QVC NETWORK INC, 10-Q, 1994-08-29

QVC NETWORK INC
10-Q, 1994-08-29
CATALOG & MAIL-ORDER HOUSES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 0-14999
------------------------

QVC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 23-2414041
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>

1365 ENTERPRISE DRIVE, WEST CHESTER, PA 19380
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(610) 430-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

QVC NETWORK, INC., GOSHEN CORPORATE PARK,
WEST CHESTER, PA 19380
(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, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK (NET OF
SHARES HELD IN TREASURY) AS OF JULY 31, 1994, WAS:

COMMON STOCK ($.01 PAR VALUE) -- 40,265,392 SHARES
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<PAGE> 2

QVC, INC.

INDEX

PART I -- FINANCIAL INFORMATION

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Balance Sheets........................................................ 2
Consolidated Statements of Operations.............................................. 3
Consolidated Statements of Cash Flows.............................................. 4
Consolidated Statement of Shareholders' Equity..................................... 5
Notes to Consolidated Financial Statements......................................... 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 12
</TABLE>

PART II -- OTHER INFORMATION

<TABLE>
<S> <C> <C>
Item 1: Legal Proceedings........................................................... 19
Item 4: Submission of Matters to a Vote of Security Holders......................... 20
Item 5: Other Information........................................................... 21
Item 6: Exhibits and Reports on Form 8-K............................................ 21
Signatures........................................................................... 23
</TABLE>
<PAGE> 3

QVC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1994 1994
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 49,537 $ 15,873
Accounts receivable, less allowance for doubtful accounts of
$66,380 at July 31, 1994 and $52,759 at January 31, 1994......... 182,810 183,162
Inventories....................................................... 150,041 148,208
Deferred taxes.................................................... 57,981 59,749
Prepaid expenses.................................................. 7,870 5,536
-------- -----------
Total current assets......................................... 448,239 412,528
Property, plant and equipment, at cost, less accumulated
depreciation......................................................... 81,072 80,579
Cable television distribution rights, net.............................. 99,662 99,579
Other assets, net...................................................... 39,657 33,664
Excess of cost over acquired net assets................................ 246,921 251,810
-------- -----------
Total assets................................................. $915,551 $ 878,160
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................. $ 3,143 $ 3,114
Accounts payable-trade............................................ 81,340 81,594
Accrued liabilities............................................... 235,871 225,989
-------- -----------
Total current liabilities.................................... 320,354 310,697
Long-term debt, less current maturities................................ 6,751 7,044
-------- -----------
Total liabilities............................................ 327,105 317,741
-------- -----------
Shareholders' equity:
Convertible Preferred Stock, par value $.10....................... 56 56
Common Stock, par value $.01...................................... 403 399
Additional paid-in capital........................................ 450,259 446,027
Retained earnings................................................. 137,728 113,937
-------- -----------
Total shareholders' equity................................... 588,446 560,419
-------- -----------
Total liabilities and shareholders' equity................... $915,551 $ 878,160
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

2
<PAGE> 4

QVC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue......................................... $303,277 $262,438 $599,718 $535,670
Cost of goods sold.................................. 184,315 154,500 365,127 313,959
-------- -------- -------- --------
Gross profit........................................ 118,962 107,938 234,591 221,711
-------- -------- -------- --------
Operating expenses:
Variable costs................................. 40,014 37,171 80,051 77,301
General and administrative..................... 36,918 36,270 69,209 66,840
Depreciation................................... 4,276 4,137 8,518 8,103
Amortization of intangible assets.............. 6,340 6,476 12,545 13,156
-------- -------- -------- --------
87,548 84,054 170,323 165,400
-------- -------- -------- --------
Operating income.................................... 31,414 23,884 64,268 56,311
-------- -------- -------- --------
Other income (expense):
Losses from joint ventures..................... (9,557) -- (19,570) --
Interest expense............................... (343) (352) (701) (896)
Interest income................................ 3,999 2,605 7,899 5,268
-------- -------- -------- --------
(5,901) 2,253 (12,372) 4,372
-------- -------- -------- --------
Income before income taxes and cumulative effect of
a change in accounting principle.................. 25,513 26,137 51,896 60,683
Income tax provision................................ (13,785) (12,810) (28,105) (29,735)
-------- -------- -------- --------
Income before cumulative effect of a change in
accounting principle.............................. 11,728 13,327 23,791 30,948
Cumulative effect of a change in accounting for
income taxes...................................... -- -- -- 3,990
-------- -------- -------- --------
Net income.......................................... $ 11,728 $ 13,327 $ 23,791 $ 34,938
======== ======== ======== ========
Income per share:
Primary:
Income before cumulative effect of a change in
accounting principle......................... $ .25 $ .26 $ .49 $ .62
Cumulative effect of a change in accounting for
income taxes................................. -- -- -- .08
-------- -------- -------- --------
Net income..................................... $ .25 $ .26 $ .49 $ .70
======== ======== ======== ========
Fully diluted:
Income before cumulative effect of a change in
accounting principle......................... $ .24 $ .26 $ .49 $ .60
Cumulative effect of a change in accounting for
income taxes................................. -- -- -- .08
-------- -------- -------- --------
Net income..................................... $ .24 $ .26 $ .49 $ .68
======== ======== ======== ========
Weighted average number of common and common
equivalent shares:
Primary................................... 47,706 50,885 48,150 50,219
======== ======== ======== ========
Fully diluted............................. 49,186 51,159 49,050 51,139
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

3
<PAGE> 5

QVC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
----------------------
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 23,791 $ 34,938
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in deferred taxes...................... (2,229) 2,676
Cumulative effect of a change in accounting for income
taxes.................................................... -- (3,990)
Depreciation............................................... 8,518 8,103
Amortization of intangible assets.......................... 12,545 13,156
Losses from joint ventures................................. 19,570 --
Losses on sales of equipment............................... 275 --
Changes in other non-current assets............................. (7,985) 1,067
Effects of changes in working capital items*.................... 7,581 (10,878)
-------- --------
Net cash provided by operating activities....................... 62,066 45,072
-------- --------
Cash flows from investing activities:
Capital expenditures............................................ (9,366) (13,278)
Changes in other assets......................................... (7,872) (1,113)
Investments in and advances to joint ventures................... (15,216) --
Proceeds from sales of equipment................................ 80 --
-------- --------
Net cash used in investing activities........................... (32,374) (14,391)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit facilities.................... -- 20,000
Payments against revolving credit facilities.................... -- (20,000)
Principal payments under capitalized leases and other debt...... (264) (250)
Payments under Senior term loan................................. -- (21,000)
Proceeds from exercise of stock options......................... 1,136 906
Proceeds from exercise of warrants.............................. 3,100 --
-------- --------
Net cash provided by (used in) financing activities............. 3,972 (20,344)
-------- --------
Net increase in cash and cash equivalents............................ 33,664 10,337
Cash and cash equivalents at beginning of period..................... 15,873 4,279
-------- --------
Cash and cash equivalents at end of period........................... $ 49,537 $ 14,616
======== ========
* Analysis of effects of changes in working capital items:
Decrease in accounts receivable................................. $ 352 $ 5,202
Increase in inventories......................................... (1,833) (17,696)
Decrease (increase) in deferred taxes........................... 1,768 (5,649)
Increase in prepaid expenses.................................... (2,334) (1,429)
(Decrease) increase in accounts payable......................... (254) 10,737
Increase (decrease) in accrued liabilities...................... 9,882 (2,043)
-------- --------
$ 7,581 $(10,878)
======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

