<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 1-9118
------------------------
HOME SHOPPING NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 59-2649518
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
2501 118TH AVENUE NORTH, ST. PETERSBURG, FLORIDA 33716
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(813) 572-8585
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Total number of shares of outstanding stock
(net of 6,986,000 shares of common stock held in treasury) as of November 1,
1996:
<TABLE>
<S> <C>
Common stock.............. 71,997,559
Class B common stock...... 20,000,000
</TABLE>
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET SALES....................................... $234,321 $217,567 $733,922 $658,841
Cost of sales................................... 136,992 139,984 453,483 419,080
-------- -------- -------- --------
Gross profit............................... 97,329 77,583 280,439 239,761
-------- -------- -------- --------
Operating expenses:
Selling and marketing......................... 35,259 38,857 107,125 122,437
Engineering and programming................... 24,539 24,399 73,280 73,838
General and administrative.................... 17,295 18,114 50,728 58,497
Depreciation and amortization................. 8,437 11,614 24,849 29,514
Other charges................................. -- 5,427 -- 5,427
Restructuring charges......................... -- -- -- 2,041
-------- -------- -------- --------
85,530 98,411 255,982 291,754
-------- -------- -------- --------
Operating profit (loss).................... 11,799 (20,828) 24,457 (51,993)
Other income (expense):
Interest income............................... 409 413 1,347 1,434
Interest expense.............................. (1,867) (2,581) (8,203) (5,858)
Miscellaneous................................. 1,046 344 5,415 3,869
Litigation.................................... -- (3,200) -- (3,200)
-------- -------- -------- --------
(412) (5,024) (1,441) (3,755)
-------- -------- -------- --------
Earnings (loss) before income taxes............. 11,387 (25,852) 23,016 (55,748)
Income tax expense (benefit).................... 4,327 (8,151) 8,747 (19,512)
-------- -------- -------- --------
NET EARNINGS (LOSS)............................. $ 7,060 $(17,701) $ 14,269 $(36,236)
======== ======== ======== ========
Net earnings (loss) per common share............ $ .07 $ (.20) $ .14 $ (.41)
======== ======== ======== ========
Weighted average shares outstanding............. 95,544 90,646 95,208 90,812
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------- DECEMBER 31,
ASSETS 1996 1995 1995
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 31,833 $ 20,438 $ 25,164
Accounts and notes receivable, net....................... 26,044 31,734 23,634
Inventories, net......................................... 90,728 136,822 101,564
Deferred income taxes.................................... 27,101 36,532 24,484
Other current assets, net................................ 4,786 11,789 8,149
-------- -------- --------
Total current assets........................... 180,492 237,315 182,995
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment......................... 90,516 107,936 90,581
Buildings and leasehold improvements..................... 70,240 75,114 69,843
Furniture and other equipment............................ 50,154 47,397 49,561
-------- -------- --------
210,910 230,447 209,985
Less accumulated depreciation and amortization......... 127,997 128,405 118,710
-------- -------- --------
82,913 102,042 91,275
Land..................................................... 16,877 17,711 17,093
Construction in progress................................. 294 3,940 406
-------- -------- --------
100,084 123,693 108,774
OTHER ASSETS
Cable distribution fees, net ($34,456 and $33,354 at
September 30, 1996 and 1995, respectively and $34,803
at December 31, 1995, to related parties).............. 109,594 94,977 99,161
Deferred income taxes.................................... 6,967 -- 23,142
Long-term investments ($10,154 at September 30, 1996 and
$10,000 at September 30, 1995 and December 31, 1995,
respectively, in related parties)...................... 14,129 14,000 14,000
Other non-current assets................................. 6,770 7,719 8,223
-------- -------- --------
137,460 116,696 144,526
-------- -------- --------
$418,036 $477,704 $436,295
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SEPTEMBER 30,
--------------------- DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
CURRENT LIABILITIES
Current maturities of long-term obligations.............. $ 230 $ 1,540 $ 1,555
Accounts payable......................................... 76,557 116,854 84,297
Income taxes payable..................................... 12,178 3,263 4,973
Accrued liabilities:
Programming fees ($621 and $4,322 at September 30, 1996
and 1995 respectively, and $2,260 at December 31,
1995, to related parties)........................... 17,321 23,457 20,377
Sales returns.......................................... 11,700 9,654 10,832
Other.................................................. 46,446 51,621 53,390
-------- -------- --------
Total current liabilities...................... 164,432 206,389 175,424
LONG-TERM OBLIGATIONS (net of current maturities)........ 98,131 116,040 135,810
DEFERRED INCOME TAXES.................................... -- 5,814 --
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 78,975,959 and 77,665,879 shares at
September 30, 1996 and 1995, respectively, and
77,718,379 shares at December 31, 1995................. 790 777 777
Class B -- convertible common stock -- $.01 par value;
authorized, issued and outstanding, 20,000,000
shares................................................. 200 200 200
Additional paid-in capital............................... 184,252 168,266 169,057
Retained earnings........................................ 21,946 33,324 7,677
Treasury stock -- 6,986,000 common shares at cost........ (48,718) (48,718) (48,718)
Unearned compensation.................................... (2,997) (4,388) (3,932)
-------- -------- --------
155,473 149,461 125,061
-------- -------- --------
$418,036 $477,704 $436,295
======== ======== ========
</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>
- ------------------------------------------------------------------------------------------------------------------
CLASS B
CONVERTIBLE ADDITIONAL UNEARNED
COMMON COMMON PAID-IN RETAINED TREASURY COMPEN-
STOCK STOCK CAPITAL EARNINGS STOCK SATION TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
BALANCE AT JANUARY 1, 1995.......... $776 $ 200 $167,463 $ 69,560 $(27,136) $(4,420 ) $206,443
Issuance of common stock upon
exercise of stock options......... 1 -- 622 -- -- -- 623
Income tax benefit related to
executive stock award program and
stock options exercised........... -- -- 181 -- -- -- 181
Expense related to executive stock
award program..................... -- -- -- -- -- 531 531
Unearned compensation related to
employee equity participation
plan.............................. -- -- -- -- -- (1,264 ) (1,264)
Expense related to employee equity
participation plan................ -- -- -- -- -- 765 765
Purchase of treasury stock, at
cost.............................. -- -- -- -- (21,582) -- (21,582)
Net loss for the nine months ended
September 30, 1995................ -- -- -- (36,236) -- -- (36,236)
---- ---- -------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1995....... $777 $ 200 $168,266 $ 33,324 $(48,718) $(4,388 ) $149,461
==== ==== ======== ======== ======== ======= ========
BALANCE AT JANUARY 1, 1996.......... $777 $ 200 $169,057 $ 7,677 $(48,718) $(3,932 ) $125,061
Issuance of common stock upon
exercise of stock options......... 13 -- 13,665 -- -- -- 13,678
Income tax benefit related to
executive stock award program,
stock options exercised and
employee equity participation
plan.............................. -- -- 1,530 -- -- -- 1,530
Expense related to executive stock
award program and stock options... -- -- -- -- -- 170 170
Expense related to employee equity
participation plan................ -- -- -- -- -- 765 765
Net earnings for the nine months
ended September 30, 1996.......... -- -- -- 14,269 -- -- 14,269
---- ---- -------- -------- -------- ------- --------
