- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NO. 0-14999
------------------------------
QVC NETWORK, 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
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
GOSHEN CORPORATE PARK
WEST CHESTER, PENNSYLVANIA 19380
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (610) 430-1000
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold as of
the close of trading on March 31, 1994, was $839,806,539.
The number of shares outstanding of the registrant's Common Stock (net of
shares held in treasury), as of March 31, 1994 was:
Common Stock ($.01 par value) -- 39,904,097 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's definitive proxy statement in connection with the 1994
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission (the 'Commission') within 120 days after the end of the fiscal year
ended January 31, 1994, is incorporated by reference in Part III of the Annual
Report on Form 10-K.
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<PAGE>
Item 8 (Financial Statements and Supplementary Data) of Registrant's
Annual Report on Form 10-K for the fiscal year ended January 31, 1994, is
hereby amended and restated in its entirety as follows:
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... 26
Consolidated Balance Sheets at January 31, 1994 and 1993................................................... 27
Consolidated Statements of Operations for the years ended January 31, 1994, January 31, 1993 and January
31, 1992................................................................................................. 28
Consolidated Statements of Cash Flows for the years ended January 31, 1994, January 31, 1993 and January
31, 1992................................................................................................. 29
Consolidated Statement of Shareholders' Equity for the years ended January 31, 1994, January 31, 1993 and
January 31, 1992......................................................................................... 30
Notes to Consolidated Financial Statements................................................................. 31
Schedules II, VIII and X to the Consolidated Financial Statements.......................................... 59
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
QVC, Inc.:
We have audited the consolidated financial statements of QVC, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QVC, Inc.
and subsidiaries as of January 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in notes 1 and 13 to the consolidated financial statements,
the Company changed its method of accounting for income taxes in 1993 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
KPMG PEAT MARWICK
Philadelphia, Pennsylvania
March 4, 1994
26
<PAGE>
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 15,873 $ 4,279
Accounts receivable, less allowance for doubtful accounts of $52,759 in 1994 and
$21,316 in 1993 (Note 2)........................................................... 183,162 97,008
Inventories........................................................................... 148,208 118,712
Deferred taxes (Note 13).............................................................. 59,749 10,680
Prepaid expenses...................................................................... 5,536 3,716
----------- -----------
Total current assets............................................................... 412,528 234,395
Property, plant and equipment (Note 3).................................................. 80,579 72,863
Cable television distribution rights (Note 4)........................................... 99,579 115,248
Other assets (Note 5)................................................................... 33,664 9,028
Excess of cost over acquired net assets, less accumulated amortization of $43,551 in
1994 and $33,710 in 1993.............................................................. 251,810 268,161
----------- -----------
Total assets....................................................................... $ 878,160 $ 699,695
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 7)......................................... $ 3,114 $ 24,073
Accounts payable-trade................................................................ 81,594 51,622
Accrued liabilities (Note 6).......................................................... 225,989 151,358
----------- -----------
Total current liabilities.......................................................... 310,697 227,053
Long-term debt, less current maturities (Note 7)........................................ 7,044 7,586
----------- -----------
Total liabilities.................................................................. 317,741 234,639
----------- -----------
Commitments and contingencies (Notes 8 and 14)
Shareholders' equity (Notes 9 and 10):
Convertible Preferred Stock, par value $.10........................................... 56 93
Common Stock, par value $.01.......................................................... 399 357
Additional paid-in capital............................................................ 446,027 409,970
Retained earnings..................................................................... 113,937 54,636
----------- -----------
Total shareholders' equity......................................................... 560,419 465,056
----------- -----------
Total liabilities and shareholders' equity......................................... $ 878,160 $ 699,695
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1993 1992 1991
----------- ----------- ---------
<S> <C> <C> <C>
Net revenue................................................................. $ 1,222,104 $ 1,070,587 $ 921,804
Cost of goods sold.......................................................... 723,175 621,840 534,650
----------- ----------- ---------
Gross profit................................................................ 498,929 448,747 387,154
----------- ----------- ---------
Operating expenses:
Variable costs............................................................ 171,242 160,420 145,348
General and administrative................................................ 132,743 123,604 110,747
Depreciation.............................................................. 16,682 17,105 16,679
Amortization of intangible assets......................................... 26,019 29,420 29,983
----------- ----------- ---------
346,686 330,549 302,757
----------- ----------- ---------
Operating income............................................................ 152,243 118,198 84,397
----------- ----------- ---------
Other income (expense):
Costs of Paramount tender offer (Note 16)................................. (34,800) -- --
Losses from joint ventures (Note 5)....................................... (11,432) -- --
Interest expense.......................................................... (1,590) (18,364) (38,979)
Interest income........................................................... 10,865 8,834 7,480
----------- ----------- ---------
(36,957) (9,530) (31,499)
----------- ----------- ---------
Income before income taxes, extraordinary item and cumulative effect of a
change in accounting principle............................................ 115,286 108,668 52,898
Income tax provision (Note 13).............................................. (59,975) (52,080) (31,165)
----------- ----------- ---------
Income before extraordinary item and cumulative effect of a change in
accounting principle...................................................... 55,311 56,588 21,733
Extraordinary item -- loss on extinguishment of debt, net of tax benefit
(Note 5).................................................................. -- (1,496) (2,108)
Cumulative effect of a change in accounting for income taxes (Note 13)...... 3,990 -- --
----------- ----------- ---------
Net income.................................................................. $ 59,301 $ 55,092 $ 19,625
----------- ----------- ---------
----------- ----------- ---------
Income per share (Note 11):
Primary:
Income before extraordinary item and cumulative effect of a change in
accounting principle.................................................. $ 1.10 $ 1.32 $ .68
Extraordinary item, net of tax benefit.................................. -- (.03) (.07)
Cumulative effect of a change in accounting for income taxes............ .08 -- --
----------- ----------- ---------
Net income.............................................................. $ 1.18 $ 1.29 $ .61
----------- ----------- ---------
----------- ----------- ---------
Fully diluted:
Income before extraordinary item and cumulative effect of a change in
accounting principle.................................................. $ 1.10 $ 1.27 $ .67
Extraordinary item, net of tax benefit.................................. -- (.03) (.06)
Cumulative effect of a change in accounting for income taxes............ .08 -- --
----------- ----------- ---------
