31, 1995 and
1994 approximates the carrying value because the underlying instrument is a
variable rate note that reprices frequently.
25