4
<PAGE> 6

QVC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL
CONVERTIBLE COMMON PAID-IN RETAINED
PREFERRED STOCK STOCK CAPITAL EARNINGS TOTAL
--------------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance January 31, 1994................ $56 $399 $ 446,027 $113,937 $560,419
Net income for period................... -- -- -- 23,791 23,791
Proceeds from exercise of warrants...... -- 3 3,097 -- 3,100
Proceeds from the exercise of employee --
stock options......................... 1 1,135 -- 1,136
--- ------ ---------- -------- --------
Balance July 31, 1994................... $56 $403 $ 450,259 $137,728 $588,446
=========== ====== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

5
<PAGE> 7

QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The interim consolidated financial statements are unaudited and should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the years ended January 31, 1994 and 1993.

In the opinion of QVC, Inc. (the "Company" or "QVC"), all adjustments
necessary for a fair presentation of such consolidated financial statements have
been included. Such adjustments principally consist of normal recurring items.
Interim results are not necessarily indicative of results for a full year.

The consolidated financial statements include the accounts of the Company
and all subsidiaries. Investments in the Company's joint ventures (50% or less
owned) are accounted for under the equity method. All significant intercompany
accounts and transactions are eliminated in consolidation.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies followed by the Company are set forth in Note 1 to
the Company's consolidated financial statements in the QVC, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1994.

NOTE 3 -- OTHER ASSETS

Other assets consist of the following:

<TABLE>
<CAPTION>
JULY JANUARY
31, 31,
1994 1994
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred taxes (Note 5).......................................... $19,494 $ 17,265
Investments in and advances to joint ventures, net of accumulated
losses......................................................... 6,840 11,194
Start-up costs................................................... 11,444 3,459
Satellite transponder rights..................................... 1,000 1,000
Other............................................................ 1,353 1,234
------- ----------
40,131 34,152
Less -- accumulated amortization................................. (474) (488)
------- ----------
Net other assets................................................. $39,657 $ 33,664
======= ========
</TABLE>

During fiscal 1993, the Company established electronic retailing program
service in the United Kingdom ("QVC -- The Shopping Channel") and Mexico ("CVC")
through joint venture agreements with British Sky Broadcasting Limited and Grupo
Televisa, S.A. de C.V., respectively. The joint venture in the United Kingdom
began broadcasting on October 1, 1993, and the joint venture in Mexico began
broadcasting on November 15, 1993. The joint venture agreement in the United
Kingdom requires, among other things, that the Company provide all funding to
the joint venture until it is profitable. The Company will then recover all
prior funding before any profits are shared. Accordingly, the Company has
included 100% of the loss on operations of this venture in the Consolidated
Statements of Operations. The operating results of the joint venture in Mexico
are shared equally by the partners.

6
<PAGE> 8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized financial information for "QVC -- The Shopping Channel" and
"CVC" on a 100% basis as of and for the three and six months ended July 31, 1994
follows (in thousands):

<TABLE>
<CAPTION>
QVC -- THE
SHOPPING CHANNEL CVC
---------------- ----------------
<S> <C> <C>
Current assets.............................................. $6,199 $11,661
Property, plant and equipment, net.......................... 2,248 2,190
Unamortized start-up costs.................................. 1,260 967
Current liabilities......................................... 6,079 12,587
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, 1994 SIX MONTHS ENDED JULY 31, 1994
--------------------------------------- ---------------------------------------
QVC -- THE QVC -- THE
SHOPPING CHANNEL CVC SHOPPING CHANNEL CVC
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenue.............. $ 4,548 $ 6,960 $ 7,617 $11,649
Gross profit............. 1,550 1,894 2,184 2,781
Loss..................... (7,096) (2,980) (14,293) (6,247)
</TABLE>

In fiscal 1993, the Company also entered a joint venture with Tribune
Entertainment Company and Regal Communications to form QRT Enterprises ("QRT").
QRT produced and syndicated "Can We Shop" with Joan Rivers, which commenced
broadcasting January 17, 1994. On June 15, 1994, QRT announced plans to cease
the venture with the last show broadcasting on July 15. 1994. "Can We Shop" was
a one-hour, Monday through Friday television show through which merchandise was
sold. The Company's one-third share of QRT's operating loss amounted to $421,000
during the second quarter of fiscal 1994 and $1.3 million during the first six
months of fiscal 1994.

The Company has made a $4.4 million investment in Friday Holdings, L.P., a
limited partnership ("Friday Holdings"). The limited partnership's purpose is to
establish or acquire businesses in the communications field and to develop
information products. The Company's one-third share of Friday Holdings'
operating loss amounted to $550,000 in the second quarter of fiscal 1994 and
$900,000 for the first six months of fiscal 1994. In August 1994, the limited
partners of Friday Holdings received notice from the general partner that the
limited partnership is to be dissolved and the assets distributed to the
partners.

The Company has capitalized $11.4 million in costs relating to Q2, a new
televised shopping/programming service, scheduled to be launched in the third
quarter of fiscal 1994 in the United States. The capitalized start-up costs will
be amortized over eighteen months starting at the commencement of broadcast
operations.

NOTE 4 -- CAPITAL STOCK

The Company has 175,000,000 shares of Common Stock authorized. There were
40,265,392 shares outstanding at July 31, 1994 and 39,895,447 shares outstanding
at January 31, 1994. The increase in the number of shares of Common Stock
outstanding is the result of the exercise of warrants (310,000), the exercise of
employee stock options (50,875) and the conversion of Convertible Preferred
Stock (9,070).

7
<PAGE> 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the number of Convertible Preferred shares
at July 31, 1994 and January 31, 1994 (in thousands):

<TABLE>
<CAPTION>
JULY 31, 1994 JANUARY 31, 1994
SHARES ------------------------ ------------------------
AUTHORIZED OUTSTANDING PAR VALUE OUTSTANDING PAR VALUE
---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A......................... 10 -- $-- -- $--
Series B......................... 1,000 28 3 28 3
Series C......................... 1,000 531 53 531 53
Series D......................... 300 -- -- 1 --
======= =======
$56 $56
======= =======
</TABLE>

NOTE 5 -- INCOME TAXES

The Company adopted the principles of Statement of Financial Accounting
Standards No. 109 ("SFAS 109") to account for income taxes in the first quarter
of fiscal 1993. The cumulative effect of adopting SFAS 109 was to increase net
income by approximately $4.0 million in the first quarter of fiscal 1993. The
provisions for income taxes for the three months and six months ended July 31,
1994 and 1993 are based on the estimated annual effective tax rate after
considering the federal and state statutory rates, amortization of intangibles
arising from the CVN acquisition, which is not deductible for tax purposes, and
the fact that the losses from joint ventures provide no significant state income
tax benefit.