Net income.............................................................. $ 1.18 $ 1.24 $ .61
----------- ----------- ---------
----------- ----------- ---------
Weighted average number of common and common equivalent shares used in
computing income per share:
Primary................................................................... 50,062 43,890 31,959
----------- ----------- ---------
----------- ----------- ---------
Fully diluted............................................................. 50,205 45,386 38,313
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1993 1992 1991
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 59,301 $ 55,092 $ 19,625
Adjustments for non-cash items included in net income:
Cumulative effect of a change in accounting for income taxes........... (3,990) -- --
Loss on extinguishment of debt......................................... -- 2,720 3,838
Losses from joint ventures............................................. 11,432 -- --
Depreciation........................................................... 16,682 17,105 16,679
Amortization of intangible assets...................................... 26,019 29,420 29,983
Grant of executive stock award......................................... -- 4,869 --
Provision for income taxes not requiring a cash outlay................. 3,366 20,275 15,800
Interest incurred but not paid......................................... -- 96 9,199
Issuance of Common Stock under Standby Equity
Agreement........................................................... -- -- 614
Losses on termination of capitalized lease and sales of fixed assets... 190 90 464
Changes in other non-current assets....................................... (3,458) 5,303 642
Effects of changes in working capital items (Note 15)..................... (36,239) (33,557) 40,107
--------- ----------- -----------
Net cash provided by operating activities................................. 73,303 101,413 136,951
--------- ----------- -----------
Cash flows from investing activities:
Capital expenditures...................................................... (24,588) (21,137) (11,870)
Investments in and advances to joint ventures............................. (22,626) -- --
Proceeds from sales of property, plant and equipment...................... -- 28 9,010
Adjustments to purchase price of CVN Companies, Inc....................... -- 5 (230)
Changes in other non-current assets....................................... (347) (494) 330
--------- ----------- -----------
Net cash used in investing activities..................................... (47,561) (21,598) (2,760)
--------- ----------- -----------
Cash flows from financing activities:
Payments under Senior term loan........................................... (21,000) (135,297) (128,101)
Principal payments under capitalized leases, mortgages and other debt..... (502) (5,300) (12,905)
Borrowings under revolving credit facilities.............................. 20,000 -- 40,414
Payments against revolving credit facilities.............................. (20,000) -- (40,414)
Proceeds from exercise of stock options and other......................... 1,169 16,687 891
Net proceeds from sale of Common Stock.................................... -- -- 51,082
Proceeds from exercise of warrants........................................ 6,185 11,570 --
Payment of unsecured note payable......................................... -- -- (31,444)
--------- ----------- -----------
Net cash used in financing activities..................................... (14,148) (112,340) (120,477)
--------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........................ 11,594 (32,525) 13,714
Cash and cash equivalents at beginning of year.............................. 4,279 36,804 23,090
--------- ----------- -----------
Cash and cash equivalents at end of year.................................... $ 15,873 $ 4,279 $ 36,804
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK CAPITAL (DEFICIT) STOCK TOTAL
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1991...................... $ 125 $ 176 $ 228,628 $ (20,081) $ (68) $ 208,780
Net income for year......................... -- -- -- 19,625 -- 19,625
Income tax benefit resulting from certain
capital stock transactions................ -- -- 11,500 -- -- 11,500
Proceeds from the exercise of employee stock
options................................... -- -- 893 -- -- 893
Issuance of Common Stock under Standby
Equity Agreement.......................... -- 1 613 -- -- 614
Excess of value assigned over amount
received for Series B Convertible
Preferred Stock........................... -- -- (239) -- -- (239)
Issuance of shares of Common Stock and
warrants in lieu of cash interest
payments.................................. -- 2 2,998 -- -- 3,000
Purchases of Treasury Stock................. -- -- -- -- (2) (2)
Net proceeds from public offering of Common
Stock..................................... -- 37 51,045 -- -- 51,082
Common Stock exchanged to retire unsecured
note payable.............................. -- 23 31,422 -- -- 31,445
Conversion of shares........................ (11) 11 -- -- -- --
Adjustments to warrants exchanged and Common
Stock issued in connection with the CVN
acquisition............................... -- -- (912) -- -- (912)
----- ----- ----------- --------- ----------- ---------
Balance January 31, 1992...................... 114 250 325,948 (456) (70) 325,786
----- ----- ----------- --------- ----------- ---------
Net income for year......................... -- -- -- 55,092 -- 55,092
Income tax benefit resulting from capital
stock transactions, exercise of stock
options and net operating loss
carryforward.............................. -- -- 22,312 -- -- 22,312
Proceeds from the exercise of employee stock
options................................... -- 13 16,708 -- (31) 16,690
Proceeds from exercise of warrants.......... -- 11 11,559 -- -- 11,570
Grant of executive stock award.............. -- 2 4,867 -- -- 4,869
Convertible subordinated note exchanged for
Common Stock, net of unamortized debt
placement fees of $1,260.................. -- 17 28,723 -- -- 28,740
Common Stock issued in warrant exchange
offer (Note 10)........................... -- 68 91,394 -- (91,462) --
Conversion of shares........................ (20) 20 -- -- -- --
Purchases of Treasury Stock................. -- -- -- -- (3) (3)
Retirement of Treasury Stock................ (1) (24) (91,541) -- 91,566 --
----- ----- ----------- --------- ----------- ---------
Balance January 31, 1993...................... 93 357 409,970 54,636 -- 465,056
----- ----- ----------- --------- ----------- ---------
Net income for year -- -- -- 59,301 -- 59,301
Income tax benefit resulting from cumulative
effect of a change in accounting for
income
taxes..................................... -- -- 27,053 -- -- 27,053
Income tax benefit resulting from exercise
of stock options.......................... -- -- 1,655 -- -- 1,655
Proceeds from exercise of employee stock
options................................... -- 1 1,168 -- -- 1,169
Proceeds from exercise of warrants.......... -- 4 6,181 -- -- 6,185
Conversion of shares........................ (37) 37 -- -- -- --
----- ----- ----------- --------- ----------- ---------
Balance January, 31, 1994..................... $ 56 $ 399 $ 446,027 $ 113,937 $ -- $ 560,419
----- ----- ----------- --------- ----------- ---------
----- ----- ----------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION.
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.
FISCAL YEAR.
The Company's fiscal year ends on January 31. Fiscal years are designated
in the financial statements and notes by the calendar year in which the fiscal
year commences.
CASH AND CASH EQUIVALENTS.
All highly-liquid debt instruments purchased with a maturity of three
months or less are classified as cash equivalents. The carrying amounts reported
in the balance sheet for cash and cash equivalents approximate
the fair value of those assets .
INVENTORIES.
Inventories, consisting primarily of products held for sale, are stated at
the lower of cost or market. Cost is determined by the average cost method which
approximates the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT.
The cost of property, plant and equipment is capitalized and
depreciated over their estimated useful lives using the straight-line method.
When assets are sold or retired, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in income. The
cost of maintenance and repairs is charged to expense as incurred.
EXCESS OF COST OVER ACQUIRED NET ASSETS.
The excess of cost over acquired net assets is amortized over thirty years
using the straight-line method.
TRANSLATION OF FOREIGN CURRENCIES.
All balance sheet items for foreign operations are translated at the
current exchange rate as of the balance sheet date, and income and expense items
are translated at average currency exchange rates for the year. Exchange gains
and losses resulting from foreign currency transactions are included in losses
from joint ventures.
NET SALES AND RETURNS.
