<PAGE> 1
================================================================================
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 JUNE 30, 1997
COMMISSION FILE NUMBER 1-9118
---------------------
HOME SHOPPING NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<C> <C>
DELAWARE 59-2649518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1 HSN DRIVE, ST. PETERSBURG, FLORIDA
(Address of principal executive offices)
33729
(Zip Code)
(813) 572-8585
(Registrant's telephone number, including area code)
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 [ ]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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 as of August 8, 1997:
<TABLE>
<S> <C>
Common stock................ 71,989,159
Class B common stock........ 20,000,000
</TABLE>
================================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
NET SALES....................................... $250,950 $243,988 $512,368 $499,601
Cost of sales................................... 147,329 151,679 299,747 316,491
-------- -------- -------- --------
Gross profit.......................... 103,621 92,309 212,621 183,110
-------- -------- -------- --------
Operating expenses:
Selling and marketing......................... 32,581 35,099 67,374 71,866
Engineering and programming................... 23,496 24,663 47,385 48,741
General and administrative.................... 19,851 16,660 37,809 33,433
Depreciation and amortization................. 8,940 8,253 17,899 16,412
-------- -------- -------- --------
84,868 84,675 170,467 170,452
-------- -------- -------- --------
Operating profit...................... 18,753 7,634 42,154 12,658
Other income (expense):
Interest income............................... 394 428 931 938
Interest expense.............................. (1,976) (2,255) (3,708) (6,336)
Miscellaneous................................. (2,999) 2,204 (6,133) 4,369
-------- -------- -------- --------
(4,581) 377 (8,910) (1,029)
-------- -------- -------- --------
Earnings before income taxes and minority
interest...................................... 14,172 8,011 33,244 11,629
Income tax expense.............................. (5,976) (3,045) (13,690) (4,420)
Minority interest............................... (909) -- (2,266) --
-------- -------- -------- --------
NET EARNINGS.................................... $ 7,287 $ 4,966 $ 17,288 $ 7,209
======== ======== ======== ========
</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>
- -------------------------------------------------------------------------------------------------
June 30,
-------------------- December 31,
ASSETS 1997 1996 1996
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... $ 19,408 $ 17,351 $ 16,274
Accounts and notes receivable, net...................... 33,786 27,908 33,868
Related party receivables............................... -- -- 4,713
Inventories, net........................................ 127,167 89,569 100,527
Deferred income taxes................................... 18,871 25,876 23,302
Other current assets, net............................... 3,381 5,122 5,396
-------- -------- --------
Total current assets.......................... 202,613 165,826 184,080
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment........................ 93,469 90,801 91,361
Buildings and leasehold improvements.................... 70,410 70,001 70,049
Furniture and other equipment........................... 47,229 49,923 47,234
-------- -------- --------
211,108 210,725 208,644
Less accumulated depreciation and
amortization................................ 135,378 125,543 129,387
-------- -------- --------
75,730 85,182 79,257
Land.................................................... 16,889 16,914 16,884
Projects in progress.................................... 11,442 92 980
-------- -------- --------
104,061 102,188 97,121
OTHER ASSETS
Cable distribution fees, net ($38,643; $35,328 and
$40,892, respectively, to related parties)............ 108,767 108,664 113,594
Long-term investments ($11,759; $10,154 and $10,536,
respectively, in related parties)..................... 28,557 14,129 24,981
Deferred income taxes................................... 4,135 20,202 3,649
Other non-current assets ($843; $639 and $1,639,
respectively, in notes receivable from related
parties).............................................. 6,267 6,901 7,622
-------- -------- --------
147,726 149,896 149,846
-------- -------- --------
$454,400 $417,910 $431,047
======== ======== ========
</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>
- -----------------------------------------------------------------------------------------------
JUNE 30,
-------------------- DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 1996
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations.............. $ 250 $ 417 $ 250
Accounts payable......................................... 70,833 69,608 65,266
Income taxes payable..................................... 17,174 6,785 8,267
Related party payable.................................... 8,466 -- --
Investment subscription payable.......................... 5,000 -- 10,000
Accrued liabilities:
Programming fees ($8,637; $580 and $9,051,
respectively, to related parties)................... 17,948 14,627 22,683
Sales returns.......................................... 10,869 12,132 11,672
Other.................................................. 39,066 48,201 48,400
-------- -------- --------
Total current liabilities...................... 169,606 151,770 166,538
LONG-TERM OBLIGATIONS (net of current maturities)........ 98,042 118,079 97,934
MINORITY INTEREST........................................ 2,267 -- 1