BALANCE AT SEPTEMBER 30, 1996....... $790 $ 200 $184,252 $ 21,946 $(48,718) $(2,997 ) $155,473
==== ==== ======== ======== ======== ======= ========
</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>
- ----------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................... $ 14,269 $(36,236)
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 12,420 20,834
Amortization of cable distribution fees...................... 12,550 8,680
Deferred income taxes........................................ 13,558 (15,402)
Inventory carrying value adjustment.......................... (1,730) 1,973
Provision for losses on accounts and notes receivable........ 697 (724)
Common stock and change in stock appreciation rights issued
for services provided....................................... 935 1,296
Gain on sale of controlling interest in joint venture........ (1,948) --
(Gain) loss on sale of assets................................ (129) 541
Equity in (earnings) losses of unconsolidated affiliates..... (57) 21
Change in current assets and liabilities:
(Increase) decrease in accounts and notes receivable...... (2,944) 4,516
Decrease in income taxes receivable....................... -- 2,816
(Increase) decrease in inventories........................ 12,566 (19,994)
Decrease in other current assets.......................... 3,363 140
Increase (decrease) in accounts payable................... (7,740) 41,590
Decrease in accrued liabilities and income taxes
payable................................................. (397) (27,534)
Increase in cable distribution fees.......................... (22,983) (35,679)
Stock purchases for employee benefit plan.................... -- (1,264)
--------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....... 32,430 (54,426)
--------- --------
Cash flows from investing activities:
Cash received from sale of controlling interest in joint
venture........................................................ 4,924 --
Increase in other non-current assets.............................. (2,995) (1,004)
Capital expenditures.............................................. (2,661) (10,247)
Proceeds from sale of assets...................................... 525 1,530
Increase in net long-term investments............................. (129) (4,000)
Proceeds from long-term notes receivable.......................... 48 2,984
Increase in intangible assets..................................... (26) (2,378)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES..................... (314) (13,115)
--------- --------
Cash flows from financing activities:
Principal payments on long-term obligations....................... (146,325) (1,601)
Net proceeds from issuance of Convertible Subordinated
Debentures..................................................... 97,200 --
Proceeds from issuance of common stock............................ 13,678 623
Borrowings from secured credit facility........................... 10,000 90,000
Payments for purchases of treasury stock.......................... -- (34,691)
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... (25,447) 54,331
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 6,669 (13,210)
Cash and cash equivalents at beginning of period.................... 25,164 33,648
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 31,833 $ 20,438
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements of Home Shopping
Network, Inc. and Subsidiaries (the "Company") are unaudited and should be read
in conjunction with the audited Consolidated Financial Statements and Notes
thereto for the years ended December 31, 1995 and 1994. Certain amounts in the
Condensed Consolidated Financial Statements for September 30, 1995, have been
reclassified to conform to the 1996 presentation.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items and non-recurring
items as discussed in Notes B, F and I. 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 and do not contain certain information
included in the Company's annual Consolidated Financial Statements and Notes
thereto.
NOTE B -- RECLASSIFICATION
During June 1996, the Company changed the classification of shipping and
handling revenues from a component of "Net Sales" to an offset of the related
fulfillment costs incurred by the Company recorded in "Cost of Sales." The
following table presents "Net Sales" and "Cost of Sales" for prior periods,
which conform to the current presentation:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
QUARTERS ENDED
---------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1995 1995 1995 1995
-------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
NET SALES....................... $ 255,613 $260,955 $ 217,567 $221,410 $ 219,864
Cost of sales................... 164,812 183,769 139,984 140,907 138,189
-------- -------- -------- -------- --------
Gross profit.................. $ 90,801 $ 77,186 $ 77,583 $ 80,503 $ 81,675
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
NET SALES............................................. $919,796 $1,014,981 $954,369
Cost of sales......................................... 602,849 618,971 611,829
-------- ---------- --------
Gross profit........................................ $316,947 $ 396,010 $342,540
======== ========== ========
</TABLE>
NOTE C -- LONG TERM INVESTMENTS
In July 1995, the Company paid $4.0 million 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.
The Company has a $10.0 million investment consisting of 100,000 shares of
Series A non-voting preferred stock, $.01 par value, with a liquidation
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 $15.0 million.
6
<PAGE> 8
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
In connection with the sale of the Company's controlling interest in HSN
Direct Joint Venture ("HSND") during the second quarter of 1996, the Company
recorded a $.2 million investment in a newly formed venture (the "New Venture").
This investment is accounted for under the cost method. See Note I.
The Company does not have the ability to exercise significant influence
over the operating or financial activities of BBJ, NRI, HSND, or the New
Venture.
NOTE D -- CREDIT FACILITIES AND CONVERTIBLE SUBORDINATED DEBENTURES
On March 1, 1996, the Company completed an offering of $100.0 million of
unsecured Convertible Subordinated Debentures (the "Debentures"), due March 1,
2006, which bear interest at 5 7/8% and are convertible into shares of the
Company's common stock any time after May 1, 1996, at a conversion price of
$12.00 per share. The Debentures are redeemable by the Company for cash at any
time on or after March 1, 1998 at specified redemption prices, plus accrued
interest, except that prior to March 1, 1999, the Debentures may not be redeemed
unless the closing price of the common stock equals or exceeds 140% of the
conversion price per share, or $16.80, for a specified period of time. The
Debentures are subordinated to all existing and future senior debt of the
Company.
The Company used the net proceeds of $97.2 million from the Debentures and
other cash to repay borrowings under its Revolving Credit Facility (the "Credit
Facility").
On August 2, 1996, the Company entered into a new $150.0 million Revolving
Credit Facility (the "New Facility") with a $25.0 million sub-limit for import
letters of credit. The New Facility, which replaced the Credit Facility, expires
on August 2, 1999, and like the Credit Facility is secured by the stock of Home
Shopping Club, Inc. and HSN Realty, Inc. At September 30, 1996, there were no
outstanding borrowings under the New Facility and $139.0 million was available
for borrowing after taking into account outstanding letters of credit. Under the
New Facility, the interest rate on borrowings is tied to the London Interbank
Offered Rate plus an applicable margin. The Company was in compliance with all
covenants contained in the New Facility as of September 30, 1996.
NOTE E -- INCOME TAXES
The Company had taxable income for the quarter and nine months ended
September 30, 1996 which offset a portion of the 1995 net operating loss ("NOL")
carryforward. Management believes that the Company will generate future taxable
income sufficient to realize the tax benefit of the NOL prior to its expiration.