During the first quarter of the current year, the Company received notice
that the Internal Revenue Service ("IRS") has completed its examinations of the
Company's federal income tax returns through fiscal 1991. As a result of the
examination, the IRS has proposed adjustments that relate primarily to the
amortization of cable television distribution rights, that would result in a
potential tax liability for those years in excess of $56.0 million. The Company
intends to vigorously contest these proposed adjustments. While it is not
possible at this time to predict the outcome of these actions, it is the opinion
of management, after reviewing the matter with outside counsel, that this matter
will be resolved without having a material financial impact on the Company.

8
<PAGE> 10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- INCOME PER SHARE

The Company computes income per share using the modified treasury stock
method. The following table presents the information needed to compute net
income per share for the three and six months ended July 31, 1994 and 1993 (in
thousands, except per share amounts).

<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
---------------------------------------- ----------------------------------------
1994 1993 1994 1993
------------------ ------------------ ------------------ ------------------
FULLY FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income:
Income before cumulative
effect of a change in
accounting for income
taxes.................. $11,728 $11,728 $13,327 $13,327 $23,791 $23,791 $30,948 $30,948
Cumulative effect of a
change in accounting
for income taxes....... -- -- -- -- -- -- 3,990 3,990
------- ------- ------- ------- ------- ------- ------- -------
Net income............... $11,728 $11,728 $13,327 $13,327 $23,791 $23,791 $34,938 $34,938
======== ======== ======== ======== ======== ======== ======== ========
Shares:
Weighted average number
of common shares
outstanding............ 40,222 40,222 36,783 36,783 40,083 40,083 36,371 36,371
Add -- Common equivalent
shares assuming
conversion of Series B,
Series C and Series D
Convertible Preferred
Stock.................. 5,590 5,590 8,264 8,264 5,592 5,592 8,655 8,655
Add -- Common shares
assumed to be
outstanding from
exercise of warrants
and options............ 9,773 9,646 10,357 10,357 9,773 9,646 10,380 10,380
Less -- Assumed purchase
of Common Stock from
proceeds of exercise of
warrants and options... (7,879) (6,272) (4,519) (4,245) (7,298) (6,271) (5,187) (4,267)
------- ------- ------- ------- ------- ------- ------- -------
47,706 49,186 50,885 51,159 48,150 49,050 50,219 51,139
======== ======== ======== ======== ======== ======== ======== ========
Income per share:
Income before cumulative
effect of a change in
accounting principle... $ .25 $ .24 $ .26 $ .26 $ .49 $ .49 $ .62 .60
Cumulative effect of a
change in accounting
for income taxes....... -- -- -- -- -- -- .08 .08
------- ------- ------- ------- ------- ------- ------- -------
Net income............... $ .25 $ .24 $ .26 $ .26 $ .49 $ .49 $ .70 $ .68
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

NOTE 7 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JULY 31,
---------------
1994 1993
---- -------
(IN THOUSANDS)
<S> <C> <C>
Supplemental cash flow information:
Interest paid.......................................... $590 $ 851
Income taxes paid...................................... 156 32,431
</TABLE>

9
<PAGE> 11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- MERGER WITH COMCAST CORPORATION AND LIBERTY MEDIA CORPORATION

On August 4, 1994, the Company, Comcast Corporation ("Comcast"), Liberty
Media Corporation ("Liberty") and a company wholly owned by Comcast and Liberty
("Holdings") entered into a definitive merger agreement pursuant to which QVC
will merge with a subsidiary of Holdings. On August 11, 1994, Holdings commenced
a tender offer for all shares of stock of QVC at a cash price of $46 per share
of QVC Common Stock and $460 per share of QVC Convertible Preferred Stock. The
total cost of the acquisition for the QVC Stock not owned by Comcast or Liberty
will be approximately $1.42 billion. Comcast and Liberty have agreed to fund a
total of approximately $316 million of the acquisition with the balance to be
provided through debt financing which, after the merger, will be an obligation
of QVC. Following the acquisition, Comcast and Liberty will own approximately
57% and 43%, respectively, of Holdings, which will own 100% of QVC.

On August 24, 1994, the Federal Trade Commission requested additional
information from Comcast and the Company on the proposed transactions. Such
request will extend the waiting period under the Hart-Scott-Rodino antitrust law
until 10 days after Comcast provides the data. The Company intends to respond
promptly and believes the proposed transactions comply with antitrust laws.

NOTE 9 -- LITIGATION

As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1994, filed with the Securities and Exchange
Commission on April 20, 1994, the Company has been named as a defendant in
certain actions filed in state and federal courts in Delaware arising out of
Liberty's prior acquisitions of shares of Home Shopping Network, Inc. ("HSN")
and the Company's July 1993 letter proposal to HSN to combine HSN and the
Company in a stock-for-stock transaction (the "HSN Actions"). The plaintiffs and
other defendants to the HSN Actions have executed a Memorandum of Understanding
(the "MOU") dated as of December 31, 1993, and amended February 7, 1994, setting
forth an agreement in principle for the settlement of the HSN Actions for a
total consideration of $13.0 million (plus $200,000 to cover administrative
expenses), all of which is to be funded by Liberty. In early May 1994, the
Company joined in the proposed settlement of the HSN Actions by becoming a party
to a revised MOU. Under the revised MOU, QVC is not required to pay any portion
of the proposed settlement fund. The proposed settlement is subject to the
parties' obtaining the approval of the Delaware courts.

In October 1993, the Company brought an action in Delaware Chancery Court
against Viacom Inc. ("Viacom"), Paramount Communications Inc. ("Paramount") and
certain Paramount directors for breach of fiduciary duty in failing to give fair
treatment to the Company's merger proposal while granting undue advantages to
Viacom's merger proposal. In November 1993, the court granted the Company's
motion for a preliminary injunction against certain anti-takeover mechanisms
being used to preclude the Paramount shareholders from accepting the Company's
cash tender offer for 50.1% of Paramount Common Stock. On appeal by Paramount
and Viacom, the Delaware Supreme Court affirmed the lower court's injunction in
December 1993. Viacom subsequently filed a motion to dismiss the Company's
complaint against it. Paramount's time to respond to the Company's complaint has
been extended to August 26, 1994.

In July 1994, after the announcement that Comcast and Liberty would make a
joint offer to purchase all of the outstanding shares of stock of the Company,
eight putative class action lawsuits (the "Consolidated Action") were filed by
certain shareholders of the Company in the Delaware Court of Chancery on behalf
of a purported class consisting of all public shareholders of the Company. The
defendants in the Consolidated Action include the Company and directors of the
Company. Plaintiffs alleged, among other things, that the defendants breached
their fiduciary duties when considering the Comcast offer in that they failed to
take all possible steps to seek out and encourage the best offer for the
Company. Plaintiffs sought, among other things, an injunction ordering the
defendants to auction the Company and an award of unspecified compensatory
damages to the members of the plaintiff class.