Revenue is recognized at time of shipment to customers. The Company's
policy is to allow customers to return merchandise for full credit up to thirty
days after date of shipment. An allowance for returned merchandise is provided
as a percentage of sales based on historical experience. The return provision
was approximately 21, 19, and 18 percent of sales in fiscal 1993, 1992 and 1991,
respectively.
31
<PAGE>
CAPITALIZATION OF START-UP COSTS.
The Company capitalizes all direct incremental costs incurred prior to
operations for new broadcast ventures. These costs are amortized over a period
of eighteen months starting at the commencement of broadcast operations.
INCOME TAXES.
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ('SFAS 109'). The
cumulative effect of the change in the method of accounting for income taxes was
included in the first quarter of 1993 Consolidated Statements of Operations and
Shareholders' Equity. Prior years' financial statements were not restated. Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the
enactment date.
The Company previously used the asset and liability method under SFAS 96.
Under the asset and liability method of SFAS 96, deferred tax assets and
liabilities were recognized for all events that had been recognized in the
financial statements. Under SFAS 96, the future tax consequences of recovering
assets or settling liabilities at their financial statement carrying amounts
were considered in calculating deferred taxes. Generally, SFAS 96 prohibited
consideration of any other future events in calculating deferred taxes.
NOTE 2 -- ACCOUNTS RECEIVABLE
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 sold accounts receivable at face value of
$418.2 million, $392.7 million and $290.4 million under this agreement in fiscal
1993, 1992 and 1991, respectively. 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 is required to pay certain finance
and servicing fees which are offset by finance charges on customer account
balances. The net amount of this finance charge income is included as interest
income and is comprised of the following (in millions):
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Finance charges on customer account balances............................... $ 26.2 $ 23.2 $ 20.0
--------- --------- ---------
Funding fees............................................................... 8.7 8.1 7.7
Service fees............................................................... 10.5 9.5 9.4
--------- --------- ---------
19.2 17.6 17.1
--------- --------- ---------
Net finance income......................................................... $ 7.0 $ 5.6 $ 2.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
The uncollected balances of accounts receivable sold under this program are
$201.2 million and $180.3 million at January 31, 1994 and 1993, respectively, of
which $170.1 million and $71.5 million represent deposits under the agreement
and are included in accounts receivable. The total reserve balances maintained
for the repurchase of uncollectible accounts are $55.7 million and $42.6 million
at January 31, 1994 and 1993, respectively. Approximately $8.6 million and $25.7
million of the reserve balances are included in accrued liabilities at January
31, 1994 and 1993, respectively; the remaining balances are included with
allowance for doubtful accounts.
32
<PAGE>
Receivables sold under this agreement are considered financial instruments
with off-balance sheet risk as defined in Statement of Financial Accounting
Standards No. 105.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, ESTIMATED
------------------------ USEFUL
1994 1993 LIFE
----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land...................................................... $ 3,977 $ 3,228 --
Buildings and improvements................................ 50,627 45,385 20-30 years
Furniture and other equipment............................. 33,866 30,246 3- 8 years
Broadcast equipment....................................... 8,942 12,478 5- 7 years
Computer equipment and software........................... 20,005 18,047 3- 5 years
Construction in progress.................................. 1,684 482 --
----------- -----------
119,101 109,866
Less -- accumulated depreciation.......................... (38,522) (37,003)
----------- -----------
Net property, plant and equipment......................... $ 80,579 $ 72,863
----------- -----------
----------- -----------
</TABLE>
In July 1993, the Company completed construction of a 50,000 square foot
telecommunications center in Chesapeake, Virginia for a total cost of
approximately $6.9 million. This new telecommunications center replaced a
facility that was leased.
NOTE 4 -- CABLE TELEVISION DISTRIBUTION RIGHTS
Cable television distribution rights consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cable television distribution rights...................................... $ 162,142 $ 166,082
Less -- accumulated amortization.......................................... (62,563) (50,834)
----------- -----------
Net cable television distribution rights.................................. $ 99,579 $ 115,248
----------- -----------
----------- -----------
</TABLE>
The amounts assigned to cable television distribution rights arose
principally from excess fair values assigned, as determined by independent
appraisals, to Convertible Preferred Stock issued to cable system operators in
exchange for distribution agreements.
Cable television distribution rights are amortized by the straight-line
method over the lives of the individual agreements. The remaining weighted
average life for all cable television distribution rights is approximately 10
years at January 31, 1994.
NOTE 5 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred taxes (Note 13)..................................................... $ 17,265 $ 7,120
Investments in and advances to joint ventures, net of accumulated losses..... 11,194 --
Start-up costs............................................................... 3,459 --
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
Satellite transponder rights................................................. 1,000 1,000
Debt placement fees.......................................................... 162 15,292
Other........................................................................ 1,072 1,475
--------- ---------
34,152 24,887
Less -- accumulated amortization............................................. (488) (15,859)
--------- ---------
Net other assets............................................................. $ 33,664 $ 9,028
--------- ---------
--------- ---------
</TABLE>
During fiscal 1993, the Company established electronic retailing program
service in England ('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 England began
broadcasting on October 1, 1993 and the joint venture in Mexico began
broadcasting on November 15, 1993. The joint venture agreement in England
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, for 1993, 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.
Summarized financial information for 'QVC -- The Shopping Channel' and
'CVC' on a 100% basis as of and for the period ended January 31, 1994 follows
(unaudited -- in thousands):
<TABLE>
<CAPTION>
QVC -- THE
SHOPPING CHANNEL CVC
----------------- ---------
<S> <C> <C>
Current assets.......................................................... $ 5,608 $ 9,687
Property, plant and equipment, net...................................... 1,645 1,665
Unamortized start-up costs.............................................. 2,205 1,650
Current liabilities..................................................... 4,181 9,507
Net revenue............................................................. 2,994 2,316
Gross profit............................................................ 514 248
Loss.................................................................... (8,943) (3,606)
</TABLE>
In fiscal 1993, the Company also entered a joint venture with Tribune
Entertainment Company and Regal Communications to form QRT Enterprises ('QRT').
QRT produces and syndicates 'Can We Shop' with Joan Rivers, which commenced
broadcasting January 17, 1994. 'Can We Shop' is a one-hour, Monday through
Friday television show through which merchandise is sold. The Company's
one-third share of QRT's operating loss amounted to $386,000 in 1993.
In fiscal 1993, the Company made a $3.8 million investment in Friday
Holdings, L.P., a limited partnership. 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 $300,000 in 1993.
During the year, the Company also capitalized $3.5 million in costs
relating to Q2, a new televised shopping/programming service, scheduled to be
launched in the spring of 1994 in the United States. The capitalized start-up
costs will be amortized over eighteen months starting at the commencement of
broadcast operations.