Accordingly, the Company has recognized a non-current asset related to this NOL
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 to allow the Company to realize the benefits of the NOL or
other deferred assets.
On July 3, 1996, the Company filed a Corporation Application for Tentative
Refund ("Refund Claim") with the Internal Revenue Service ("IRS") to carryback
to prior taxable years $8.8 million of its 1995 NOL. The resulting refund of
$2.8 million was received on August 19, 1996.
On July 17, 1996, the Company filed a second Refund Claim (the "Second
Claim") with the IRS to carryback an additional $24.4 million of its 1995 NOL to
the year ended August 31, 1986. The Second Claim is based on Internal Revenue
Code Sections 172 (b)(1)(C) and 172 (f) which provide for a 10-year carryback of
specified liability losses, as defined. The resulting refund of $11.2 million
was received on August 19, 1996. Of this refund, $2.9 million is attributable to
the 1986 statutory federal income tax rate exceeding the current rate of 34%.
7
<PAGE> 9
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Second Claim is based upon an area of tax law without substantial legal
precedent or guidance and accordingly, the IRS may challenge the Company's
entitlement to this claim. The Company intends to defend its right to this claim
but can give no assurance as to its ultimate resolution. If the Second Claim is
disallowed, in whole or in part, the Company will be required to repay any
disallowed portion of the $11.2 million plus interest to the IRS and the
disallowed portion of the carryback will be subject to the normal NOL
carryforward rules.
On September 11, 1996, the Company filed amended federal income tax returns
to claim an additional $2.8 million in federal income tax refunds for fiscal
years 1986 through 1989. These amended returns claim deductions for amounts
previously disallowed by the IRS relating to royalty payments made to a then
related party. The Company continues to maintain that it has meritorious
positions regarding the deductibility of these payments and will vigorously
defend this claim if disallowed by the IRS.
NOTE F -- RESTRUCTURING CHARGES
During the three months ended March 31, 1995, the Company recorded charges
of $2.0 million covering employee and other costs related to the closing of its
fulfillment center in Reno, Nevada. In the fourth quarter of 1995 the Company
recorded additional charges of $2.1 million to reflect costs expected to be
incurred in relation to the closing. The facility was closed by June 30, 1995.
During the three months ended September 30, 1996, payments totaling $.2 million
were made related to this charge leaving $2.0 million accrued for future
payments.
NOTE G -- 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. Fully diluted earnings (loss) per
common share is considered to be the same as primary earnings (loss) per common
share since the effect of certain potentially dilutive securities is
anti-dilutive in all periods presented.
NOTE H -- CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
auction preferred shares, money market funds and certificates of deposit with
original maturities of less than 91 days.
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH PAID FOR:
Interest..................................................... $ 9,077 $ 4,363
Income taxes................................................. 207 385
CASH RECEIVED FOR:
Income tax refund............................................ 14,000 11,006
</TABLE>
On March 27, 1995, Precision Systems, Inc. ("PSi") repaid $2.7 million,
plus accrued interest, of its $5.0 million 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 maintenance charges through
December 1995.
8
<PAGE> 10
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
During April 1996, in connection with the sale of the Company's controlling
interest in HSND, the Company recorded a note receivable of $1.0 million. See
Note I.
NOTE I -- PRO FORMA STATEMENTS OF OPERATIONS
1. SALE OF HSND
During April 1996, the Company sold a majority of its interest in HSND for
$5.9 million to a company under the control of Tele-Communications, Inc.
("TCI"), which also owns a controlling interest in the Company. The Company
received $4.9 million in cash at closing and is due $1.0 million payable in four
equal annual installments commencing on February 1, 1997. The Company will
retain a 15% interest in HSND and the New Venture. See Note C. In connection
with the sale of its controlling interest in HSND, the Company recorded a $1.9
million gain which is included in miscellaneous income for the nine months ended
September 30, 1996.
The following table reports the unaudited pro forma results of the Company
for 1995, after the shipping and handling reclassification discussed in Note B
and giving effect to the sale of HSND as if it occurred on January 1, 1995:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
NET SALES................................. $259,681 $ 215,390 $216,956 $ 210,098
Cost of sales............................. 182,774 138,629 139,380 135,494
-------- -------- -------- --------
Gross profit............................ 76,907 76,761 77,576 74,604
Operating expenses........................ 103,691 96,219 91,504 89,274
-------- -------- -------- --------
Operating loss.......................... (26,784) (19,458) (13,928) (14,670)
Other income (expense).................... (11,413) (5,138) (676) 1,119
-------- -------- -------- --------
Loss before income taxes.................. $(38,197) $ (24,596) $(14,604) $ (13,551)
======== ======== ======== ========
</TABLE>
Due to the anticipated sale and gain associated therewith, the results of
operations of HSND were not included in the consolidated results of operations
for 1996.
2. SALE OF ORTHO-VENT ASSETS
During the fourth quarter of 1995, the Company sold the assets of
Ortho-Vent, Inc. ("Ortho-Vent"), one of the Company's mail order subsidiaries.
The following table reports the unaudited pro forma results of the Company for
1995, after the shipping and handling reclassification and giving effect to the
sales of HSND and Ortho-Vent as if they occurred on January 1, 1995:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
NET SALES................................. $256,712 $ 211,244 $212,337 $ 206,229
Cost of sales............................. 180,990 136,033 136,634 133,219
-------- -------- -------- --------
Gross profit............................ 75,722 75,211 75,703 73,010
Operating expenses........................ 102,472 90,785 89,919 87,786
-------- -------- -------- --------
Operating loss.......................... (26,750) (15,574) (14,216) (14,776)
Other income (expense).................... (11,465) (5,173) (719) 1,089
-------- -------- -------- --------
Loss before income taxes.................. $(38,215) $ (20,747) $(14,935) $ (13,687)
======== ======== ======== ========
</TABLE>
9
<PAGE> 11
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE J -- PROPOSED SILVER KING MERGER
The Company has entered into an Agreement and Plan of Exchange and Merger,
dated as of August 25, 1996, by and among Silver King Communications, Inc.
("SKC"), a subsidiary of SKC ("Silver King Sub"), Liberty HSN, Inc., and the
Company, pursuant to which, subject to the satisfaction of certain conditions
(including the receipt of all required approvals of the stockholders of SKC and
the Company), the Company will merge with Silver King Sub (the "Merger"). In the
Merger, each share of outstanding common stock of the Company at the time of the
Merger will be converted into the right to receive 0.45 of a share of common
stock of SKC and each share of outstanding Class B common stock of the Company
will be converted into the right to receive 0.54 of a share of Class B common
stock of SKC with the result that the Company would become at least an 80.1%
owned subsidiary of SKC with the remaining shares owned by Liberty Media
Corporation ("Liberty"), a wholly-owned subsidiary of TCI. In addition to the
shares which will be issued in connection with this transaction, 2.6 million
shares of SKC Class B common stock, to be issued to Liberty in the Merger, will
be issued in the form of a contingent right to receive such shares upon the
occurrence of certain events. There can be no assurance that the foregoing
conditions will be satisfied or that the Merger will be consummated.