10
<PAGE> 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On or about August 5, 1994, counsel for plaintiffs, defendants, Comcast and
Liberty reached an agreement in principle providing for the settlement and
dismissal with prejudice of the Consolidated Action. The agreement in principle
provides, among other things, that an affiliate of Comcast and Liberty will
commence a tender offer to purchase all of the outstanding shares of QVC Common
Stock for $46 per share in cash, to be followed by a merger in which the
remaining holders of QVC Common Stock will receive $46 per share in cash. The
agreement in principle also provides that all defendants deny that any of them
have committed or threatened to commit any violations of law or breaches of
duty; that plaintiffs' counsel will apply to the court for an award of fees (to
be paid by the Company in the event that the offer and merger are consummated)
in an amount to be agreed among plaintiffs and defendants; and that the terms of
the settlement are subject to court approval in all respects. In the event of
court approval, all claims against defendants (and certain others) that were or
could have been asserted in the settled Consolidated Action litigation will be
dismissed with prejudice and released, and all such shareholders of the Company
who may have had such claims by the Company's stockholders, at any time from
June 29, 1994 through the effective date of the merger, will be barred from
asserting them in the future. Prior to the time that court approval for the
settlement described above is sought, shareholders of the Company who are
members of the class on behalf of whom the action is brought will receive
written notice of the terms of the settlement and the claims to be settled,
released, dismissed and barred.

The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. Although the outcome of these
matters cannot be determined, in the opinion of management, disposition of these
proceedings will not have a material effect on the Company's financial position.

11
<PAGE> 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company is a retailer of a wide range of consumer products which are
marketed and sold by merchandise-focused televised-shopping programs. The
average number of homes receiving the QVC Service was (in millions, except
dollar amounts):

<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
----------------- ----------------
1994 1993 1994 1993
----- ------ ------ ------
<S> <C> <C> <C> <C>
Cable homes -- 24 hours per day................ 45.1 43.2 44.8 42.8
Cable homes -- part-time....................... 3.0 2.9 3.0 2.9
Satellite dish homes (estimated)............... 3.0 3.0 3.0 3.0
----- ------ ------ ------
Total................................ 51.1 49.1 50.8 48.7
===== ====== ====== ======
Full-time equivalent homes ("FTE")............. 47.6 45.7 47.3 45.3
QVC net sales per FTE home..................... $6.36 $5.72 $12.65 $11.78
</TABLE>

FTE homes equal the total number of cable homes receiving the QVC Service
24 hours per day plus one-third of the part-time cable homes and one-half of the
satellite dish homes. This calculation reflects the Company's estimate of the
relative value to the Company of part-time homes and satellite dish homes
compared to full-time homes. QVC net sales excludes non-merchandise revenue.

Net revenue increased in the first six months of fiscal 1994 due to the
increase in the number of homes receiving the QVC Service as well as an increase
in net sales to existing subscribers. It is unlikely that the number of homes
receiving the QVC Service will continue to grow at rates comparable to prior
periods, given that the QVC Service is already received by approximately 80% of
all the cable television homes in the United States. As relative growth in the
number of homes declines, future growth in sales will depend increasingly on
continued additions of new customers from homes already receiving the QVC
Service and continued growth in repeat sales to existing customers.

Operating profit margins have improved during the quarter largely as a
result of variable costs not growing in proportion to increases in revenue and
the relatively fixed nature of depreciation and amortization.

12
<PAGE> 14

RESULTS OF OPERATIONS

The following table sets forth the Company's Consolidated Statements of
Operations expressed as a percentage of net revenue:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JULY 31, ENDED JULY 31,
-------------- --------------
1994 1993 1994 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue............................................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................................... 60.8 58.9 60.9 58.6
----- ----- ----- -----
Gross profit........................................... 39.2 41.1 39.1 41.4
----- ----- ----- -----
Operating expenses:
Variable costs.................................... 13.2 14.2 13.3 14.4
General and administrative........................ 12.2 13.8 11.5 12.5
Depreciation...................................... 1.4 1.6 1.4 1.5
Amortization of intangible assets................. 2.1 2.4 2.1 2.5
----- ----- ----- -----
28.9 32.0 28.3 30.9
----- ----- ----- -----
Operating income....................................... 10.3 9.1 10.8 10.5
Other income (expense):
Losses from joint ventures........................ (3.1) -- (3.3) --
Interest expense.................................. (0.1) (0.1) (0.1) (0.2)
Interest income................................... 1.3 1.0 1.3 1.0
----- ----- ----- -----
(1.9) 0.9 (2.1) 0.8
----- ----- ----- -----
Income before income taxes and cumulative effect of a
change in accounting principle....................... 8.4 10.0 8.7 11.3
Income tax provision................................... (4.5) (4.9) (4.7) (5.5)
----- ----- ----- -----
Income before cumulative effect of a change in
accounting principle................................. 3.9 5.1 4.0 5.8
Cumulative effect of a change in accounting for income
taxes................................................ -- -- -- .7
----- ----- ----- -----
Net income............................................. 3.9% 5.1% 4.0% 6.5%
===== ===== ===== =====
</TABLE>

NET REVENUE AND GROSS PROFIT

Net revenue for the three months ended July 31, 1994 was $303.3 million, an
increase of 15.6% over the $262.4 million net revenue in the prior year's
quarter. During the first six months of 1994, net revenue was $599.7 million
compared to $535.7 million in the prior period which was an increase of 12.0%.
The sales increase during the second quarter was due to the 4.2% increase in the
average number of homes receiving the QVC Service and, to a greater extent, the
11.2% increase in net sales per FTE home. For the six months ending July 31,
1994, the sales increase was due to the 4.4% increase in the average number of
homes receiving the QVC Service as well as the 7.4% increase in net sales per
FTE home.

Net revenue for the three and six month periods in 1994 includes $2.3
million and $5.1 million, respectively, of net sales from the Company's second
channel, consisting of The QVC Fashion Channel and onQ, to 9.0 million FTE
homes. In 1993, the QVC Fashion Channel net sales were $6.8 million and $14.7
million for the same three and six month periods to 7.6 million FTE homes. The
Company is starting a new shopping service, consisting of onQ and Q2, which is
going to replace The QVC Fashion Channel. onQ is QVC's new fashion service for
younger adults and will broadcast weekdays. onQ is currently broadcasting
sixteen hours of live programming three days a week. Q2 is being designed for
the audience that has not yet purchased from traditional home-shopping formats
and will broadcast weekends. The Company anticipates that onQ and Q2 will be
fully operational, seven days a week, in the third quarter of fiscal 1994.

13
<PAGE> 15

The Company has two credit programs, the QVC Easy-Pay Plan and the QVC
revolving credit card program. The Company offers customers the Easy-Pay option
only on selected items. The Easy-Pay Plan permits customers to pay for such
items in several monthly installments. When the Easy-Pay Plan is selected by the
customer, the item purchased is shipped after the first payment is billed to the
customer's credit card. The customer's credit card is subsequently billed up to
four additional monthly installments until the total purchase price of the
product has been received by the Company. QVC's revolving credit card program
permits customers to charge purchases on the Company's own credit card. The
accounts receivable from the revolving credit card program are purchased (with
recourse) and serviced by an unrelated third party. Sales under these credit
programs amounted to 44.0% and 39.8% of net revenue for the three months ended
July 31, 1994 and 1993, respectively. For the six months ended July 31, 1994 and
1993, sales under these programs were 43.5% and 39.1% of net revenue,
respectively. Sales under these credit programs increased as a percentage of
total sales in the current quarter and six months primarily because of more
sales under the Easy-Pay Plan. The loss provision for uncollectible accounts
under these credits programs amounted to $3.5 million in the current quarter
compared with $4.1 million in the prior year and $8.7 million in the first six
months of 1994 compared to $10.1 million in the prior year.