Debt placement fees on the Senior term loan arising out of the CVN
acquisition have been amortized over the expected life of the debt using the
effective interest rate method. On March 5, 1993, the Company retired the Senior
term loan. Debt placement fees of $15.1 million associated with the Senior term
loan were fully amortized and the cost and accumulated amortization were removed
from the accounts. During fiscal 1992, the Company prepaid $86.3 million of the
Senior term loan. As a result, the amortization of debt placement fees of $2.7
million was accelerated and reported as an extraordinary loss of $1.5 million,
net of $1.2 million income tax benefit. During fiscal 1991, the Company prepaid
$98.1 million of the Senior term loan and the amortization of debt placement
fees of
34
<PAGE>
$3.8 million was accelerated and reported as an extraordinary loss of $2.1
million, net of $1.7 million income tax benefit.
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Income taxes (Note 13).................................................... $ 80,879 $ 25,889
Reserve for uncollectible accounts under revolving credit program (Note
2)...................................................................... 8,636 25,699
Non-inventory accounts payable............................................ 35,452 26,418
Accrued compensation and benefits......................................... 13,996 13,035
Sales and other taxes..................................................... 11,324 12,079
Allowance for sales returns............................................... 17,787 11,344
Other..................................................................... 57,915 36,894
----------- -----------
$ 225,989 $ 151,358
----------- -----------
----------- -----------
</TABLE>
NOTE 7 -- LONG-TERM DEBT
Aggregate amounts of outstanding long-term debt consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
10.4% Mortgage notes payable in monthly installments
until 1998................................................................. $ 10,158 $ 10,659
Senior term loan............................................................. -- 21,000
--------- ---------
10,158 31,659
Less -- current portion...................................................... (3,114) (24,073)
--------- ---------
$ 7,044 $ 7,586
--------- ---------
--------- ---------
</TABLE>
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 .25% is payable
on the unused portion of the revolving credit facility. The credit agreement
requires the Company to maintain certain ratios for total liabilities to
shareholders' equity and for coverage of fixed charges. The Company borrowed
$20.0 million under the facility in March 1993 and retired the remaining balance
on the Senior term loan. All amounts borrowed under the facility were repaid
from net cash provided by operating activities during the first quarter of 1993.
Outstanding letters of credit totaled approximately $7.8 million at January 31,
1994.
The interest rate on the outstanding balance of the Senior term loan was
4.4% at January 31, 1993.
Maturities of the 10.4% mortgage notes payable for the five years
subsequent to January 31, 1994 are $3,114,000 in 1994; $601,000 in 1995;
$666,000 in 1996; $739,000 in 1997 and $5,038,000 in 1998.
35
<PAGE>
NOTE 8 -- LEASES AND TRANSPONDER SERVICE AGREEMENTS
Future minimum payments under all non-cancellable operating leases and
transponder service agreements with initial terms of one year or more at January
31, 1994 consist of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------------------
<S> <C>
1994................................................................................. $8,029
1995................................................................................. 6,405
1996................................................................................. 5,450
1997................................................................................. 5,173
1998................................................................................. 5,287
Thereafter........................................................................... 34,001
---------
Total $64,345
---------
---------
</TABLE>
Expense for operating leases, principally for data processing equipment and
facilities, and for transponder service agreements amounted to $11,280,000,
$12,895,000 and $13,047,000 in fiscal years 1993, 1992 and 1991, respectively.
In November 1992, the Company started to transmit the QVC program on a
protected, non-preemptible transponder on the C-4 Satellite at a monthly cost
that averages $224,000 over the term of the twelve-year agreement.
In December 1992, the Company started to transmit The QVC Fashion Channel
on a protected non-preemptible transponder on the C-3 Satellite at a cost of
$205,000 per month over the term of the twelve-year agreement.
NOTE 9 -- CAPITAL STOCK
The Company has 175,000,000 shares of Common Stock authorized. There were
39,895,447 shares outstanding at January 31, 1994 and 35,734,062 shares
outstanding at January 31, 1993. The reasons for the increase in the number of
shares of Common Stock outstanding were the conversion of Convertible Preferred
Stock (3,659,040), the exercise of warrants (408,908) and the exercise of
employee stock options (93,437).
The following table summarizes the convertible preferred shares at January
31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
SHARES OUTSTANDING
SHARES AUTHORIZED PAR VALUE
----------------- -------------------- --------------------
1994 AND 1993 1994 1993 1994 1993
----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Series A............................................. 10 -- -- $ -- $ --
Series B............................................. 1,000 28 55 3 6
Series C............................................. 1,000 531 788 53 79
Series D............................................. 300 1 83 -- 8
--------- ---------
$ 56 $ 93
--------- ---------
--------- ---------
</TABLE>
The shares of Convertible Preferred Stock were issued to cable system
operators in connection with their signing or extending cable television
distribution agreements in prior years.
36
<PAGE>
CONVERTIBILITY.
Each share of Series B, Series C and Series D Convertible Preferred Stock
is convertible into ten shares of Common Stock.
VOTING RIGHTS.
The holders of the Common Stock are empowered to elect two directors of the
Company as a class. The holders of each class of stock are entitled to cast one
vote per share for the election of the remaining directors of the Company.
LIQUIDATION.
Upon the dissolution and liquidation of the Company, the assets remaining
after the payment of all debts and liabilities of the Company shall be
distributed first to the holders of the Series B Convertible Preferred Stock at
$10.00 per share. To the extent available, the holders of Series C Convertible
Preferred Stock will then receive $10.00 per share followed by Series D
Convertible Preferred Stock holders at $15.00 per share. The balance, if any,
will be paid to the holders of the Common Stock share-for-share.
NOTE 10 -- STOCK OPTIONS, WARRANTS AND AWARDS
The following table summarizes shares of Common Stock reserved for issuance
for outstanding stock options and warrants:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE PRICE
JANUARY 31, AT JANUARY 31,
---------------------------- --------------------
1994 1993 1994 1993 EXPIRATION DATE
------------- ------------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Qualified stock options.................. 1,751,800 1,717,462 $ 30.56 $ 28.94 11/1996-01/2004
Non-qualified stock options.............. 6,275,500 6,279,600 32.83 32.33 04/2000-07/2003
Warrants issued in connection with 1987
debt financing......................... 310,000 310,000 10.00 10.00 04/1994
Warrants issued in connection with
Convertible subordinated debt.......... 1,600,000 1,600,000 17.49 17.49 10/1995
Warrants exchanged for CVN Series 2
Warrants............................... -- 408,908 -- 15.13 --
Warrants issued with Common Stock in lieu
of cash interest expense............... 100,000 100,000 13.35 13.35 04/1996-10/1996
------------- -------------
Total reserved shares............... 10,037,300 10,415,970
------------- -------------
------------- -------------
</TABLE>
The Company has Incentive Stock Option Plans ('ISO Plans'), under which options
may be granted to key managerial employees to purchase up to 10,300,000 shares
of Common Stock. The ISO Plans are administered by the Executive Compensation
Committee appointed by the Company's Board of Directors. The Committee has the
authority to determine optionees, the number of shares to be covered by each
option and certain other terms and conditions of the grant. The ISO Plans
require that the exercise price of options be equal to or greater than the fair
market value of the stock at the time of grant, and the term of any option
cannot exceed ten years. Options issued under the 1990 Non-Qualified Stock
Option Plan and the 1993 Qualified Stock Option Plan vest ratably over four
years, commencing one year from the date of the grant of the option and
qualified and non-qualified options under all other ISO Plans, except where
noted below, vest ratably over three years, commencing on the date of grant.
