<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
JULY 2, 1996
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
---------------------
SILVER KING COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-20579 59-2712807
(State or other (Commission File Number) (IRS Employer Identification
jurisdiction of No.)
incorporation)
12425 24TH STREET, NORTH 33716
ST. PETERSBURG, FLORIDA (Zip Code)
(Address of principal executive
offices)
</TABLE>
(813) 573-0339
(Registrant's telephone number, including area code)
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<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The audited consolidated financial statements of the Registrant for the
four month transition period ended December 31, 1995 together with an
independent auditors' report with respect to such statements are filed herewith.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SILVER KING COMMUNICATIONS, INC.
By: /s/ STEVEN H. GRANT
-------------------------------
Steven H. Grant
Executive Vice President
Chief Financial/Administrative
Officer and Treasurer
Date: July 2, 1996
<PAGE> 4
EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -------------------------------------------------------------------------------
<C> <C> <S>
99.1 -- Audited Consolidated Financial Statements for the registrant for the four month
transition period ended December 31, 1995 and Independent Auditors' Report.
</TABLE>
<PAGE> 1
ITEM 7 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD SEPTEMBER 1, 1995 THROUGH DECEMBER
31, 1995............................................................................
Consolidated Balance Sheets......................................................... 2
Consolidated Statements of Operations............................................... 3
Consolidated Statements of Stockholders' Equity (Deficit)........................... 4
Consolidated Statements of Cash Flows............................................... 5
Notes to Consolidated Financial Statements.......................................... 6
</TABLE>
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Silver King Communications, Inc.
We have audited the accompanying consolidated balance sheets of Silver King
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1995
and August 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the period
September 1, 1995 through December 31, 1995 and for each of the three years in
the period ended August 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and August 31, 1995 and 1994, and the results of its operations and its cash
flows for the period September 1, 1995 through December 31, 1995 and for each of
the three years in the period ended August 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note B-9 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective September 1, 1993 to
conform with Statement of Financial Standards No. 109.
Deloitte & Touche LLP
Tampa, Florida
July 2, 1996
1
<PAGE> 3
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ---------------------
1995 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 19,140 $ 22,210 $ 12,040
Accounts receivable, net.......................................... 1,402 612 789
Notes receivable, current......................................... 2,835 2,695 1,927
Other current assets.............................................. 1,199 970 520
Deferred income taxes............................................. 1,797 755 365
------------ --------- ---------
Total current assets....................................... 26,373 27,242 15,641
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer and broadcast equipment.................................. 76,033 76,144 76,605
Buildings and leasehold improvements.............................. 19,520 19,520 19,291
Furniture and other equipment..................................... 2,991 2,996 2,889
------------ --------- ---------
98,544 98,660 98,785
Less accumulated depreciation................................... (72,851) (71,419) (67,890)
------------ --------- ---------
25,693 27,241 30,895
Land.............................................................. 3,334 3,334 3,329
Construction in progress.......................................... 244 181 258
------------ --------- ---------
29,271 30,756 34,482
OTHER ASSETS
Intangible assets, net............................................ 59,984 63,103 72,492
Capitalized bank fees, net........................................ 3,293 3,581 4,118
Notes receivable, net of current portion.......................... 12,188 12,674 13,262
Long-term investments............................................. 5,135 5,135 5,135