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 and outstanding 71,989,159 shares at
June 30, 1997 and December 31, 1996; issued 78,970,759
and outstanding 71,984,759 shares at June 30, 1996..... 720 790 720
Class B -- convertible common stock -- $.01 par value;
authorized, issued and outstanding 20,000,000 shares... 200 200 200
Additional paid-in capital............................... 140,062 184,196 140,062
Retained earnings........................................ 45,585 14,886 28,297
Treasury stock -- 6,986,000 common shares, at cost at
June 30, 1996.......................................... -- (48,718) --
Unearned compensation.................................... (2,082) (3,293) (2,705)
-------- -------- --------
184,485 148,061 166,574
-------- -------- --------
$454,400 $417,910 $431,047
======== ======== ========
</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
Common Common Paid-In Retained Treasury Unearned
Stock Stock Capital Earnings Stock Compensation Total
- ----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996......... $777 $200 $169,057 $ 7,677 $(48,718) $(3,932) $125,061
Issuance of common stock upon
exercise of stock options........ 13 -- 13,622 -- -- -- 13,635
Income tax benefit related to
executive stock award program,
stock options exercised and
employee equity participation
plan............................. -- -- 1,517 -- -- -- 1,517
Expense related to executive stock
award program and stock
options.......................... -- -- -- -- -- 129 129
Expense related to employee equity
participation plan............... -- -- -- -- -- 510 510
Net earnings for the six months
ended June 30, 1996.............. -- -- -- 7,209 -- -- 7,209
---- ---- -------- ------- -------- ------- --------
BALANCE AT JUNE 30, 1996........... $790 $200 $184,196 $14,886 $(48,718) $(3,293) $148,061
==== ==== ======== ======= ======== ======= ========
BALANCE AT JANUARY 1, 1997......... $720 $200 $140,062 $28,297 $ -- $(2,705) $166,574
Expense related to executive stock
award program and stock
options.......................... -- -- -- -- -- 113 113
Expense related to employee equity
participation plan............... -- -- -- -- -- 510 510
Net earnings for the six months
ended June 30, 1997.............. -- -- -- 17,288 -- -- 17,288
---- ---- -------- ------- -------- ------- --------
BALANCE AT JUNE 30, 1997........... $720 $200 $140,062 $45,585 $ -- $(2,082) $184,485
==== ==== ======== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
HOME SHOPPING NETWORK, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1997 1996
-------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 17,288 $ 7,209
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization of cable distribution fees................ 9,734 8,162
Depreciation and amortization.......................... 8,273 8,319
Equity in (earnings) losses of unconsolidated
affiliates............................................ 6,317 (80)
Inventory carrying value adjustment.................... (4,522) 3,071
Deferred income taxes.................................. 3,945 1,548
Minority interest...................................... 2,266 --
Common stock issued for services provided.............. 623 639
Provision for losses on accounts receivable............ 502 542
(Gain) loss on sale of assets.......................... 119 (100)
Gain on sale of controlling interest in joint
venture............................................... -- (1,948)
Change in current assets and liabilities:
Increase in accounts and notes receivable............ (417) (4,816)
(Increase) decrease in inventories................... (22,118) 8,924
Decrease in other current assets..................... 2,015 3,027
Increase (decrease) in accounts payable.............. 5,568 (14,689)
Increase in payable to related party................. 13,179 --
Decrease in accrued liabilities...................... (10,966) (6,310)
Increase in cable distribution fees.................... (4,907) (17,665)
-------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... 26,899 (4,167)
-------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (14,626) (1,088)
Increase in net long-term investments..................... (9,893) (129)
Proceeds from long-term notes receivable.................. 793 48
Increase in other non-current assets...................... (312) (2,488)
Proceeds from sale of assets.............................. 273 416
Cash received from sale of controlling interest in joint
venture................................................ -- 4,924
Increase in intangible assets............................. -- (26)
-------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................... (23,765) 1,657
-------- ---------
Cash flows from financing activities:
Principal payments on long-term obligations............... -- (126,138)
Net proceeds from issuance of Convertible Subordinated
Debentures............................................. -- 97,200
Proceeds from issuance of common stock.................... -- 13,635
Borrowings from secured credit facility................... -- 10,000
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES............. -- (5,303)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 3,134 (7,813)
Cash and cash equivalents at beginning of period............ 16,274 25,164
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 19,408 $ 17,351
======== =========
</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 year ended December 31, 1996. Certain amounts in the Condensed
Consolidated Financial Statements for the six months ended June 30, 1996, have
been reclassified to conform to the 1997 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. 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.