NOTE K -- SUBSEQUENT EVENT
On October 10, 1996, the Company, Quell Schickedanz AG & Co. ("Quell"),
Thomas Kirch ("Kirch") and Dr. Georg Kofler ("Kofler") entered into a binding
Memorandum of Understanding (the "Memorandum") in connection with their joint
participation in Home Order Television GmbH & Co. ("HOT"), Germany's only
television shopping network. Pursuant to the terms of the Memorandum, the
Company will purchase a 29% equity interest in HOT (the "HOT Interest") from
Quell, Kirch and Kofler. Currently, Quell, Kirch and Kofler own equity interests
of 50%, 40% and 10%, respectively, in HOT and will reallocate their respective
remaining ownership interests to account for the sale of the HOT Interest to the
Company. The Company will pay $15.0 million for the HOT Interest: $5.0 million
of which was placed into escrow in October 1996, to be released upon execution
of a definitive agreement among the Company, Quell, Kirch and Kofler; and $5.0
million is expected to be paid in each of April 1997 and September 1997. It is
expected that such definitive agreement will also contain certain restrictions
and other provisions regarding transfers by such persons of equity interests in
HOT.
10
<PAGE> 12
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.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new developments, new merchandising strategies and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are not limited to, the
following: business conditions and the general economy, competitive factors,
channel space availability and the cost and availability of appropriate
merchandise.
A. CONSOLIDATED RESULTS OF OPERATIONS
The following discussion presents the material changes in the consolidated
results of operations of the Company which have occurred in the third quarter
and first nine months of 1996, compared with the same periods in 1995. Reference
should also be made to the Condensed Consolidated Financial Statements included
herein.
In April 1996, the Company sold a majority of its interest in its
infomercial joint venture, HSN Direct Joint Venture ("HSND"). Due to the
anticipated sale and gain associated therewith, the results of operations of
HSND were not included in the consolidated results of operations for 1996.
During 1995, the consolidated results of operations included a $4.3 million
pre-tax loss related to HSND. In addition, in the fourth quarter of 1995, the
Company sold the assets of Ortho-Vent, Inc. ("Ortho-Vent"), a subsidiary of HSN
Mail Order, Inc. ("Mail Order"). See Note I to the Condensed Consolidated
Financial Statements included herein for the pro forma effects of excluding HSND
and Ortho-Vent from the Company's 1995 results of operations.
As discussed in Note B to the Condensed Consolidated Financial Statements
included herein, shipping and handling revenues are now included as a reduction
of Cost of Sales to offset the related fulfillment costs incurred by the
Company. Prior to the second quarter of 1996, shipping and handling revenues
were included as a component of Net Sales. All amounts and percentages in the
following discussion reflect this reclassification.
All tables and discussion included herein calculate the percentage changes
using actual versus rounded dollar amounts.
NET SALES
For the quarter and nine months ended September 30, 1996, net sales for the
Company increased $16.7 million, or 7.7%, to $234.3 million from $217.6 million
and $75.1 million, or 11.4%, to $733.9 million from $658.8 million,
respectively, compared to the same periods in 1995. Net sales of HSC increased
$21.4 million, or 11.5%, and $85.2 million, or 15.2%, for the quarter and nine
months ended September 30, 1996, respectively. HSC's sales reflect increases of
22.1% and 12.5% in the number of packages shipped and a decrease of 13.8% and an
increase of 1.0% in the average price per unit sold for the quarter and nine
months ended September 30, 1996, respectively, compared to the same periods in
1995. Sales by wholly-owned subsidiaries, Vela Research, Inc. ("Vela") and
Internet Shopping Network, Inc. ("ISN") increased $1.0
11
<PAGE> 13
million and $.3 million, respectively, for the quarter ended September 30, 1996,
and increased $7.4 million and $5.4 million, respectively, for the nine months
then ended. In addition, sales for Mail Order increased $8.5 million for the
nine months ended September 30, 1996. These increases were partially offset by
decreases related to HSND of $2.2 million and $16.4 million for the quarter and
nine months ended September 30, 1996, respectively, and decreases related to the
sale of Ortho-Vent assets of $4.1 million and $12.6 million for the quarter and
nine months ended September 30, 1996, respectively.
In November 1995, the Company appointed a new chairman of the board and a
new president and chief executive officer, both with significant experience in
the electronic retailing and programming areas. The Company believes that the
improved sales in the quarter and nine months ended September 30, 1996 compared
to 1995 were primarily the result of immediate changes made by new management to
the Company's merchandising and programming strategies. In addition, the Company
offered a "no interest-no payment" credit promotion through September 1996 for
certain purchases made during June 1996 using the Company's private label credit
card. A similar promotion will take place for purchases made during the fourth
quarter of 1996 with the payment deferral period extending to March 1997.
Management is taking additional steps designed to attract both first-time and
active customers which include changes in the merchandising area designed to
broaden product assortment, changing the sales mix, optimizing product variety
and value, maintaining the average price per unit at the desired level,
improving inventory management and better planning of programmed shows. In
addition, management will be reformatting the existing Spree! network to
America's Jewelry Store ("AJS") which is expected to launch in early 1997. AJS
will be a twenty-four hour jewelry shopping network. The Company believes that
its negative performance in the third quarter and first nine months of 1995
which resulted in decreases in consolidated net sales of $31.3 million and $85.9
million, respectively, from the comparable 1994 periods, was due, in part, to
the adverse effects of certain merchandising and programming strategies which
had been implemented in late 1994 and 1995. There can be no assurance that
changes to the Company's merchandising and programming strategies will achieve
management's intended results.
For the quarter and nine months ended September 30, 1996, respectively,
HSC's merchandise return percentage decreased to 23.2% from 27.6% and to 24.3%
from 25.6%, compared to the same periods in 1995. Management believes that the
lower return rates are primarily attributable to the decreases in average price
per unit sold. Promotional price discounts increased to 2.7% of HSC sales from
2.4% for the quarter ended September 30, 1996 and to 3.3% from 2.9% for the nine
months ended September 30, 1996, compared to the same periods in 1995.
At September 30, 1996, HSC had approximately 4.6 million active customers
representing a 3.3% decline from September 30, 1995. An active customer is one
that has completed a transaction within the last 18 months or placed an order
within the last seven months. In addition, 59.4% of active customers have made
more than one purchase in the last 18 months, compared to 59.1% at September 30,
1995.
Approximately 70.0% of this active customer file has completed a
transaction within the last twelve months. Since December 1994, the active
customer file had been declining steadily, however, this trend reversed
beginning in February 1996 and has increased every month since then for a
cumulative total increase of 6.0%. In addition, since January 1996, repeat
buyers in the twelve month file have increased from 49.0% of the total to 50.6%
of the total.