The sales mix by product category as a percentage of net sales was as
follows:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JULY 31, ENDED JULY 31,
-------------- --------------
1994 1993 1994 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Jewelry.......................................... 42.5 % 45.3% 40.7 % 42.7%
Apparel and accessories.......................... 19.0 16.9 18.8 18.2
Housewares....................................... 9.9 10.5 12.1 11.4
Electronics...................................... 9.1 7.7 8.0 7.7
Collectibles..................................... 6.9 8.8 6.9 8.9
Other............................................ 12.6 10.8 13.5 11.1
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>

Gross profit for the quarter ended July 31, 1994 was $119.0 million, or
39.2% of net revenue, compared to $107.9 million, or 41.1% of net revenue in the
prior year. For the first six months of 1994, gross profit was $234.6 million,
or 39.1% of net revenue, compared to $221.7 million, or 41.4% of net revenue, in
the prior year. The principal reason for the increases in gross profit was the
increased sales volume. The decrease in the gross profit percentage in 1994 was
principally due to the effect of higher gold prices and less sales of the
Company's Diamonique products on jewelry product profit margins and, to a lesser
extent, stronger sales of the Company's promotional Today's Special Value items
which sell below normal gross profit margins.

VARIABLE COSTS

Variable costs totaled $40.0 million and $37.2 million for the second
quarter of 1994 and 1993, respectively, and $80.1 million and $77.3 million for
the first six months of 1994 and 1993, respectively. The major components of
this expense classification are detailed below, expressed in amounts and as a
percentage of net revenue (dollars in millions):

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JULY 31, ENDED JULY 31,
---------------------------- ----------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
$ % $ % $ % $ %
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Order processing and customer
service.......................... 16.0 5.3 14.6 5.5 30.9 5.1 29.2 5.5
Commissions and license fees....... 15.8 5.2 13.8 5.3 31.1 5.2 28.6 5.3
Provision for doubtful accounts.... 3.9 1.3 5.0 1.9 9.6 1.6 11.8 2.2
Credit card processing fees........ 4.3 1.4 3.8 1.5 8.5 1.4 7.7 1.4
---- ---- ---- ---- ---- ---- ---- ----
40.0 13.2 37.2 14.2 80.1 13.3 77.3 14.4
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>

14
<PAGE> 16

Order processing and customer service expenses increased as a result of the
higher sales volume. These expenses decreased as a percentage of net revenue in
1994 due to greater utilization of the Company's automated ordering system which
gives customers the option to place orders by using their touchtone telephone
instead of speaking to a telemarketing operator. In 1994, commissions and
license fees increased in amount as a result of the higher sales volume and
decreased as a percentage of net revenue as a result of a reduction of sales to
homes obtained under the license agreement with JC Penney Television Shopping
Channel, Inc. The provision for doubtful accounts as a percentage of net revenue
decreased in 1994 due to an improvement in collection experience of QVC's
revolving credit card program. Credit card processing fees as a percentage of
net revenue have remained stable.

GENERAL AND ADMINISTRATIVE

During the second quarter of 1994, general and administrative expenses
totaled $36.9 million, or 12.2% of net revenue compared to $36.3 million, or
13.8% of net revenue, in the prior year. For the first six months of 1994
general and administrative expenses total $69.2 million or 11.5% of net revenue,
compared to $66.8 million or 12.5% of net revenue in the prior year. The major
components of general and administrative expenses are detailed below, expressed
in amounts and as a percentage of net revenue (dollars in millions).

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JULY 31, ENDED JULY 31,
--------------------------- ---------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
$ % $ % $ % $ %
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Administration............................ 13.4 4.4 16.0 6.1 24.3 4.1 26.7 5.0
Advertising and marketing................. 7.6 2.5 6.6 2.5 14.9 2.5 13.4 2.5
Data processing........................... 5.2 1.7 4.7 1.8 9.3 1.5 9.0 1.7
Broadcasting.............................. 5.8 1.9 5.1 1.9 11.1 1.8 9.9 1.8
Merchandising and programming............. 3.5 1.2 2.6 1.0 6.7 1.1 5.1 1.0
Occupancy costs........................... 1.4 0.5 1.3 0.5 2.9 0.5 2.7 0.5
---- ---- ---- ---- ---- ---- ---- ----
36.9 12.2 36.3 13.8 69.2 11.5 66.8 12.5
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>

The decrease in administration expenses during the second quarter of 1994
is the result of a $3.8 million settlement of the Shop Television Network, Inc.
litigation during the second quarter of 1993 which was partially offset by $1.2
million of costs associated with the attempted merger with CBS during the
current quarter. Advertising and marketing expenses increased in 1994 due to
increases in the costs of advertising the Company's televised-shopping program
on cable systems and additional promotional mailings to QVC customers. Data
processing costs increased in the second quarter of 1994 due to higher manpower
costs associated with computer programming. The increase in broadcasting
expenses in 1994 reflects the higher costs to enhance the on-air presentation.
Merchandising and programming expenses increased due to additional personnel
needed to sustain the Company's sales growth.

DEPRECIATION AND AMORTIZATION

Depreciation expense has remained constant compared to the prior year.
Amortization expense decreased in the six months of 1994 due to the reduction in
amortization of debt placement fees as a result of the repayment of the Senior
term loan during the first quarter of 1993.

OPERATING INCOME

Operating income was $31.4 million during the second quarter of 1994
compared to $23.9 million in the prior year. For the six months ended July 31,
1994, operating income was $64.3 million compared to $56.3 million in the prior
year. The increases in operating income are due primarily to the additional
gross profit arising from higher revenue which was partially offset by higher
operating expenses.

15
<PAGE> 17

LOSSES FROM JOINT VENTURES

During 1993, the Company entered into four joint ventures which resulted in
combined losses of $9.6 million during the second quarter of 1994 and $19.6
million during the first six months of 1994. The most significant joint ventures
are those formed with British Sky Broadcasting Limited ("BSkyB") and Grupo
Televisa, S.A. de C.V. BSkyB and the Company formed a joint venture to bring
electronic retailing to the United Kingdom. On October 1, 1993, BSkyB and the
Company launched "QVC -- The Shopping Channel." A majority of all consumers
subscribing to BSkyB's service are now able to receive the new QVC service --
approximately 2.0 million homes. In addition, approximately .6 million cable
homes receive the program. The agreement with BSkyB requires, among other
things, that the Company provide all funding to the venture until it is
profitable. The Company will then recover all prior funding before any profits
are shared. During the three months ended July 31, 1994, QVC -- The Shopping
Channel operations resulted in a $7.1 million loss, which was recorded by the
Company, including $471,000 amortization of capitalized start-up costs. For the
first six months of 1994, the channel's operations resulted in a $14.3 million
loss, including $942,000 amortization of capitalized start-up costs.