On December 20, 1996, the Company consummated a merger (the "Merger") with
HSN, Inc. ("HSNi"), formerly known as Silver King Communications, Inc. The
Merger does not result in a change in accounting basis of the net assets of the
Company as presented in the accompanying Condensed Consolidated Financial
Statements.
NOTE B -- CREDIT FACILITIES
On May 1, 1997, HSNi entered into a new $275.0 million revolving credit
facility (the "New Facility") with a $35.0 million sub-limit for letters of
credit. The New Facility, which replaced the existing credit facilities of both
HSNi and the Company, expires on May 1, 2002. The New Facility is unsecured and
the interest rate on borrowings is tied to the London Interbank Offered Rate
plus an applicable margin. The Company is a guarantor of the New Facility.
NOTE C -- INCOME TAXES
The Company had taxable income for the quarter and six months ended June
30, 1997, which utilized the entire net operating loss from the short taxable
year, December 21, 1996 to December 31, 1996.
On June 23, 1997, the Internal Revenue Service ("IRS") completed the
examination of the Company's federal income tax returns for fiscal years 1992,
1993 and 1994. The IRS proposed adjustments resulting in a potential tax
deficiency of $9.3 million, primarily related to the disallowance of deductions
pertaining to a legal settlement and stock options exercised under the 1986
Cable Operators Stock Option Plan. On July 23, 1997, the Company made a payment
of $1.3 million of tax and $.3 million of interest, for all undisputed issues.
These undisputed issues were related to inter-period allocations of tax
deductions, which will reverse in subsequent periods. The Company maintains it
has meritorious positions with respect to the disputed adjustments and intends
to file a protest with the IRS. To minimize interest expense in the event of an
unfavorable outcome, the Company deposited $2.8 million with the IRS during July
1997.
In addition, the IRS reversed its position on an issue with respect to a
former related party, which will result in a refund of $5.0 million in taxes and
interest related to fiscal years 1986 to 1989.
The effects of the settlement of undisputed items, the potential impact of
the undisputed items, and the $5.0 million refund were provided for in previous
years and, accordingly, had no impact on the income tax provision for the
quarter and six months ended June 30, 1997.
The Company believes it has made adequate provision for all outstanding tax
issues.
6
<PAGE> 8
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE D -- 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 disclosure of cash flow information:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH PAID FOR:
Interest.................................................. $2,970 $5,475
Income taxes.............................................. 949 183
CASH RECEIVED FOR:
Income tax refund......................................... 110 649
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS IN
ACCORDANCE WITH GENERAL INSTRUCTION H TO FORM 10-Q
HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
GENERAL
Home Shopping Network, Inc., which includes its subsidiaries,
(collectively, the "Company"), is a majority-owned subsidiary of HSN, Inc.,
formerly named Silver King Communications, Inc., ("HSNi"). The Company's primary
business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"),
a wholly-owned subsidiary of the Company, which operates two retail sales
services, The Home Shopping Network ("HSN") and America's Store, each
twenty-four hours a day, seven days a week.
On August 25, 1996, the Company entered into a merger agreement ("Merger
Agreement") with a subsidiary of HSNi ("Merger Sub") and Liberty HSN, Inc.
("Liberty HSN"), an indirect, wholly-owned subsidiary of Liberty Media
Corporation, which in turn, is a wholly-owned subsidiary of Tele-Communications,
Inc. On December 20, 1996, pursuant to the Merger Agreement, Merger Sub was
merged with and into the Company and the Company became a subsidiary of HSNi.
After consummation of the merger, HSNi owned 80.1% of the equity and 90.8% of
the voting power of the Company, with the remaining 19.9% of the equity and 9.2%
of the voting power owned by Liberty HSN.