Management believes that future levels of net sales of HSC will be
dependent on the success of its current efforts to increase market penetration.
Market penetration represents the level of active customers within a market.
12
<PAGE> 14
The following table highlights the changes in the estimated unduplicated
television household reach of The Home Shopping Network ("HSN"), the Company's
primary network, for the twelve months ended September 30, 1996:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
CABLE* BROADCAST SATELLITE TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands of households)
Households -- September 30, 1995.................... 43,476 21,722 3,750 68,948
Net additions/(deletions)........................... 1,099 (944) 38 193
Shift in classification............................. 2,381 (2,381) -- --
Change in Nielsen household counts.................. -- 524 -- 524
------ ------ ----- ------
Households -- September 30, 1996.................... 46,956 18,921 3,788 69,665
====== ====== ===== ======
</TABLE>
- ---------------
* Households capable of receiving both broadcast and cable transmissions are
included under cable and excluded from broadcast to present unduplicated
household reach. Cable households at September 30, 1996, include 1.8 million
direct broadcast satellite households.
According to industry sources, as of September 30, 1996, there were 95.8
million homes in the United States with a television set, 62.5 million basic
cable television subscribers, 3.7 million homes with direct broadcast satellite
dish receivers and 3.8 million homes with C Band satellite dish receivers.
In addition to the households in the above table, as of September 30, 1996
approximately 11.5 million cable television households were reached by the
Company's Spree! network, of which 4.6 million were on a part-time basis. Of the
total cable television households receiving Spree!, 9.9 million also receive
HSN. The Company is in the process of reformatting the Spree! network to AJS.
During the remainder of 1996, cable system contracts covering 2.4 million
cable subscribers are subject to termination or renewal. This represents 5.2% of
the total number of unduplicated cable households receiving HSN. The Company is
pursuing both renewals and additional cable television system contracts, but
channel availability, competition, consolidation within the cable industry and
cost of carriage are some of the factors affecting the negotiations for cable
television system contracts. Although management cannot determine the percentage
of expiring contracts that will be renewed or the number of households that will
be added through new contracts, management believes that a majority of these
contracts will be renewed.
Silver King Communications, Inc. ("SKC") through its subsidiaries, owns
twelve broadcast television stations, including one television satellite
station. These stations are located in many of the top markets in the United
States and exclusively broadcast HSC programming, except for a portion of
broadcast time which is used to provide public affairs and other
non-entertainment programming and advertising inserts.
Each of the full power SKC stations has an affiliation agreement with HSC
to carry HSC's programming through December 28, 1997 providing for an hourly
fee, and upon reaching certain sales levels, commissions on net sales. By their
terms, the affiliation agreements automatically renew for additional five year
terms on December 28, 1997 and December 28, 2002 unless SKC provides notice of
nonrenewal by December 28, 1996 (a six month extension from the prior deadline,
which extension has been provided for in an amendment to the affiliation
agreements) and June 28, 2001, respectively, with respect to such renewal terms.
Thereafter, the affiliation agreements automatically renew for successive five
year terms unless and until either party provides the other with written notice
of nonrenewal.
SKC has informed the Company that it has not made any decision regarding
whether it will renew any or all of the affiliation agreements, or whether SKC
will, instead, develop and broadcast programming independently of the Company.
SKC has also informed the Company that there is a substantial likelihood that
SKC will not terminate the affiliation agreements, unless it receives adequate
assurances that its broadcast signal will be carried by cable systems presently
carrying SKC's broadcast signal. After evaluating the needs and costs of
additional program carriage, the Company believes that the orderly termination
of the affiliation agreements may be in the Company's best interests because of
the potential cost savings and the existing cable carriage of HSC programming in
many of the SKC markets. HSN has obtained carriage of its programming
13
<PAGE> 15
in many of the SKC markets through long-term cable affiliation agreements. As a
result, the Company and SKC are discussing the process for an orderly
termination of such affiliation agreements in the event that the agreements are
not renewed and the Company has initiated preliminary discussions in a number of
markets for the purpose of securing alternative carriage of its programming.
There can be no assurance that SKC will in fact terminate any or all of the
affiliation agreements or that, if so terminated, the Company will be able to
find other means of distributing its programming to the cable households in the
broadcast areas currently served by SKC stations at a reasonable cost. Depending
upon the availability and cost of alternative carriage for HSN programming,
termination of the affiliation agreements could also disrupt HSN's ability to
reach existing customers and may cause a reduction in HSN's revenues. HSN may
also incur additional expenses (including the making of upfront payments), which
could be substantial, in connection with entering into cable distribution
agreements with other cable system operators for the purpose of securing
alternative carriage of its programming.
GROSS PROFIT
For the quarter and nine months ended September 30, 1996, gross profit
increased $19.7 million, or 25.5%, to $97.3 million from $77.6 million and $40.6
million, or 17.0%, to $280.4 million from $239.8 million, respectively, compared
to the same periods in 1995. As a percentage of net sales, gross profit
increased to 41.5% from 35.7% and to 38.2% from 36.4% for the quarter and nine
months ended September 30, 1996, respectively, compared to the same periods in
1995.
Gross profit of HSC and Vela increased $23.1 million and $.5 million for
the quarter ended September 30, 1996 and increased $53.2 million and $3.3
million, respectively, for the nine months then ended. These increases were
partially offset by decreases related to HSND and Ortho-Vent of $.8 million and
$1.6 million, respectively, for the quarter ended September 30, 1996 and $10.8
million and $5.0 million, respectively, for the nine months then ended. As a
percentage of HSC's net sales, gross profit increased to 40.9% from 33.2% and to
37.4% from 33.6% for the quarter and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995.
The dollar increases in consolidated and HSC's gross profit relate to the
higher sales volume. The comparative increases in consolidated gross profit
percentage in the quarter and nine months ended September 30, 1996, relate to
warehouse sales and other promotional events held during 1995 which reduced
gross profit in these periods and a 1996 product sales mix which was composed of
higher gross profit merchandise. In future periods, management expects a slight
decrease in the Company's gross profit percentage from the third quarter of
1996.
OPERATING EXPENSES
The following table highlights the operating expense section from the
Company's Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------------- -------------------------
$ $ % $ $ %
AMOUNT CHANGE CHANGE AMOUNT CHANGE CHANGE
--------------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing.............. $35.3 $ (3.6) (9.3)% $107.1 $(15.3) (12.5)%
Engineering and programming........ 24.5 .1 .6 73.3 (.6) (.8)
General and administrative......... 17.3 (.8) (4.5) 50.7 (7.8) (13.3)
Depreciation and amortization...... 8.4 (3.2) (27.4) 24.9 (4.7) (15.8)
Other charges...................... -- (5.4) (100.0) -- (5.4) (100.0)
Restructuring charges.............. -- -- -- -- (2.0) (100.0)
----- ------ ------ ------
$85.5 $(12.9) $256.0 $(35.8)
===== ====== ====== ======
</TABLE>
14
<PAGE> 16
As a percentage of net sales, operating expenses decreased to 36.5% from
45.2% and to 34.9% from 44.3%, respectively, for the quarter and nine months
ended September 30, 1996, compared to the same periods in 1995.