On November 15, 1993, the Company and Grupo Televisa, S.A. de C.V. began
broadcasting "CVC" in Mexico. CVC is distributed through broadcast television,
cable television and satellite dishes to approximately 7.3 million FTE homes.
The Company's 50% share of CVC's operations resulted in a $1.5 million loss and
a $3.1 million loss during the three months and six months ended July 31, 1994,
respectively. Included in the losses were amortization of capitalized start-up
costs of $306,000 and $624,000 for the three and six month periods,
respectively.

The Company also entered a joint venture with Tribune Entertainment Company
and Regal Communications to produce and distribute "Can We Shop" with Joan
Rivers. "Can We Shop" first aired on January 17, 1994. On June 15, 1994, QRT
announced plans to cease the venture with the last show broadcasted on July 15,
1995. "Can We Shop" was a one-hour, Monday through Friday television show
through which merchandise was sold. The Company's share of the operating loss
amounted to $421,000 and $1.3 million during the three and six months ended July
31, 1994, respectively.

The Company made a one-third investment in Friday Holdings, L.P. for the
purpose of establishing or acquiring businesses in the communications field as
well as developing information products. The Company recorded a $550,000 loss
and $900,000 loss for the three and six months ended July 31, 1994,
respectively, in association with this partnership. In August 1994, the limited
partners of Friday Holdings received notice from the general partner that this
partnership is to be dissolved and the assets distributed to the partners.

INTEREST EXPENSE

Interest expense has remained relatively constant.

INTEREST INCOME

The Company experienced higher interest income on its revolving charge card
due to higher average account balances as well as an increase in the number of
customer accounts. The Company also experienced higher interest income on its
temporary cash investments.

INCOME TAX PROVISION

The Company adopted the principles of Statement of Financial Accounting
Standards No. 109 ("SFAS 109") to account for income taxes in the first quarter
of fiscal 1993. The provisions for income taxes for the three and six months
ended July 31, 1994 and 1993 are based on the estimated annual effective tax
rate after considering the federal and state statutory rates, amortization of
intangibles arising from the CVN acquisition which is not deductible for tax
purposes, and the fact that the joint venture operations provide no significant
state income tax benefit.

16
<PAGE> 18

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

Effective February 1, 1993, the Company changed its method of accounting
for income taxes as required by SFAS 109, "Accounting for Income Taxes". This
statement superseded SFAS 96, which was adopted by the Company in fiscal 1988.
The cumulative effect of adopting SFAS 109 was to increase net income by
approximately $4.0 million in the first quarter of fiscal 1993.

NET INCOME

Net income for the second quarter of 1994 was $11.7 million compared to net
income of $13.3 million in the prior year. For the six months ended July 31,
1993, net income was $23.8 million compared to $34.9 million in the prior year.
The changes in net income resulted from the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of working capital is internally-generated
cash flow from operations. For the six months ended July 31, 1994, net cash
provided by operating activities totaled $62.1 million. Net cash provided by
operations was increased by the decrease in working capital items of $7.6
million in 1994.

The Company's capital expenditures during the first six months of 1994
totaled $9.4 million, principally for broadcast equipment and computer equipment
and software.

The Company has an agreement with an unrelated third party which provides
for the sale and servicing of accounts receivable originating from the Company's
revolving credit card. The Company remains obligated to repurchase uncollectible
accounts pursuant to the recourse provisions of the agreement and is required to
maintain a specified percentage of all outstanding receivables transferred under
the program as a deposit with the third party to secure its obligations under
the agreement.

The Company has a $60.0 million bank revolving credit facility to finance
operations as well as to fund letters of credit for merchandise purchases.
Interest on outstanding amounts under this agreement is payable at the bank's
prime rate or other interest rate options. A commitment fee of .15% is currently
payable on the unused portion of the revolving credit facility. The commitment
fee was reduced from .25% on March 30, 1994. The credit agreement requires the
Company to maintain certain ratios for total liabilities to shareholders' equity
and for coverage of fixed charges. Outstanding letters of credit totaled $15.7
million at July 31, 1994.

Working capital at July 31, 1994 was $127.9 million compared to $101.8
million at January 31, 1994. The current ratio was 1.4 at July 31, 1994 compared
to 1.3 at January 31, 1994. Long-term debt to total capitalization was 1.1% at
July 31, 1994.

During the first quarter of 1994, the Company entered into affiliation
agreements with various cable system operators for carriage of the Company's new
shopping service, Q2. The cable system operators will receive compensation from
the Company which is dependent upon the number of additional subscribers and the
launch date of Q2 on the cable system. The Company estimates that launch fees to
the cable system operators will approximate $40.0 million during fiscal 1994,
which will be funded from the Company's cash flow from operations.

On August 4, 1994, Comcast Corporation ("Comcast"), Liberty Media
Corporation ("Liberty"), a wholly owned subsidiary of Comcast and Liberty
("Holdings") and the Company entered into a Merger Agreement (the "Merger
Agreement"), providing for the acquisition of QVC, Inc. by Holdings. Pursuant to
the Merger Agreement, Holdings commenced a tender offer to purchase all the
outstanding shares of Common and Preferred Stock of QVC, Inc. for $46 and $460
per share, respectively (the "Offer"). Following the successful completion of
the Offer and the satisfaction of the other conditions set forth in the Merger
Agreement, a wholly owned subsidiary of Holdings will merge with and into QVC,
Inc., with QVC, Inc., continuing as the surviving corporation (the "Merger").

17
<PAGE> 19

$20 million, respectively, of the acquisition, with the balance to be provided
through debt financing, which, after the Merger, will be the obligation of QVC.
Following the consummation of the Merger, which is subject to financing,
governmental approval and certain other conditions, Comcast and Liberty (through
Holdings) will own approximately 57% and 43%, respectively, of QVC, and QVC will
be managed by Comcast.

The Company will be highly leveraged, primarily as a result of the debt
incurred in connection with the Merger. The Company's ability to make scheduled
payments or to refinance its obligations with respect to its indebtedness
depends on its financial and operating performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond its control. There can be no assurance that the Company's operating
results will continue to be sufficient for payment of the Company's
indebtedness.

The Company believes that its present capital resources and future
operations will result in adequate financial resources to fund all future
interest and debt payments existing as of July 31, 1994, as well as capital
expenditures.

EFFECTS OF INFLATION

Inflation has not had a significant impact on the results of the Company's
operations.