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS. THESE ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE," "OPTIMISTIC," "INTEND," "AIM," "WILL," AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY UNDERTAKES NO OBLIGATION
TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
AS WELL AS AFFECT THE COMPANY'S ABILITY TO ACHIEVE ITS GOALS REFERRED TO HEREIN,
INCLUDE BUT ARE NOT LIMITED TO, THE FOLLOWING: BUSINESS AND GENERAL ECONOMIC
CONDITIONS, COMPETITIVE FACTORS, CHANNEL SPACE AVAILABILITY, THE COST AND
AVAILABILITY OF APPROPRIATE MERCHANDISE AND DELIVERY SERVICES, CONSOLIDATION
WITHIN THE CABLE INDUSTRY, COST OF CARRIAGE OF THE COMPANY'S PROGRAMMING AND
CHANGES IN THE REGULATORY ENVIRONMENT.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion presents the material changes in the consolidated
results of operations of the Company which have occurred in the second quarter
and the first six months of 1997, compared with the same periods in 1996.
Reference should also be made to the Condensed Consolidated Financial Statements
included herein.
All tables and discussion included herein calculate the percentage changes
using actual dollar amounts, versus rounded dollar amounts.
NET SALES
For the quarter and six months ended June 30, 1997, net sales for the
Company increased $7.0 million, or 2.9%, to $251.0 million from $244.0 million
and $12.8 million, or 2.6%, to $512.4 million from $499.6 million, respectively,
compared to the same periods in 1996. Net sales of HSC increased $21.3 million,
or 10.0%, and $39.2 million, or 9.0%, for the quarter and six months ended June
30, 1997, respectively, compared to the same periods in 1996. HSC's sales
reflect increases of 13.5% and 12.8% in the number of packages shipped and
decreases of 7.7% and 9.2% in the average price per unit sold for the quarter
and six months ended June 30, 1997, respectively, compared to the same periods
in 1996. The increase in HSC net sales was offset by planned decreases in net
sales of wholly-owned subsidiaries, HSN Mail Order, Inc. ("Mail Order"), and the
retail outlet stores of $10.9 million and $2.7 million, respectively, for the
quarter ended June 30, 1997, and $17.1 million and $5.2 million, respectively,
for the six months then ended, compared to the same periods in 1996.
8
<PAGE> 10
The Company believes that the improved sales in the quarter and six months
ended June 30, 1997, compared to the same periods in 1996, were primarily the
result of ongoing changes made to the Company's merchandising and programming
strategies. Management is continuing to take additional steps to improve sales
by changing the mix of products sold, introducing new products, reducing the
average price per unit, creating exciting programming and taking measures to
increase the customer base. Additional personnel have been hired to assist in
implementing these new merchandising and programming strategies. Management has
reformatted the former Spree! service to America's Store which was launched in
January 1997. This change was designed to focus America's Store on some of the
most popular product areas of electronic retailing. This service has undergone
various format changes to date, and the Company is continuing to develop this
service. There can be no assurance that the additional changes to the Company's
merchandising and programming strategies will achieve management's intended
results.
For the quarter and six months ended June 30, 1997, HSC's merchandise
return percentage decreased to 23.4% from 24.7% and to 22.6% from 24.8%,
respectively, compared to the same periods in 1996. Management believes that the
lower return rate is primarily attributable to the decrease in the average price
per unit and the mix of products sold, which may vary in subsequent quarters.
Promotional price discounts decreased to 1.8% from 3.3% of HSC sales for the
quarter ended June 30, 1997 and to 1.7% from 3.5% for the six months ended June
30, 1997, compared to the same periods in 1996, as fewer discounts were offered.
At June 30, 1997 and 1996, HSC had approximately 4.7 million active
customers. An active customer is one who has completed a transaction within the
last eighteen months or placed an order within the last seven months. In
addition, 60.6% of active customers have made more than one purchase in the last
eighteen months, compared to 59.3% at June 30, 1996.