In late 1995 and the first quarter of 1996, management instituted measures
aimed at streamlining operations primarily by reducing the Company's work force
and taking other actions to reduce operating expenses. These changes resulted in
reductions in operating expenses in the third quarter and first nine months of
1996 compared to the same periods in 1995 and are expected to result in future
reductions to operating expenses when compared to 1995.
SELLING AND MARKETING
For the quarter and nine months ended September 30, 1996, selling and
marketing expenses, as a percentage of net sales, decreased to 15.0% from 17.9%
and to 14.6% from 18.6%, respectively, compared to the same periods in 1995.
The major components of selling and marketing expenses are detailed below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------------ ------------------------
$ $ % $ $ $
AMOUNT CHANGE CHANGE AMOUNT CHANGE CHANGE
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In millions, except %)
Telephone, operator and customer
service............................... $14.2 $ 2.9 25.8% $40.2 $ 2.9 7.9%
Fees to cable system operators:
Commissions........................... 9.2 1.2 14.9 29.0 6.2 27.1
Performance bonus commissions......... 2.5 (.5 ) (15.3) 8.2 (1.6 ) (15.9)
Marketing payments for cable
advertising........................ 2.3 (1.9 ) (46.1) 7.5 (5.3 ) (41.4)
Mail order catalog expenses............. 2.4 (1.6 ) (40.1) 7.5 (2.1 ) (22.1)
Promotional/media expenses.............. -- (1.6 ) (100.0) -- (1.8 ) (100.0)
HSND selling expenses................... -- (.6 ) (100.0) -- (9.6 ) (100.0)
</TABLE>
Telephone, operator and customer service expenses are typically related to
sales, call volume and the number of packages shipped. Telephone expense
increased $2.9 million for both the quarter and nine months ended September 30,
1996, compared to the same periods in 1995. This increase is due to increases in
sales, call and package volume and a $1.4 million rebate received in the third
quarter of 1995 from the Company's long distance carrier in connection with a
new contract for telephone services. Operator and customer service payroll
expenses remained constant due to work force reduction measures and volume
efficiencies. Management expects telephone, operator and customer service
expenses to remain at the same percentage of net sales and fluctuate in relation
to call and package volume for the remainder of 1996.
For the quarter and nine months ended September 30, 1996, commissions to
cable system operators increased as a result of the increase in net sales.
Commission payments are based on net merchandise sales after giving effect to
customer returns. Additionally, cable operators which have executed affiliation
agreements to carry the Company's programming are generally compensated for all
sales within their franchise resulting from watching the program via cable,
satellite dish, or a broadcast television station. Commissions as a percentage
of sales increased due to the growth in cable households and the increase in
cable households within broadcast markets. As a result of the above factors,
subject to sales volume, fees paid to cable system operators are expected to
remain at higher levels in future periods.
Performance bonus commissions decreased for the quarter and nine months
ended September 30, 1996 because of higher guaranteed minimum commissions in the
same periods in 1995. Performance bonus commissions are expected to fluctuate in
relation to sales for the remainder of 1996.
Marketing payments for cable advertising decreased for the quarter and nine
months ended September 30, 1996, because older agreements requiring such
payments expired or were renegotiated and new cable
15
<PAGE> 17
carriage agreements were executed. Current contracts generally provide other
forms of incentive compensation to cable operators, including upfront payments
of cable distribution fees or performance bonus commissions which require
payments based upon HSC attaining certain sales levels in the cable operator's
franchise area. Accordingly, marketing payments for cable advertising are
expected to decrease and amortization of cable distribution fees will increase
in 1996 as discussed in "Depreciation and Amortization."
The decreases in mail order catalog expenses relate to the sale of
Ortho-Vent assets in the fourth quarter of 1995. The decreases in
promotional/media expenses relate to the Company's change in programming
strategies in the third quarter of 1995. The remaining net decrease in selling
and marketing expenses is attributable to lower advertising and promotional
expenses of the Company's other subsidiary operations. As a result of the
Company's promotional program related to its private label credit card, the
Company will incur selling and marketing expenses in the form of additional
interest charges in the fourth quarter of 1996. Selling and marketing expenses
are expected to remain relatively constant as a percentage of net sales for the
remainder of 1996, compared to the first nine months of 1996.
ENGINEERING AND PROGRAMMING
For the quarter and nine months ended September 30, 1996, engineering and
programming expenses, as a percentage of net sales, decreased to 10.5% from
11.2% and to 10.0% from 11.2%, respectively, compared to the same periods in
1995, primarily as a result of the increase in net sales.
Broadcast costs payable to SKC increased $1.0 million and $3.3 million for
the quarter and nine months ended September 30, 1996, respectively, related to
the increase in sales. In addition, HSC production costs increased $1.4 million
for the nine months ended September 30, 1996 compared to the same periods in
1995 primarily due to higher payroll expense. These increases were partially
offset by lower broadcast costs of $.7 million and $3.8 million for the quarter
and nine months ended September 30, 1996, respectively, relating to fewer
broadcast affiliates compared to the same periods in 1995. In addition,
engineering and programming expenses decreased $.1 million and $1.6 million for
the quarter and nine months ended September 30, 1996 related to the sale of a
majority of the Company's interest in HSND. For the remainder of 1996,
engineering and programming expenses are expected to remain relatively constant
in comparison to the first nine months of 1996.
GENERAL AND ADMINISTRATIVE
For the quarter and nine months ended September 30, 1996, general and
administrative expenses, as a percentage of net sales, decreased to 7.4% from
8.3% and to 6.9% from 8.9%, respectively, compared to the same periods in 1995.
For the quarter ended September 30, 1996, decreases in expense related to
Stock Appreciation Rights ("SAR's") for the former chief executive officer,
legal, repairs and maintenance and other administrative expenses, totaling $2.7
million, were offset by increases in consulting, payroll, and other employment
expenses totaling $1.8 million. For the nine months ended September 30, 1996,
decreases in payroll, consulting, legal, repairs and maintenance and other
administrative expenses totaling $8.6 million were offset by a $.8 million
credit in the nine months ended September 30, 1995 related to SAR's.
Due to additional consulting and legal expenses expected to be incurred in
connection with the proposed merger with SKC and offsetting savings to be
realized in connection with the reduction of the Company's work force and other
expense reduction initiatives, management expects general and administrative
expenses to remain consistent with 1995 levels for the remainder of 1996.