In connection with obtaining a portion of the proposed financing for the
cash tender offer for Paramount Communications Inc. (Note 16), the Company
granted BellSouth Corporation, Advance Publications, Inc. and Cox Enterprises,
Inc. options to purchase an aggregate of 14.3 million shares of
37
<PAGE>
Common Stock at $60.00 per share. The options were granted at the termination of
the QVC/Paramount tender offer on February 15, 1994 and are exercisable until
the later of August 15, 1994 or ten business days after stockholders of the
Company vote with respect to such grant of options.
On December 9, 1992, the Company and two of its principal shareholders
(Comcast Corporation and Liberty Media Corporation) announced an agreement
pursuant to which Mr. Barry Diller would become Chairman of the Board and Chief
Executive Officer. In connection with this agreement, the Company granted Mr.
Diller 160,000 shares of Common Stock. The value of the shares on the date of
grant ($4.9 million) was charged to general and administrative expense in fiscal
1992. Also in connection with this agreement, the Company granted to Mr. Diller
stock options covering 6,000,000 shares of Common Stock. All of the options have
a five-year term. One-half of these options ('base options') have an exercise
price of $30.43; the other one-half ('scaled options') have an exercise price
equal to $30.43 per share increased by 13 percent per annum until December 9,
1994 and thereafter by 15 percent per annum compounded annually. The exercise
price on any unexercised scaled options increases annually. One-half of the base
options and one-half of the scaled options became exercisable December 9, 1993
and the balance become exercisable December 9, 1994. The exercise date can be
accelerated upon certain events.
In August 1991, the Company granted to Mr. Joseph M. Segel, then Chairman
and Chief Executive Officer, non-qualified stock options covering 600,000 shares
of Common Stock at an exercise price of $15.90. One-half of these options vested
on the first anniversary of the date of grant and the balance was to vest on the
second anniversary of the date of grant. On December 9, 1992, the Board of
Directors and the Executive Compensation Committee approved the acceleration of
the vesting of the second half of these options to December 1992, in order to
allow Mr. Segel to realize their value in 1992. The Board and the Executive
Compensation Committee also accelerated an additional 50,000 options under ISO
Plans for Mr. Segel that were scheduled to vest in 1993 and 1994.
On December 9, 1992, the Board agreed to enter into a consulting and
severance arrangement with Mr. Segel whereby he would serve as a consultant to
the Company for a period of ten years after his retirement in January 1993 at an
annual salary of $240,000 and, as incentive to Mr. Segel to accept employment as
a consultant, granted to Mr. Segel, pursuant to the 1992 Qualified Incentive
Stock Option Plan, 100,000 options to purchase shares of Common Stock,
exercisable at $30.43 per share. These options vest ratably over a period of
five years. The present value of the ten-year consulting and severance
arrangement with Mr. Segel of $2.2 million was expensed in fiscal 1992.
The Board also approved entering into three-year (five-year in the case of
Michael C. Boyd, former President of the Company) employment agreements for nine
senior Company executives, pursuant to which, among other things, the executives
would be entitled to compensation at their current salaries and eligible for
bonus and incentive compensation programs as may be maintained from time to time
during the term of the agreement. As incentive to enter into the employment
agreements, the Board granted to these executives, pursuant to the 1992 Stock
Option Plan, an aggregate 1,450,000 options to purchase Common Stock exercisable
at $30.43 per share. Options granted under the 1992 Qualified Incentive Stock
Option Plan vest ratably over three years (five years in the case of Mr. Boyd).
In February 1994, Mr. Boyd retired from the Company and entered into a
consulting agreement. Accordingly, the present value of his employment agreement
of $1.3 million was expensed in fiscal 1993.
38
<PAGE>
A summary of changes in outstanding options under the ISO Plans is as
follows:
<TABLE>
<CAPTION>
NON-QUALIFIED OPTION
QUALIFIED OPTION SHARES SHARES
------------------------ ------------------------
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE PRICE RANGE
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1991............. 590,112 504,737 630,000 85,000 $ 5.00 -- $17.25
Granted................................. 5,000 1,250 607,500 -- 12.13 -- 15.90
Cancelled............................... (26,500) (19,000) (11,000) (1,375) 5.00 -- 16.00
Became exercisable...................... -- 49,625 -- 144,875 5.00 -- 16.00
Exercised............................... (65,825) (65,825) (26,000) (26,000) 5.00 -- 13.00
----------- ----------- ----------- ----------- -----------------
Balance at January 31, 1992............. 502,787 470,787 1,200,500 202,500 5.00 -- 17.25
Granted................................. 1,582,000 351,167 6,010,000 -- 19.00 -- 38.86
Cancelled............................... (1,750) (1,750) (11,000) (3,500) 5.00 -- 16.00
Became exercisable...................... -- 29,500 -- 796,375 5.00 -- 16.00
Exercised............................... (365,575) (365,575) (919,900) (919,900) 5.00 -- 17.25
----------- ----------- ----------- ----------- -----------------
Balance at January 31, 1993............. 1,717,462 484,129 6,279,600 75,475 5.00 -- 38.86
Granted................................. 106,000 1,250 50,000 -- 39.88 -- 70.75
Cancelled............................... (5,575) (5,575) (26,750) (3,000) 5.00 -- 23.25
Became exercisable...................... -- 370,416 -- 3,095,250 5.00 -- 34.39
Exercised............................... (66,087) (66,087) (27,350) (27,350) 5.00 -- 23.25
----------- ----------- ----------- ----------- -----------------
Balance at January 31, 1994............. 1,751,800 784,133 6,275,500 3,140,375 $ 5.00 -- $70.75
=========== =========== =========== =========== =================
</TABLE>
In December, 1992, the Company offered to exchange warrants into shares of
Common Stock equivalent in value to the difference between the warrant exercise
price and the market price ($37.75) at the time of the offer. Warrants that
would have been exercisable for 7,061,005 shares were extinguished in this offer
and the Company issued 4,367,690 net shares of Common Stock. The warrant holders
were able to effect the exchange several ways. The net effect on the number of
shares of Common Stock outstanding after the exchange was the same. A total of
3,893,962 warrants were exercised by delivering to the Company 1,424,404
previously issued shares of Common Stock valued at the market price ($37.75). A
total of 2,492,017 warrants were exercised for $37,692,000, the proceeds of
which were used to purchase from the warrant holders 998,457 shares of Common
Stock at market. A total of 675,026 warrants were exchanged for 404,572 shares
of Common Stock with an aggregate value equal to the difference between the
market price and the exercise price. Warrant holders of an aggregate 2,418,908
shares declined the offer. Since this warrant exchange was treated as a non-cash
financing transaction, it is not reflected on the Consolidated Statements of
Cash Flows.