The following table highlights the changes in the estimated unduplicated
television household reach of HSN, the Company's primary service, for the twelve
months ended June 30, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CABLE* BROADCAST SATELLITE TOTAL
- --------------------------------------------------------------------------------------------------
(In thousands of households)
<S> <C> <C> <C> <C>
Households -- June 30, 1996.............................. 45,891 19,802 3,788 69,481
Net additions/(deletions)................................ 3,642 (1,087) -- 2,555
Shift in classification.................................. 326 (326) -- --
Change in Nielsen household counts....................... -- (926) -- (926)
------ ------ ----- ------
Households -- June 30, 1997.............................. 49,859 17,463 3,788 71,110
====== ====== ===== ======
</TABLE>
- ---------------
* Households capable of receiving both broadcast and cable transmissions are
included under cable and therefore are excluded from broadcast to present
unduplicated household reach. Cable households included 3.4 million and 1.4
million direct broadcast satellite ("dbs") households at June 30, 1997 and
1996, respectively, and therefore, these households are excluded from
satellite.
According to industry sources, as of June 30, 1997, there were 96.9 million
homes in the United States with a television set, 64.6 million basic cable
television subscribers and 3.8 million homes with satellite dish receivers,
excluding dbs.
In addition, as of June 30, 1997, approximately 10.4 million cable
television households could be reached by America's Store, of which 3.8 million
are on a part-time basis. Of the total cable television households receiving
America's Store, 9.0 million also receive HSN.
During the remainder of 1997, cable system contracts covering 2.7 million
cable subscribers are subject to termination or renewal. This represents 5.4% 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 successfully renegotiated.
9
<PAGE> 11
HSNi, as part of its disengagement strategy, has selected its Miami,
Florida station as the initial station which will cease broadcasting HSN and
commence broadcasting its new local programming format in the Spring of 1998.
The Miami station currently carries HSN. Management is continuing to evaluate
the effects that the disaffiliation will have on Home Shopping's ability to
reach some of its existing customers in the Miami area, including a reduction in
revenues or additional expenses to secure carriage of HSN. The Company believes
that the process of disaffiliation can be successfully managed to minimize
adverse consequences.
GROSS PROFIT
For the quarter and six months ended June 30, 1997, gross profit increased
$11.3 million, or 12.3%, to $103.6 million from $92.3 million and $29.5 million,
or 16.1%, to $212.6 million from $183.1 million, respectively, compared to the
same periods in 1996. As a percentage of net sales, gross profit increased to
41.3% from 37.8% for the quarter ended June 30, 1997 and to 41.5% from 36.7% for
the six months then ended, compared to the same periods in 1996.
Gross profit of HSC increased $14.0 million and $36.6 million,
respectively, for the quarter and six months ended June 30, 1997. These
increases were primarily offset by decreases in Mail Order's gross profit of
$4.4 million and $7.1 million, respectively, relating to the planned reduction
of the mail order business in 1997. As a percentage of HSC's net sales, gross
profit increased to 40.1% from 37.5% and to 40.4% from 35.7% for the quarter and
six months ended June 30, 1997, respectively, compared to the same periods in
1996.
The dollar increases in consolidated and HSC's gross profit relate to the
higher sales volume. Management believes that the increases in consolidated and
HSC's gross profit percentage when compared to 1996, are primarily the result of
changes in merchandising and programming strategies, as discussed in "Net
Sales."
OPERATING EXPENSES
The following table highlights the operating expense section from the
Company's Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------------- -------------------------
$ $ % $ $ %
AMOUNT CHANGE CHANGE AMOUNT CHANGE CHANGE
- ---------------------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing...................... $32.6 $(2.5) (7.2)% $ 67.4 $(4.5) (6.3)%
Engineering and programming................ 23.5 (1.2) (4.7) 47.4 (1.4) (2.8)
General and administrative................. 19.9 3.2 19.2 37.8 4.4 13.1
Depreciation and amortization.............. 8.9 .7 8.3 17.9 1.5 9.1
----- ----- ------ -----
$84.9 $ .2 .2 $170.5 $ -- --
===== ===== ====== =====
</TABLE>
As a percentage of net sales, operating expenses decreased to 33.8% from
34.7% and to 33.3% from 34.1%, respectively, for the quarter and six months
ended June 30, 1997, compared to the same periods in 1996.
SELLING AND MARKETING
For the quarter and six months ended June 30, 1997, selling and marketing
expenses, as a percentage of net sales, decreased to 13.0% from 14.4% and to
13.1% from 14.4%, respectively, compared to the same periods in 1996.