DEPRECIATION AND AMORTIZATION
The decreases in depreciation and amortization for the quarter and nine
months ended September 30, 1996, were primarily due to decreases of $1.6 million
and $4.6 million, respectively, related to assets that became fully depreciated
in 1995, the retirement of certain equipment in the fourth quarter of 1995 and
lower capital expenditure levels in the quarter and nine months ended September
30, 1996, compared to the same
16
<PAGE> 18
periods in 1995. Depreciation expense is expected to remain at lower levels for
the remainder of 1996 compared to the same periods in 1995. In addition,
amortization expense for name lists decreased $2.8 million and $3.9 million for
the quarter and nine months ended September 30, 1996, respectively, relating to
the sale of Ortho-Vent assets in the fourth quarter of 1995. These decreases
were offset by increased amortization of cable distribution fees of $1.2 million
and $3.9 million for the quarter and nine months ended September 30, 1996.
Amortization of these fees is expected to total $16.9 million in 1996 based on
existing agreements. This amortization will increase if additional long-term
cable contracts containing upfront payments of cable distribution fees are
entered into during 1996, as discussed in "Selling and Marketing."
OTHER CHARGES
The other charges for the quarter and nine months ended September 30, 1995,
of $5.4 million, included severance costs of $2.0 million related to a reduction
in work force and $2.1 million of payments to the former president and chief
executive officer, as provided for under his employment agreement, in connection
with the termination of his employment. In addition, the Company recorded a
write-down of inventory totaling $1.3 million to net realizable value in
connection with the sale of Ortho-Vent assets.
RESTRUCTURING CHARGES
Restructuring charges for the nine months ended September 30, 1995, of $2.0
million, represented management's estimate of costs to be incurred in connection
with the closing of the Company's Reno, Nevada, distribution center, which was
accomplished in June 1995. The decision to close the Reno distribution center
was based on an evaluation of the Company's overall distribution strategy.
Management believes that consolidation of the Company's distribution facilities
resulted in operating efficiencies and improved service to customers.
OTHER INCOME (EXPENSE)
For the quarter and nine months ended September 30, 1996, the Company had
net other expense of $.4 million and $1.4 million, respectively, compared to
$5.0 million and $3.8 million, respectively, for the same periods in 1995.
Interest expense for the quarter ended September 30, 1996 decreased $.7
million due to lower interest rates resulting from additional financing obtained
by the Company on March 1, 1996 through a private placement of $100.0 million of
Convertible Subordinated Debentures (the "Debentures"), as discussed in
"Financial Position, Liquidity and Capital Resources" and Note D to the
Condensed Consolidated Financial Statements included herein. Interest expense
increased $2.3 million for the nine months ended September 30, 1996, compared to
the same period in 1995, due to a higher level of borrowings by the Company and
a reduction in the useful life of loan costs due to the refinancing of the
Company's Revolving Credit Facility (the "Credit Facility"). Management expects
that interest expense for the remainder of 1996 will decrease relative to the
same period in 1995.
For the quarter ended September 30, 1996, the Company had net miscellaneous
income of $1.0 million which primarily included a gain on the sale of other
assets of $.8 million. For the nine months ended September 30, 1996, the Company
had net miscellaneous income of $5.4 million, which also included a gain on the
sale of a controlling interest in HSND of $1.9 million and a one-time $1.5
million payment received in the first quarter of 1996 in connection with the
termination of the Canadian Home Shopping Network license agreement. For the
quarter and nine months ended September 30, 1995, the Company had net
miscellaneous income of $.3 million and $3.9 million, respectively, which
primarily included the receipt of proceeds from lawsuit settlements of $.4
million and $1.5 million, respectively, royalty income related to HSND of $.1
million and $.9 million, respectively, and a gain of $.6 million on the sale of
other assets in the first quarter of 1995.
17
<PAGE> 19
INCOME TAXES
The Company's effective tax rate was 38.0% for the quarter and nine months
ended September 30, 1996, and benefits of (31.5)% and (35.0)% for the quarter
and nine months ended September 30, 1995, respectively. The Company's effective
tax rate for these periods differed from the statutory rate due primarily to the
amortization of goodwill, state income taxes and the provision for interest on
adjustments proposed by the Internal Revenue Service. The Company anticipates
full realization of its net operating loss carryforward and accordingly no
valuation allowance has been provided. The Company's effective tax rate is
expected to vary from the statutory rate for the remainder of 1996.
SEASONALITY
The Company believes that seasonality does impact its business but not to
the same extent it impacts the retail industry in general.
B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The following table highlights various balances and ratios from the
Condensed Consolidated Financial Statements included herein:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
SEPTEMBER 30,
----------------- DECEMBER 31,
1996 1995 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents (millions)................. $ 31.8 $ 20.4 $ 25.2
Working capital(millions)............................ $ 16.1 $ 30.9 $ 7.6
Current ratio........................................ 1.10:1 1.15:1 1.04:1
Accounts and notes receivable, net (millions)........ $ 26.0 $ 31.7 $ 23.6
Inventories, net (millions).......................... $ 90.7 $136.8 $101.6
Inventory turnover for the quarter (annualized for
September periods only)............................ 6.08 4.58 5.47
Inventory turnover for the nine months (annualized
for September periods only)........................ 6.29 4.37 5.47
</TABLE>
The principal sources of cash for the twelve months ended September 30,
1996 were the Credit Facility and proceeds from the issuance of the Debentures.
The Credit Facility and available cash provided from operations were used
principally to pay cable distribution fees of $41.7 million, pay litigation
settlements of $8.6 million and pay for capital expenditures of $5.4 million.
Proceeds from the issuance of the Debentures and cash provided from operations
were used to repay outstanding borrowings under the Credit Facility. Net
earnings adjusted for non-cash items totaled $37.4 million for the twelve months
ended September 30, 1996. The principal source of cash for the nine months ended
September 30, 1996, was proceeds from the issuance of the Debentures, which,
along with available cash provided from operations, was used principally to
repay outstanding borrowings under the Credit Facility, pay cable distribution
fees of $27.5 million and pay litigation settlements of $3.7 million. Net
earnings adjusted for non-cash items totaled $50.6 million for the nine months
ended September 30, 1996.
Accounts and notes receivable at September 30, 1996 included "FlexPay"
accounts receivable totaling $14.6 million, compared to $15.2 million at
September 30, 1995 and $13.0 million at December 31, 1995. The Company's
financing of "FlexPay" accounts receivable has not had a significant impact on
its liquidity position. Accounts and notes receivable at September 30, 1995 also
included $3.0 million due from a former chairman of the Company's Board of
Directors.
The inventory balance is net of a carrying value adjustment of $35.0
million at September 30, 1996, compared to $20.5 million at September 30, 1995
and $33.3 million at December 31, 1995. The inventory carrying value adjustment,
which was significantly increased in the fourth quarter of 1995, is primarily
related to product which is inconsistent with HSC's new sales and merchandising
philosophy. Inventory levels will increase in the fourth quarter of 1996 in
preparation for the holiday selling season.