39
<PAGE>
NOTE 11 -- 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 fiscal years 1993, 1992 and 1991 (in thousands, except per
share data):
<TABLE>
<CAPTION>
1993 1992 1991
------------------------ ------------------------ ------------------------
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Income before extraordinary item and
cumulative effect of a change in
accounting principle.................. $ 55,311 $ 55,311 $ 56,588 $ 56,588 $ 21,733 $ 21,733
Add -- Imputed income from interest
savings, net of tax, on assumed
retirement of debt with remaining
proceeds from assumed exercise of
warrants and options.................. -- -- 1,452 1,239 -- 3,896
--------- ------------- --------- ------------- --------- -------------
Adjusted income before extraordinary
item and cumulative effect of a change
in accounting principle............... 55,311 55,311 58,040 57,827 21,733 25,629
Extraordinary item -- loss on
extinguishment of debt, net of tax
benefit............................... -- -- (1,496) (1,496) (2,108) (2,108)
Cumulative effect of a change in
accounting for income taxes........... 3,990 3,990 -- -- -- --
--------- ------------- --------- ------------- --------- -------------
Adjusted net income..................... $ 59,301 $ 59,301 $ 56,544 $ 56,331 $ 19,625 $ 23,521
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
SHARES:
Weighted average number of common shares
outstanding........................... 37,845 37,845 27,885 27,885 19,750 19,750
Add -- Common equivalent shares assuming
conversion of Series B, C and D
Convertible Preferred Stock........... 7,387 7,387 10,340 10,340 12,209 12,209
Add -- Common equivalent shares assuming
conversion of subordinated note at
beginning of fiscal year.............. -- -- -- 1,280 -- 1,704
Add -- Common shares assumed to be
outstanding from exercise of warrants
and options........................... 10,184 10,180 12,812 10,517 -- 11,925
Less -- Assumed purchase of Common Stock
from proceeds of exercise of warrants
and options........................... (5,354) (5,207) (7,147) (4,636) -- (7,275)
--------- ------------- --------- ------------- --------- -------------
50,062 50,205 43,890 45,386 31,959 38,313
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
INCOME PER SHARE:
Income before extraordinary item and
cumulative effect of a change in
accounting principle.................. $ 1.10 $ 1.10 $ 1.32 $ 1.27 $ .68 $ .67
Extraordinary item, net of tax
benefit............................... -- -- (.03) (.03) (.07) (.06)
Cumulative effect of a change in
accounting for income taxes........... .08 .08 -- -- -- --
--------- ------------- --------- ------------- --------- -------------
Net income.............................. $ 1.18 $ 1.18 $ 1.29 $ 1.24 $ .61 $ .61
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
</TABLE>
PRO FORMA NET INCOME PER SHARE
On a pro forma basis, net income for fiscal 1991 would have been $22.9
million, or $.64 per share, assuming the Company's October 1991 public offering
of Common Stock and the related retirement of long-term debt as well as the
exchange of Common Stock with Liberty Media
40
<PAGE>
Corporation in satisfaction of one-half of the unsecured note payable occurred
as of the beginning of the year. The pro forma computation assumes adjustments
have been made to interest expense attributable to the reduction of the
long-term debt, net of income tax effect. It also assumes that the shares issued
in connection with the public offering and the exchange were outstanding from
the beginning of the period.
NOTE 12 -- RETIREMENT AND SAVINGS PLANS
The Company has a defined contribution Employee Retirement Plan which
covers substantially all of the Company's employees after completion of one year
of service. The Company's contribution under the Plan is equal to 3.0% of
eligible employees' salaries. The costs of this Plan charged to expenses were
$2,202,000, $2,177,000, and $1,664,000 in fiscal years 1993, 1992 and 1991,
respectively.
In addition, the Company sponsors a 401(k) Savings Plan which permits
employees to make contributions to the Savings Plan on a pre-tax salary
reduction basis in accordance with the Internal Revenue Code. Substantially all
full-time employees are eligible to participate after completion of one year of
service. The Company matches a portion of the voluntary employee contributions.
The costs of this Savings Plan charged to expenses were $2,053,000, $1,501,000,
and $812,000 in fiscal years 1993, 1992 and 1991, respectively.
NOTE 13 -- INCOME TAXES
Effective February 1, 1993, the Company changed its method of accounting
for income taxes as required by SFAS 109. The cumulative effect of this change
in accounting was to increase the net income of the first quarter of fiscal 1993
by approximately $4.0 million, which is reported separately in the Consolidated
Statements of Operations. Prior year's financial statements have not been
restated to reflect the provisions of SFAS 109.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal.......................................................... $ 66,366 $ 49,770 $ 19,394
State............................................................ 21,710 19,810 11,771
--------- --------- ---------
Total............................................................ 88,076 69,580 31,165
--------- --------- ---------
Deferred
Federal.......................................................... (23,159) (17,500) --
State............................................................ (4,942) -- --
--------- --------- ---------
Total............................................................ (28,101) (17,500) --
--------- --------- ---------
Total provision.................................................... $ 59,975 $ 52,080 $ 31,165
--------- --------- ---------
--------- --------- ---------
</TABLE>
41
<PAGE>
NOTE 13 -- INCOME TAXES -- (CONTINUED)
Total income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 35.0% for fiscal 1993 and 34.0% for fiscal 1992
and 1991 to income before income taxes and extraordinary item as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Provision at statutory rate.................................................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit................................. 14.5 12.0 14.7
Amortization of intangibles not deductible for tax purposes.................... 3.0 3.2 6.7
Net operating loss carryforward................................................ -- -- (1.2)
Other.......................................................................... (.5) (1.3) 4.7
--------- --------- ---------
Total income tax expense....................................................... 52.0% 47.9% 58.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the value of assets and liabilities and their tax bases and the benefit
of existing net operating loss carryforwards. Significant components of the net
deferred tax assets as of January 31, 1994 and 1993 follow (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts and related
reserves for uncollectible accounts under the Company's revolving credit program...... $ 25,715 $ 15,985
Inventories, principally due to obsolescence reserves and additional costs of inventories
for tax purposes pursuant to the Tax Reform Act of 1986............................... 7,497 6,801
Allowance for sales returns.............................................................. 7,625 3,857
Executive stock award.................................................................... -- 1,655
Costs associated with the terminated Paramount tender offer.............................. 14,964 --
Costs associated with cable television distribution rights............................... 26,619 2,813
Other.................................................................................... 7,061 (363)
--------- ---------
Total gross deferred tax assets.......................................................... 89,481 30,748
Less: Valuation allowance................................................................ (12,467) --
Less -- amounts not recognized due to SFAS 96 limitations on carrybacks of future net
deductible amounts and carryforwards of alternative minimum tax credits............... -- (12,948)
--------- ---------
Net deferred tax assets.................................................................. $ 77,014 $ 17,800
--------- ---------
--------- ---------
</TABLE>
Of the total net additional deferred tax asset recorded at the time of the
adoption of SFAS 109, approximately $27.0 million was credited to additional
paid-in capital and approximately $6.5 million was credited to the excess of
cost over acquired net assets. The net increase in the deferred tax asset during
fiscal 1993 differs from the deferred benefit component of the current year's
tax provision primarily due to the recognition of a portion of the net operating
loss carryforwards.