10
<PAGE> 12
The major components of selling and marketing expenses are detailed below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
-------------------------- --------------------------
$ $ % $ $ %
AMOUNT CHANGE CHANGE AMOUNT CHANGE CHANGE
- ---------------------------------------------------------------------------------------------------
(In millions, except %)
<S> <C> <C> <C> <C> <C> <C>
Telephone, operator and customer
service................................ $12.4 $ .1 .5 % $25.6 $ .4 1.8 %
Fees to cable system operators:
Commissions............................ 10.4 .9 9.9 21.2 1.4 7.3
Performance bonus commissions.......... 2.4 (.6) (19.9) 4.7 (1.0) (17.6)
Marketing payments for cable
advertising......................... 2.2 (.3) (13.0) 4.3 (.9) (17.2)
Mail order catalog expenses.............. .1 (2.4) (97.8) .7 (4.4) (85.7)
</TABLE>
Telephone, operator and customer service expenses are typically related to
sales, call volume, and the number of packages shipped. Telephone expense
increased $.6 million, or 12.0%, and $1.3 million, or 13.1%, for the quarter and
six months ended June 30, 1997, respectively, compared to the same periods in
1996, due to the increase in call and package volume. Operator and customer
service payroll expenses decreased $.5 million, or 7.2%, and $.9 million, or
5.9%, respectively, due to volume efficiencies and a reduced work force.
Management expects telephone, operator and customer service expenses to
fluctuate in relation to call and package volume for the remainder of 1997.
For the quarter and six months ended June 30, 1997, commissions to cable
system operators increased as a result of the increase in 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 area resulting from watching the services via cable
or a broadcast television station. As a result of the above factors, subject to
sales volume, fees paid to cable system operators are expected to remain at
these higher levels in future periods.
Performance bonus commissions decreased for the quarter and six months
ended June 30, 1997, compared to the same periods in 1996, due to lower
guaranteed minimum commission expense in 1997. Performance bonus commissions are
expected to fluctuate in relation to sales for the remainder of 1997.
Marketing payments for cable advertising decreased for the quarter and six
months ended June 30, 1997, compared to the same periods in 1996, because older
agreements requiring such payments expired or were renegotiated and new cable
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
for the remainder of 1997, compared to the same period in 1996.
The decrease in mail order catalog expenses relates to the planned
reduction of the mail order business in 1997. Total selling and marketing
expenses are expected to remain relatively constant as a percentage of net sales
for the remainder of 1997.
ENGINEERING AND PROGRAMMING
For the quarter and six months ended June 30, 1997, engineering and
programming expenses, as a percentage of net sales, decreased to 9.4% from 10.1%
and to 9.2% from 9.8%, respectively, compared to the same periods in 1996,
primarily as a result of the increase in net sales.
Broadcast costs payable to SKTV, Inc. ("SKTV"), a wholly-owned subsidiary
of HSNi, for the quarter and six months ended June 30, 1997, decreased $.6
million and $1.4 million, respectively, compared to the same periods in 1996.
The expense for the quarter and six months ended June 30, 1996, includes $.9
million and $1.8 million, respectively, of bonus commissions which were reversed
in the fourth quarter of 1996 and not
11
<PAGE> 13
accrued in the quarter and six months ended June 30, 1997. In addition,
broadcast costs, other than SKTV, decreased $.5 million and $.7 million for the
quarter and six months ended June 30, 1997, relating to fewer broadcast
affiliates compared to 1996. These decreases were offset by increased HSC
production and set costs of $.5 million and $1.3 million for the quarter and six
months ended June 30, 1997, respectively, primarily relating to the launch and
development of America's Store in 1997. For the remainder of 1997, engineering
and programming expenses are expected to decrease slightly in comparison to the
same periods in 1996.
GENERAL AND ADMINISTRATIVE
For the quarter and six months ended June 30, 1997, general and
administrative expenses, as a percentage of net sales, increased to 7.9% from
6.8% and to 7.4% from 6.7%, respectively, compared to the same periods in 1996.
The increase in general and administrative expenses for the quarter and six
months ended June 30, 1997, is due to higher payroll costs of $1.4 million and
$2.5 million, respectively, primarily relating to additional management
personnel hired in late 1996 and early 1997, and higher accrued bonus expense of
$1.8 million and $1.9 million, respectively, relating to a new management bonus
plan and other contractual obligations.