18
<PAGE> 20
Capital expenditures for the nine months ended September 30, 1996, were
$2.7 million. The Company estimates capital expenditures will range between $3.0
million and $5.0 million for the remainder of 1996.
The Company has initiated a plan to improve and expand the capabilities of
its computer systems. This plan will increase capital expenditures in 1997 and
1998 by $10.0 to $15.0 million per year. When completed, the Company expects to
achieve savings in its call center and fulfillment operations.
On August 2, 1996, the Company entered into a new $150.0 million Revolving
Credit Facility (the "New Facility") with a $25.0 million sub-limit for import
letters of credit. The New Facility, which replaced the Credit Facility
discussed above, expires on August 2, 1999, and like the Credit Facility, is
secured by the stock of HSC and HSN Realty, Inc. There were no outstanding
borrowings under the New Facility as of September 30, 1996, and $139.0 million
was available for borrowing after taking into account outstanding letters of
credit. The Company anticipates that it will use its borrowing capacity under
the New Facility for working capital requirements, capital expenditures and
general corporate purposes.
As discussed in Note K to the Condensed Consolidated Financial Statements
included herein, on October 10, 1996, the Company entered into a binding
Memorandum of Understanding to purchase a 29% equity interest in Home Order
Television GmbH & Co. ("HOT") for a total investment of $15.0 million, $5.0
million of which was placed into escrow in October 1996, to be released upon
execution of a definitive agreement and $5.0 million is expected to be paid in
each of April 1997 and September 1997.
During the remainder of 1996, management expects to pay cable distribution
fees, totaling $4.8 million, relating to new and current contracts with cable
system operators to carry HSC programming.
In April 1996, the Company sold a majority of its interest in HSND for $5.9
million, $4.9 million of which was received as of the closing of the
transaction, the remainder of which will be received in four equal annual
installments commencing on February 1, 1997.
During the nine months ended September 30, 1996, the Company received cash
proceeds of $13.7 million from the exercise of 1.3 million options to purchase
the Company's stock.
In management's opinion, available cash, internally generated funds and the
New Facility will provide sufficient capital resources to meet the Company's
foreseeable needs.
During the nine months ended September 30, 1996, the Company did not pay
any cash dividends and does not anticipate paying cash dividends in the
immediate future.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") effective for fiscal years beginning after December
15, 1995. FAS 123 provides alternatives for the methods used by entities to
record compensation expense associated with its stock-based compensation plans.
Additionally, FAS 123 provides further guidance on the disclosure requirements
relating to stock-based compensation plans. Presently, management intends to
present the effects of FAS 123 only on a disclosure basis.
19
<PAGE> 21
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On March 2, 1995, the Federal Trade Commission ("FTC") issued an
administrative complaint against the Company, HSC and HSN Lifeway Health
Products, Inc., In Re Home Shopping Network, Inc. et. al., No. D-9272, in
connection with the on-air presentation in 1993 of certain spray vitamin and
nutritional supplement products. The FTC alleged that the Company did not have a
reasonable basis to support certain on-air claims. On May 9, 1996, the Company
and its subsidiaries entered into a consent and cease and desist order under
which they agreed to obtain competent and reliable scientific evidence to
substantiate claims made for specified categories of products, including any
claim that any product can cure or prevent any illness, or affect the structure
or function of the human body. The settlement does not represent any admission
or wrongdoing by the Company, and does not require payment of any monetary
damages. A final decision and order incorporating the terms of the settlement
was issued on September 26, 1996.
On August 26, 1996, after announcement that SKC, House Acquisition Corp., a
newly formed subsidiary of SKC, Liberty HSN, Inc. and the Company had entered
into the Agreement and Plan of Exchange and Merger dated as of August 25, 1996
(the "HSN Merger Agreement"), a class action complaint titled Andre Engle v. Leo
J. Hindery, et. al. was filed in the Court of Chancery of the State of Delaware,
in and for the County of New Castle (the "Delaware Court"), against the Company,
Leo J. Hindery Jr., Gen. H. Norman Schwarzkopf, Eli J. Segal, Peter R. Barton,
Robert R. Bennett, Barry Diller, James G. Held, SKC, Liberty Media Corporation
("Liberty") and Tele-Communications, Inc. by a shareholder of the Company on
behalf of a purported class consisting of all public shareholders of the Company
(other than Liberty and its controlled affiliates). Shortly thereafter, four
other class action complaints were filed against the foregoing defendants with
the Delaware Court by shareholders of the Company on behalf of a purported class
consisting of all public shareholders of the Company (other than Liberty and its
controlled affiliates); one of these actions also named as defendants, J.
Anthony Forstmann and Victor A. Kaufman. Plaintiffs allege, among other things,
that, by approving the HSN Merger Agreement, the Company's director defendants
and, by supporting the merger, Liberty breached their fiduciary duties to the
stockholders and that the consideration to be paid to stockholders in the HSN
Merger is unfair and inadequate. Plaintiffs seek, among other things, an
injunction preventing the defendants from taking actions toward consummation of
the HSN Merger and related transactions, rescission or rescissory damages
(should the transactions proceed), and an award of unspecified compensatory
damages to the members of the plaintiff class. On October 7, 1996, the five
class action lawsuits were consolidated for all purposes in an action titled In
Re: Home Shopping Network, Inc. Shareholders Litigation, Consolidated Civil
Action No. 15179.
ITEM 6(A) -- EXHIBITS
Exhibit 27 -- Financial Data Schedule (for SEC use only).
ITEM 6(B) -- REPORTS ON FORM 8-K
A report on Form 8-K dated August 26, 1996 reported a definitive merger
agreement between the Company and SKC.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME SHOPPING NETWORK, INC.
---------------------------------------------
(Registrant)
Dated November 8, 1996 /s/ JAMES G. HELD
----------------------------------------------
James G. Held
President and
Chief Executive Officer
Dated November 8, 1996 /s/ KEVIN J. MCKEON
-----------------------------------------------
Kevin J. McKeon
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Dated November 8, 1996 /s/ BRIAN J. FELDMAN
-----------------------------------------------
Brian J. Feldman
Vice President and Controller
(Chief Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 31,833
<SECURITIES> 0
<RECEIVABLES> 26,044
<ALLOWANCES> 0
<INVENTORY> 90,728
<CURRENT-ASSETS> 180,492
<PP&E> 228,081
<DEPRECIATION> 127,997
<TOTAL-ASSETS> 418,036
<CURRENT-LIABILITIES> 164,432
<BONDS> 98,131
0
0
<COMMON> 790
<OTHER-SE> 154,683
<TOTAL-LIABILITY-AND-EQUITY> 418,036
<SALES> 733,922
<TOTAL-REVENUES> 733,922
<CGS> 453,483
<TOTAL-COSTS> 453,483
<OTHER-EXPENSES> 255,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,203
<INCOME-PRETAX> 23,016
<INCOME-TAX> 8,747
<INCOME-CONTINUING> 14,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,269
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