42
<PAGE>
NOTE 13 -- INCOME TAXES -- (CONTINUED)
Deferred tax assets were not recorded as of January 31, 1993 for state
income tax purposes since the Company's income is principally allocable to
states that do not permit carrybacks that would give rise to refundable taxes.
In addition, no deferred tax assets were recorded for federal or state tax
purposes in fiscal 1991 since refundable taxes could not be generated from
carrying back future net deductible amounts under the requirements of SFAS 96.
The increase in the deferred tax asset for fiscal 1992 differs from the
deferred benefit component of the current year tax provision because portions of
the deferred tax provision recorded were allocated to additional paid-in capital
or the excess of cost over acquired net assets.
The valuation allowance for deferred tax assets as of February 1, 1993 was
$12.2 million. The net change in the valuation allowance for fiscal 1993 was an
increase of $255,000. Approximately $6.0 million of the valuation allowance will
result in a credit to additional paid-in capital when it becomes more likely
than not that certain deductions associated with cable television distribution
rights will be realizable.
The following table summarizes the nature of certain tax benefits realized
that reduced taxes payable but were not credited to the tax provision (in
thousands):
<TABLE>
<CAPTION>
ADDITIONAL PAID-IN EXCESS OF COST OVER
CAPITAL ACQUIRED NET ASSETS
-------------------- --------------------
SOURCE OF TAX BENEFIT 1993 1992 1993 1992
- --------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Exercise of employee stock options............................. $ 1,655 $ 12,366 $ -- $ --
Net operating loss carryforward and other deductions arising
from equity transactions..................................... -- 6,967 -- --
Realization of tax benefits associated with temporary
differences in CVN acquisition............................... -- -- 6,510 5,086
Alternative minimum tax credit carryforward generated from
equity related deductions.................................... -- 2,979 -- --
--------- --------- --------- ---------
$ 1,655 $ 22,312 $ 6,510 $ 5,086
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
In 1993, the tax benefits realized from net operating loss carryforwards of $6.6
million reduced taxes payable and were credited to deferred tax assets.
As of January 31, 1994, the Company has a net operating loss carryforward
of $634,000 available to reduce future federal taxable income. There are no
other credits or loss carryforwards available as of the end of fiscal 1993.
NOTE 14 -- LITIGATION
In July 1993, Shop Television Network, Inc. ('STN'), J.C. Penney Company,
Inc. ('JCP'), JCPenney Television Shopping Channel Inc. ('JCPTV'), Michael Rosen
and the Company settled the litigation that STN had brought in the Superior
Court of the State of California for the County of Los Angeles in 1991, in
connection with the negotiation and execution of an agreement dated May 16,
1991, between the Company and JCPTV. The settlement requires dismissal of all
pending litigation between the parties, payment of approximately $8.8 million to
STN, and repurchase by STN of all its shares held by JCP for an agreed price.
JCPTV and the Company agreed to divide the settlement payment to STN between
them, with the Company being responsible for the payment of approximately $3.8
million of such settlement payment. This amount was included as a charge in
general and administrative expenses in the second quarter of fiscal 1993.
In July 1993, the Company was joined as a defendant in actions filed in
state and federal court in Delaware by certain shareholders of Home Shopping
Network, Inc. ('HSN') against HSN, Liberty Media Corporation ('Liberty'),
Liberty Program Investments, Inc., RMS Limited Partnership
43
<PAGE>
('RMS'), and certain individual directors and officers of HSN. The
actions challenge Liberty's purchase of HSN Class A and Class B Common
Stock from RMS, Liberty's tender offer for 15.0 million shares of HSN Common
Stock as well as the Company's July 12, 1993 letter proposal to HSN to combine
HSN and the Company in a stock-for-stock transaction (the 'Proposed HSN
Merger'). The actions allege that the Company aided and abetted breaches of
fiduciary duties in connection with the Proposed HSN Merger, as well as
violations of certain regulations of the Securities Exchange Act. Plaintiffs
seek class certification, declaratory and injunctive relief, compensatory
damages, counsel fees, interest and costs. Management believes that the
allegations against the Company in these shareholder lawsuits are unfounded and
intends to defend against such actions vigorously. On November 5, 1993, the
Company and HSN announced their mutual agreement to terminate negotiations on
the Proposed HSN Merger. The Company's time to respond to the complaint in the
state action was extended indefinitely. In March, 1994, the Company filed a
motion to dismiss the complaint in the federal action. The parties are currently
engaged in settlement discussions.
In September 1993, Viacom International Inc. ('Viacom International'), a
subsidiary of Viacom Inc. ('Viacom'), brought an action against the Company,
Tele-Communications, Inc., Liberty, Satellite Services, Inc., Encore Media
Corp., and Netlink USA, challenging the Company's September 20, 1993 proposal to
Paramount Communications Inc. ('Paramount') to combine Paramount and the Company
in a cash and stock-for-stock exchange. Viacom International amended its
complaint in November, 1993, adding Comcast Corporation ('Comcast') as an
additional defendant. The Company filed an answer to the amended complaint on
November 19, 1993. Comcast was subsequently dismissed as a defendant. Management
believes that the allegations against the Company in Viacom International's
action are unfounded and intends to defend against such action vigorously. On
February 15, 1994, the Company terminated its tender offer for 50.1% of
Paramount Common Stock.
In October 1993, the Company commenced legal action in the Delaware
Chancery Court against Viacom, Paramount and certain Paramount directors for
breach of fiduciary duties in failing to give fair treatment to the Company's
merger proposal while granting undue advantages to Viacom's merger proposal. The
Company sought to compel Paramount's board to give the two merger proposals
equal consideration and also sought to invalidate certain 'lockup' agreements
and share purchase options given by Paramount to Viacom. Following a hearing,
the Court, on November 24, 1993, granted the Company's motion for a preliminary
injunction against Paramount's poison pill rights plan and certain other
anti-takeover mechanisms being used to preclude the Paramount shareholders from
accepting the Company's cash tender offer for approximately 50.1% of Paramount's
shares. On appeal by Paramount and Viacom, the Delaware Supreme court affirmed
the injunction granted by the Delaware Chancery Court on December 9, 1993, and
issued a formal opinion in support of its ruling on February 4, 1994. On
December 21, 1993, Viacom filed a motion to dismiss the Company's complaint
against it. On February 15, 1994, the Company terminated its tender offer for
Paramount's Common Stock.