18
<PAGE> 20

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As previously reported by QVC, Inc. (the "Company" or "QVC") in its Annual
Report on Form 10-K for the fiscal year ended January 31, 1994, and its
Quarterly Report on Form 10-Q for the quarter ended April 30, 1994, filed with
the Securities and Exchange Commission (the "Commission") on April 20, 1994, and
June 14, 1994, respectively, the Company has been named as a defendant in
certain actions filed in the state and federal courts in Delaware arising out of
Liberty Media Corporation's ("Liberty") prior acquisitions of shares of Home
Shopping Network, Inc. ("HSN") and the Company's July 1993 letter proposal to
HSN to combine HSN and the Company in a stock-for-stock transaction (the "HSN
Actions"). As also previously reported, the plaintiffs and other defendants to
the HSN Actions had previously executed a Memorandum of Understanding (the
"MOU") setting forth an agreement in principle for the settlement of the HSN
Actions for a total consideration of $13 million (plus $200,000 to cover
administrative expenses), all of which is to be funded by Liberty. In early May
1994, the Company joined in the proposed settlement of the HSN Actions by
becoming a party to a revised MOU. Under the revised MOU, QVC is not required to
pay any portion of the proposed settlement fund. The parties filed formal
settlement papers with the state and federal courts in Delaware on or about
August 19, 1994, and are presently awaiting the issuance of scheduling orders by
these courts setting the dates for formal settlement hearings.

As also previously reported, in October 1993, the Company brought an action
in the Delaware Chancery Court against Viacom Inc. ("Viacom"), Paramount
Communications Inc. ("Paramount") and certain Paramount directors for breach of
fiduciary duty in failing to give fair treatment to QVC's proposal to merge with
Paramount while granting undue advantages to Viacom's merger proposal. In
November 1993, the court granted the Company's motion for a preliminary
injunction against certain anti-takeover mechanisms being used to preclude the
Paramount shareholders from accepting the Company's cash tender offer for
Paramount shares. This injunction was affirmed by the Delaware Supreme Court in
December 1993. Viacom subsequently filed a motion to dismiss the Company's
complaint, which is pending. Paramount's time to respond to the complaint has
been extended to August 26, 1994. In February, 1994, the Company terminated its
efforts to acquire Paramount, and Viacom eventually acquired Paramount in a cash
and stock-for-stock exchange.

In July 1994, after the announcement that Comcast Corporation ("Comcast")
and Liberty would make a joint offer to purchase all of the outstanding shares
of stock of the Company (see Item 5 below), eight putative class action lawsuits
were filed by certain shareholders of the Company in the Delaware Court of
Chancery on behalf of a purported class consisting of all public shareholders of
the Company. These actions were consolidated under the caption In Re QVC, Inc.
Shareholders Litigation, Consolidated Civil Action No. 13590 (Court of Chancery,
New Castle County, State of Delaware) (the "Consolidated Action"). The
defendants in the Consolidated Action include the Company and directors of the
Company. Plaintiffs alleged, among other things, that the defendants breached
their fiduciary duties when considering the Comcast offer in that they failed to
take all possible steps to seek out and encourage the best offer for the
Company. Plaintiffs sought, among other things, an injunction ordering the
defendants to auction the Company and an award of unspecified compensatory
damages to the members of the plaintiff class.

During early August, counsel for the shareholder plaintiffs advised counsel
for Liberty that they were preparing to amend the operative complaint to name
Comcast and Liberty as defendants in the Consolidated Action. On August 3 and 4,
1994, plaintiffs' counsel engaged in direct negotiations with counsel for
Liberty with respect to a proposed increase in the consideration to be paid to
the Company's public shareholders as well as the accelerated payment of such
consideration in the Comcast/Liberty proposal, and with respect to settling the
Consolidated Action. The negotiations culminated in an agreement in principle
providing for the settlement of the Consolidated Action, subject to court
approval, and certain terms and conditions including, among other things, the
commencement by Comcast and Liberty of an all cash tender offer at $46 per share
of common stock of the Company, subject to the approval of the Board of
Directors of the Company.

19
<PAGE> 21

On or about August 5, 1994, counsel for plaintiffs, defendants, Comcast and
Liberty reached an agreement in principle providing for the settlement and
dismissal with prejudice of the Consolidated Action. The agreement in principle
provides, among other things, that an affiliate of Comcast and Liberty will
commence a tender offer to purchase all of the outstanding shares of common
stock for $46 per share in cash, to be followed by a merger in which the
remaining holders of common stock will receive $46 per share in cash. The
agreement in principle also provides that all defendants deny that any of them
have committed or threatened to commit any violations of law or breaches of
duty; that plaintiffs' counsel will apply to the court for an award of fees (to
be paid by the Company in the event that the offer and merger are consummated)
in an amount to be agreed among plaintiffs and defendants; and that the terms of
the settlement are subject to court approval in all respects. In the event of
court approval, all claims against defendants (and certain others) that were or
could have been asserted in the settled Consolidated Action litigation will be
dismissed with prejudice and released, and all such shareholders of the Company
who may have had such claims by the Company's stockholders, at any time from
June 29, 1994 through the effective date of the merger, will be barred from
asserting them in the future. Prior to the time that court approval for the
settlement described above is sought, shareholders of the Company who are
members of the class on behalf of whom the action is brought will receive
written notice of the terms of the settlement and the claims to be settled,
released, dismissed and barred.

On August 24, 1994, the Federal Trade Commission requested from Comcast and
the Company additional information on the proposed transactions involving the
Company and Comcast (see Item 5 below). Such request will extend the waiting
period under the Hart-Scott-Rodino antitrust law until 10 days after Comcast
provides the data. The Company intends to respond promptly and believes the
proposed transactions comply with federal antitrust laws.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company's Annual Meeting of Shareholders was held on June 27, 1994. At
this Annual Meeting, the following nominees were elected by the stockholders
entitled to vote thereon to serve as directors of the Company until the next
Annual Meeting and until their successors are elected and duly qualified:
William F. Costello, by a vote of 34,173,481 in favor and 75,045 withheld; Barry
Diller, by a vote of 34,149,820 in favor and 98,706 withheld; J. Bruce
Llewellyn, by a vote of 34,725,823 in favor and 74,396 withheld; Bruce M. Ramer,
by a vote of 34,721,477 in favor and 78,742 withheld; Brian L. Roberts, by a
vote of 34,721,498 in favor and 78,721 withheld; Ralph J. Roberts, by a vote of
34,715,242 in favor and 84,977 withheld; Joseph M. Segel, by a vote of
34,721,482 in favor and 78,737 withheld; and Linda J. Wachner, by a vote of
34,721,683 in favor and 78,536 withheld. All of the foregoing nominees elected
to the Board were then incumbent directors of the Company.

The Company's stockholders also voted at this Annual Meeting: (i) to ratify
the Board of Directors' selection of KPMG Peat Marwick as auditors of the
Company, by a vote of 34,735,091 in favor and 29,739 against, with 35,389
abstaining; (ii) to approve the adoption of an amendment to the Company's
Restated Certificate of Incorporation to change the name of the Company to QVC,
Inc., by a vote of 34,312,730 in favor and 27,989 against, with 26,249
abstaining; (iii) to approve and adopt the 1993 Qualified Incentive Stock Option
Plan, by a vote of 30,082,108 in favor and 725,532 against, with 78,711
abstaining; and (iv) to ratify the Board of Directors' grant of certain stock
options to BellSouth Corporation, Advance Publications, Inc. and Cox Enterprises
Inc., by a vote of 29,666,903 in favor and 343,632 against, with 688,478
abstaining.