For the remainder of 1997, management expects general and administrative
expenses to remain higher than comparable quarters in the prior year.
DEPRECIATION AND AMORTIZATION
The increase in depreciation and amortization for the quarter and six
months ended June 30, 1997, was primarily due to higher capital expenditure
levels compared to the same periods in 1996. Depreciation expense is expected to
remain at higher levels for the remainder of 1997, compared to the same periods
in 1996. In addition, amortization of cable distribution fees increased $.7
million and $1.6 million for the quarter and six months ended June 30, 1997.
Amortization of these fees is expected to total $19.6 million in 1997 based on
existing agreements. Amortization amounts will increase if additional long-term
cable contracts containing up-front payments of cable distribution fees are
entered into during the remainder of 1997, as discussed in "Selling and
Marketing."
OTHER INCOME (EXPENSE)
For the quarter and six months ended June 30, 1997, the Company had net
other expense of $4.6 million and $8.9 million, respectively, compared to net
other income of $.4 million and net other expense of $1.0 million, respectively,
for the same periods in 1996.
Interest expense decreased $.3 million and $2.6 million for the quarter and
six months ended June 30, 1997, respectively, due to a lower level of borrowings
by the Company at a lower average interest rate primarily due to the private
placement on March 1, 1996, of $100.0 million of Convertible Subordinated
Debentures. Management expects that interest expense for the remainder of 1997
will be comparable to the same periods in 1996.
For the quarter and six months ended June 30, 1997, the Company had net
miscellaneous expense of $3.0 million and $6.1 million, respectively, primarily
due to equity losses totaling $3.0 million and $6.3 million, respectively,
relating to the Company's investments in Home Order Television GmbH & Co. and
Jupiter Shop Channel Co.; Ltd. For the quarter and six months ended June 30,
1996, the Company had net miscellaneous income of $2.2 million and $4.4 million,
respectively, which primarily included a one time gain on the sale of a
controlling interest in its infomercial joint venture, HSN Direct Joint Venture,
of $1.9 million in the second quarter of 1996 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.
INCOME TAXES
The Company's effective tax rate, calculated on earnings before income
taxes and minority interest, was 42.2% and 41.2% for the quarter and six months
ended June 30, 1997, respectively, and 38.0% for the quarter
12
<PAGE> 14
and six months ended June 30, 1996. The Company's effective tax rate for these
periods differed from the statutory rate due to the amortization of
non-deductible goodwill and state income taxes. The Company's effective tax rate
is expected to exceed the statutory rate for the remainder of 1997.
SEASONALITY
The Company believes that seasonality does impact its business but not to
the extent it impacts the retail industry in general.
13
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 6(A) -- EXHIBITS
Exhibit 27 -- Financial Data Schedule (for SEC use only).
14
<PAGE> 16
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)
<TABLE>
<S> <C>
Dated August 14, 1997 /s/ JAMES G. HELD
--------------------------------------------------------
- ------------------------------------------------- James G. Held
President and Chief Executive Officer
Dated August 14, 1997 /s/ JED B. TROSPER
--------------------------------------------------------
- ------------------------------------------------- Jed B. Trosper
Senior Executive Vice President,
Chief Operating Officer, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
Dated August 14, 1997 /s/ BRIAN J. FELDMAN
--------------------------------------------------------
- ------------------------------------------------- Brian J. Feldman
Vice President and Controller
(Chief Accounting Officer)
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,408
<SECURITIES> 0
<RECEIVABLES> 33,786
<ALLOWANCES> 0
<INVENTORY> 127,167
<CURRENT-ASSETS> 202,613
<PP&E> 239,439
<DEPRECIATION> 135,378
<TOTAL-ASSETS> 454,400
<CURRENT-LIABILITIES> 169,606
<BONDS> 98,042
0
0
<COMMON> 720
<OTHER-SE> 183,765
<TOTAL-LIABILITY-AND-EQUITY> 454,400
<SALES> 512,368
<TOTAL-REVENUES> 512,368
<CGS> 299,747
<TOTAL-COSTS> 299,747
<OTHER-EXPENSES> 170,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,708
<INCOME-PRETAX> 33,244
<INCOME-TAX> 13,690
<INCOME-CONTINUING> 17,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,288
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