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.
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<PAGE>
NOTE 15 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS
An analysis of changes in working capital items follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Increase in accounts receivable.................................. $ (86,154) $ (29,029) $ (6,006)
Increase in inventories.......................................... (29,496) (9,784) (8,428)
Increase in deferred taxes....................................... (24,389) (10,680) --
Increase in prepaid expenses..................................... (1,820) (450) (732)
Increase in accounts payable -- trade............................ 29,972 11,312 7,245
Increase in accrued liabilities.................................. 75,648 5,074 48,028
---------- ---------- ---------
$ (36,239) $ (33,557) $ 40,107
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information:
Interest paid.................................................. $ 1,369 $ 20,512 $ 30,397
Income taxes paid.............................................. 31,841 37,944 1,351
</TABLE>
In fiscal year 1993, the Company did not enter into any non-cash financing
transactions. In fiscal years 1992 and 1991, the following non-cash financing
transactions were entered into by the Company (dollars in thousands).
<TABLE>
<S> <C>
1992
Issuance of 1,704,546 shares of Common Stock in prepayment of Convertible subordinated
note, net of $1,260 debt placement fees.................................................. $28,740
Exercise of 3,893,962 warrants through deliverance of 1,424,404 shares of Common Stock at
market value............................................................................. 53,771
Exercise of 2,492,017 warrants for $37,692 with simultaneous repurchase of 998,457 shares
of Common Stock at market value.......................................................... 37,692
Issuance of 404,572 shares of Common Stock in exchange for 675,026 warrants, representing
the aggregate difference between the market price and the exercise price................. 15,273
Exercise of stock options through deliverance of 800 shares of Common Stock at market
value.................................................................................... 31
</TABLE>
<TABLE>
<S> <C>
1991
Issuance of an aggregate of 243,522 shares of Common Stock and 100,000 warrants to Comcast
Financial Corporation in lieu of cash interest expense................................ $ 3,000
Issuance of 75,075 shares of Common Stock to the Standby Investors in consideration for
signing the Standby Equity Agreement..................................................... 614
Issuance of 2,269,552 shares of Common Stock to Liberty Media Corporation in exchange for
one-half of the outstanding balance of an unsecured note payable......................... 31,445
Adjustment to the number of shares of Common Stock assumed issued to holders of certain CVN
Series 2 Warrants from 3,377,949 to 3,410,843 (at market value).......................... 526
Adjustment to the number of new QVC Warrants assumed exchanged for certain CVN Series 2
Warrants from 6,822,767 to 6,469,913 (value based on an independent appraisal)........... (1,438)
</TABLE>
NOTE 16 -- PARAMOUNT TENDER OFFER
On October 27, 1993, the Company made an $80.00 cash tender offer for 50.1
percent of the outstanding common shares of Paramount. This tender offer was
amended several times during the bidding process against Viacom for Paramount.
On February 1, 1994, the Company amended its cash
45
<PAGE>
tender offer to $104 per share. The Company offered approximately $6.4 billion
in cash for 61.7 million Paramount common shares. The proposed cash tender offer
would have been funded through a $3.25 billion bank loan commitment and proposed
capital contributions to the Company of $1.5 billion from BellSouth Corporation
and $0.5 billion each from Advance Publications, Cox Enterprises and Comcast
Corporation. On February 15, 1994, Paramount notified the Company that Viacom
received the minimum condition in its tender offer and had delivered to
Paramount a completion certificate pursuant to the bidding procedures.
Accordingly, the Company terminated its tender offer for 50.1 percent of the
Common Stock of Paramount. The costs incurred on the tender offer, comprised
principally of bank fees and legal and advisory fees, totaled $34.8 million
which were expensed in the fourth quarter of 1993. The $3.25 billion bank loan
commitment expired on February 15, 1994 upon the termination of the tender
offer.
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT AS TO PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL 1993 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue......................................................... $ 273,232 $ 262,438 $ 313,945 $ 372,489
Gross profit........................................................ 113,773 107,938 128,902 148,316
Income before income taxes and cumulative effect of a change in
accounting principle (1).......................................... 34,546 26,137 42,732 11,871
Income tax provision................................................ (16,925) (12,810) (21,215) (9,025)
Income before cumulative effect of a change in accounting
principle......................................................... 17,621 13,327 21,517 2,846
Cumulative effect of a change in accounting principle (2)........... 3,990 -- -- --
Net income.......................................................... 21,611 13,327 21,517 2,846
Income per share (3):
Primary
Income before cumulative effect of a change in accounting
principle..................................................... .36 .26 .42 .06
Net income...................................................... .44 .26 .42 .06
FISCAL 1992 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------- --------- --------- --------- ---------
Net revenue......................................................... $ 233,168 $ 221,253 $ 274,332 $ 341,834
Gross profit........................................................ 100,354 94,259 115,501 138,633
Income before income taxes and extraordinary item................... 22,917 15,905 31,468 38,378
Income tax provision................................................ (11,425) (7,190) (15,105) (18,360)
Income before extraordinary item.................................... 11,492 8,715 16,363 20,018
Extraordinary item, net of tax benefit (4).......................... (348) -- -- (1,148)
Net income.......................................................... 11,144 8,715 16,363 18,870
Income per share (5)(6):
Primary
Income before extraordinary item................................ .29 .22 .40 .44
Net income...................................................... .28 .22 .40 .42
Fully-diluted
Income before extraordinary item................................ .29 .22 .40 .42
Net income...................................................... .28 .22 .40 .40
</TABLE>
- ------------------
(1) Fourth quarter amount includes a charge of $34.8 million related to the
Paramount tender offer (Note 16).
(2) Amount represents the cumulative effect of adopting SFAS 109.
(3) Fully diluted earnings per share for all periods are not presented since
they are the same as the primary earnings per share.
(4) Amounts represent accelerated amortization of debt placement fees, net of
income tax benefits, due to prepayments of the Senior term loan (Note 5).
(5) The sum of the quarterly per share amounts does not equal the annual amount
due to the substantial changes in the number of shares throughout the year.
(6) In the fourth quarter of fiscal 1992, the modified treasury stock method of
computing earnings per share resulted in a fully-diluted computation with a
lower amount than the primary computation.
46
<PAGE>
This is due primarily to using the year-end closing share price for the
fully-diluted computation versus the average share price for the fourth
quarter. The year-end closing price was $40.50 versus a fourth quarter
average of $32.92.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QVC NETWORK, INC.
By: /s/ Neal S. Grabell
Neal S. Grabell
Senior Vice President
Dated: April 26, 1994