See the Definitive Proxy Statement on Schedule 14A (including the Exhibits
thereto) and related Proxy Cards, which were filed with the Commission on behalf
of the Company on May 31, 1994, and which are incorporated by reference hereby.

20
<PAGE> 22

ITEM 5. OTHER INFORMATION.

On or about July 1, 1994, the Company and CBS, Inc. ("CBS") announced that
they were finalizing negotiations for the merger of QVC and CBS. On or about
July 12, 1994, Comcast proposed to acquire the approximately 85% of QVC shares
that Comcast did not already own through a merger in which the QVC stockholders
other than Comcast would receive cash and securities valued at $44 per share of
QVC Common Stock. Subsequently, QVC and CBS terminated negotiations on their
proposed merger. On or about July 22, 1994, Comcast and Liberty made a joint
proposal to acquire, for $44 cash per share of QVC Common Stock, the
approximately 65% of QVC shares that Comcast and Liberty collectively did not
already own. On August 4, 1994, the Company entered into a merger agreement
("Merger Agreement") with Comcast, Liberty and a wholly owned subsidiary of
Comcast and Liberty ("Holdings"), pursuant to which Comcast and Liberty would
acquire QVC. On or about August 11, 1994, pursuant to the Merger Agreement,
Holdings commenced a cash tender offer to purchase all outstanding QVC common
shares at a price of $46 per share and all outstanding QVC preferred shares at a
price of $460 per share ("Tender Offer"). Following expiration of the Tender
Offer, Holdings (or a subsidiary thereof) will merge with QVC and any remaining
shares of QVC will be converted into cash at the same price as offered in the
Tender Offer (the "Merger").

The total cost of the acquisition of the QVC stock not currently owned by
Comcast or Liberty will be approximately $1.42 billion. Comcast and Liberty have
agreed to fund approximately $296 million and $20 million, respectively, of the
acquisition, with the balance to be provided through debt financing, which,
after the Merger, will be the obligation of QVC. Following the consummation of
the Merger, which is subject to financing, governmental approval and certain
other conditions, Comcast and Liberty (through Holdings) will own approximately
57% and 43%, respectively, of QVC, and QVC will be managed by Comcast.

See the Amendment No. 1 to Schedule 14D-9 (including the Exhibits thereto),
which was filed with the Commission on behalf of the Company on August 12, 1994,
and which is incorporated by reference hereby.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

a. Exhibits.

2. Agreement and Plan of Merger, dated as of August 4, 1994, among
the Company, Comcast Corporation, Liberty Media Corporation and
Comcast QMerger, Inc. (now known as QVC Programming Holdings,
Inc.), filed on August 11, 1994, as Exhibit 4 to the Company's
Schedule 14D-9, is incorporated by reference herein.

22. Definitive Proxy Statement on Schedule 14A (including the Exhibits
thereto) and related Proxy Cards, filed by the Company on May 31,
1994, is incorporated by reference herein.

99.1 Offer to Purchase, dated August 11, 1994, filed on August 12, 1994
as Exhibit 1 to the Company's Amendment No. 1 to Schedule 14D-9,
is incorporated by reference herein.

99.2 Letter of Transmittal, filed on August 12, 1994, as Exhibit 2 to
the Company's Amendment No. 1 to Schedule 14D-9, is incorporated
by reference herein.

99.3 Letter Agreement, dated as of August 4, 1994, among Comcast
Corporation, Barry Diller and Arrow Investments, Inc., filed on
August 11, 1994, as Exhibit 5 to the Company's Schedule 14D-9, is
incorporated by reference herein.

99.4 Letter Agreement, dated as of August 4, 1994, among Comcast
Corporation, Liberty Media Corporation and Tele-Communications,
Inc., filed on August 11, 1994, as Exhibit 6 to the Company's
Schedule 14D-9 is incorporated by reference herein.

99.5 Opinion of Allen & Company Incorporated, dated August 4, 1994,
filed on August 11, 1994, as Exhibit 9 to the Company's Schedule
14D-9, is incorporated by reference herein.

21
<PAGE> 23

99.6 Report of Allen & Company Incorporated to the Board of Directors
of the Company, dated August 4, 1994, filed on August 11, 1994, as
Exhibit 10 to the Company's Schedule 14D-9, is incorporated by
reference herein.

99.7 Engagement Letter, dated August 4, 1994, between the Company and
Allen & Company Incorporated (including the related Indemnity
Letter), filed on August 11, 1994, as Exhibit 11 to the Company's
Schedule 14D-9, is incorporated by reference herein.

b. Reports on Form 8-K.

During the fiscal quarter ended July 31, 1994, no Current Reports on Form
8-K were filed.

22
<PAGE> 24

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.

QVC, INC.
(Registrant)

/s/ BARRY DILLER
--------------------------------------
Barry Diller
Chairman and
Chief Executive Officer

/s/ WILLIAM F. COSTELLO
--------------------------------------
William F. Costello
Executive Vice President
and Chief Financial Officer

Dated: August 25, 1994

23
<PAGE> 25

INDEX OF EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2. Agreement and Plan of Merger, dated as of August 4, 1994, among the Company,
Comcast Corporation, Liberty Media Corporation and Comcast QMerger, Inc. (now
known as QVC Programming Holdings, Inc.), filed on August 11, 1994, as Exhibit
4 to the Company's Schedule 14D-9, is incorporated by reference herein.

22. Definitive Proxy Statement on Schedule 14A (including the Exhibits thereto) and
related Proxy Cards, filed by the Company on May 31, 1994, is incorporated by
reference herein.

99.1 Offer to Purchase, dated August 11, 1994, filed on August 12, 1994 as Exhibit 1
to the Company's Amendment No. 1 to Schedule 14D-9, is incorporated by
reference herein.

99.2 Letter of Transmittal, filed on August 12, 1994, as Exhibit 2 to the Company's
Amendment No. 1 to Schedule 14D-9, is incorporated by reference herein.

99.3 Letter Agreement, dated as of August 4, 1994, among Comcast Corporation, Barry
Diller and Arrow Investments, Inc., filed on August 11, 1994, as Exhibit 5 to
the Company's Schedule 14D-9, is incorporated by reference herein.

99.4 Letter Agreement, dated as of August 4, 1994, among Comcast Corporation,
Liberty Media Corporation and Tele-Communications, Inc., filed on August 11,
1994, as Exhibit 6 to the Company's Schedule 14D-9 is incorporated by reference
herein.

99.5 Opinion of Allen & Company Incorporated, dated August 4, 1994, filed on August
11, 1994, as Exhibit 9 to the Company's Schedule 14D-9, is incorporated by
reference herein.

99.6 Report of Allen & Company Incorporated to the Board of Directors of the
Company, dated August 4, 1994, filed on August 11, 1994, as Exhibit 10 to the
Company's Schedule 14D-9, is incorporated by reference herein.

99.7 Engagement Letter, dated August 4, 1994, between the Company and Allen &
Company Incorporated (including the related Indemnity Letter), filed on August
11, 1994, as Exhibit 11 to the Company's Schedule 14D-9, is incorporated by
reference herein.
</TABLE>