Other............................................................. 426 426 358
------------ --------- ---------
81,026 84,919 95,365
------------ --------- ---------
$ 136,670 $ 142,917 $ 145,488
============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations....................... $ 12,456 $ 16,588 $ 10,475
Accrued liabilities:
Payroll and payroll taxes....................................... 1,315 1,534 624
Rent............................................................ 722 753 835
Interest........................................................ 777 831 716
Other........................................................... 2,217 1,494 1,438
Restructuring................................................... 1,333 -- --
------------ --------- ---------
Total current liabilities.................................. 18,820 21,200 14,088
DEFERRED INCOME TAXES............................................... 14,399 14,502 14,261
LONG-TERM OBLIGATIONS, net of current maturities.................... 95,980 97,937 114,525
COMMITMENTS AND CONTINGENCIES....................................... -- -- --
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value; 50,000 shares authorized, no
shares issued and outstanding................................... -- -- --
Common stock - $.01 par value; 30,000,000 shares authorized,
6,996,332 and 6,483,394 shares issued and outstanding,
respectively.................................................... 70 69 65
Class B - convertible common stock - $.01 par value; 2,415,945
shares authorized, issued and outstanding....................... 24 24 24
Additional paid-in capital........................................ 126,119 125,377 109,881
Note receivable from common stock issuance to key executive....... (4,998) (4,998) --
Deficit........................................................... (110,123) (107,241) (107,356)
Unearned compensation............................................. (3,621) (3,953) --
------------ --------- ---------
7,471 9,278 2,614
------------ --------- ---------
$ 136,670 $ 142,917 $ 145,488
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD
SEPTEMBER 1, 1995 YEARS ENDED AUGUST 31,
THROUGH ------------------------------
DECEMBER 31, 1995 1995 1994 1993
----------------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Broadcasting.................................. $15,061 $ 44,563 $ 42,682 $ 41,249
Production.................................... 919 3,355 3,881 4,887
----------------- -------- -------- --------
Net revenue........................... 15,980 47,918 46,563 46,136
COSTS AND EXPENSES
Cost of production............................ 193 614 938 1,203
General and administrative.................... 9,163 24,394 21,309 21,379
Depreciation and amortization................. 4,701 14,674 15,000 17,849
Restructuring................................. 2,000 -- -- --
Loss due to closing of operating unit......... 603 -- 1,205 --
----------------- -------- -------- --------
Total costs and expenses.............. 16,660 39,682 38,452 40,431
----------------- -------- -------- --------
Operating profit (loss)............... (680) 8,236 8,111 5,705
OTHER INCOME (EXPENSE)
Interest income............................... 888 3,410 1,321 1,013
Interest expense - Other...................... (3,463) (10,963) (722) (22)
Interest expense - HSNCC...................... -- -- (11,456) (12,795)
Dividend income from preferred stock
investment................................. -- 463 3,366 --
Miscellaneous................................. -- 107 (14) 19
----------------- -------- -------- --------
Total other income (expense) (2,575) (6,983) (7,505) (11,785)
----------------- -------- -------- --------
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle for income taxes.................... (3,255) 1,253 606 (6,080)
Income tax benefit (provision).................. 373 (1,138) (1,505) (306)
----------------- -------- -------- --------
Earnings (loss) before cumulative effect of
change in accounting principle for income
taxes......................................... (2,882) 115 (899) (6,386)
Cumulative effect of change in accounting
principle for income taxes.................... -- -- (2,979) --
----------------- -------- -------- --------
NET EARNINGS (LOSS)............................. $(2,882) $ 115 $ (3,878) $ (6,386)
============= ======== ======== ========
PER SHARE OF COMMON STOCK
Earnings (loss) before cumulative effect........ $ (0.31) $ .01 $ (0.10) $ (0.72)
Cumulative effect of change in accounting
principle..................................... -- -- (0.34) --
----------------- -------- -------- --------
NET EARNINGS (LOSS) PER COMMON SHARE............ $ (0.31) $ .01 $ (0.44) $ (0.72)
============= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
COMMON COMMON CLASS B FROM
STOCK STOCK CONVERTIBLE ADDITIONAL COMMON
$1.00 $0.01 COMMON PAID-IN STOCK UNEARNED
PAR VALUE PAR VALUE STOCK CAPITAL ISSUANCE DEFICIT COMPENSATION TOTAL
--------- --------- ---------- --------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1992...... $ 1 $ -- $ -- $ 10,405 -- $ (97,092) $ (378) $(87,064)
Amortization of unearned
compensation related to the
HSN executive stock award
program....................... -- -- -- -- -- -- 18 18
Forfeiture of unearned
compensation from the HSN
executive stock award
program....................... -- -- -- -- -- -- 360 360
Adjustment to equity caused by
distribution of Company stock
by HSN........................ (1) 64 24 99,299 -- -- -- 99,386
Issuance of common stock upon
exercise of SKC stock
options....................... -- -- -- 54 -- -- -- 54
Issuance of common stock of HSN
stock options exercised on or
about the Distribution Date... -- -- -- 28 -- -- -- 28
Net loss for the year ended
August 31, 1993............... -- -- -- -- -- (6,386) -- (6,386)
--------- --------- ----- --------- ---------- --------- ----------- --------
BALANCE AT AUGUST 31, 1993...... -- 64 24 109,786 -- (103,478) -- 6,396
Issuance of common stock upon
exercise of SKC stock
options....................... -- 1 -- 95 -- -- -- 96
Net loss for the year ended
August 31, 1994............... -- -- -- -- -- (3,878) (3,878)
--------- --------- ----- --------- ---------- --------- ----------- --------
BALANCE AT AUGUST 31, 1994...... -- 65 24 109,881 -- (107,356) -- 2,614
Issuance of common stock to key
executive..................... -- 4 -- 9,996 (4,998) -- -- 5,002
Value of common stock in excess
of key executive's purchase
price......................... -- -- -- 926 -- -- -- 926
Issuance of common stock upon
exercise of SKC stock
options....................... -- -- -- 180 -- -- -- 180
Unearned compensation related to
grant of stock options to key
executive..................... -- -- -- 3,973 -- -- (3,973) --
Amortization of unearned
compensation related to grant
of stock options to key
executive..................... -- -- -- -- -- -- 20 20
Income tax benefit relating to
stock options exercised....... -- -- -- 421 -- -- -- 421
Net earnings for the year ended
August 31, 1995............... -- -- -- -- -- 115 -- 115
--------- --------- ----- --------- ---------- --------- ----------- --------
BALANCE AT AUGUST 31, 1995...... -- 69 24 125,377 (4,998) (107,241) (3,953) 9,278
Issuance of common stock upon
exercise of SKC stock
options....................... -- 1 -- 187 -- -- -- 188
Amortization of unearned
compensation related to grant
of stock options to key
executive..................... -- -- -- -- -- -- 332 332
Income tax benefit relating to
stock options exercised....... -- -- -- 555 -- -- -- 555
Net loss for the period ended
December 31, 1995............. -- -- -- -- -- (2,882) -- (2,882)
--------- --------- ----- --------- ---------- --------- ----------- --------
$ -- $ 70 $ 24 $ 126,119 $ (4,998) $(110,123) $(3,621) $ 7,471
======== ======== ========= ========= ========= ========== ============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
SEPTEMBER 1, 1995
THROUGH YEARS ENDED AUGUST 31,
DECEMBER 31, ------------------------------
1995 1995 1994 1993
------------------ -------- --------- -------
<S> <C> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net earnings (loss)........................... $ (2,882) $ 115 $ (3,878) $(6,386)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Depreciation and amortization.............. 4,701 14,674 15,000 17,849
Provision for (recovery of) losses on
accounts receivable...................... 51 179 (163) 125
Non-cash compensation to key executive..... -- 926 -- --
Non-cash interest expense.................. 288 820 -- --
Non-cash portion of loss due to closing of
operating unit........................... -- -- 546 --
(Gain) loss on retirement or sale of fixed
assets................................... 603 (111) 99 1
Amortization of unearned compensation
related to grant of stock options to key
executive................................ 332 20 -- --
Expense related to the HSN executive stock
award program............................ -- -- -- 18
Expense related to leases with escalation
clause................................... (31) (82) (46) 2
Non-cash interest income................... -- -- -- (53)
Deferred income tax expense................ (710) 219 3,845 226
(Increase) decrease in other assets........ -- (260) (74) (138)
Changes in current assets and liabilities:
(Increase) decrease in accounts
receivable............................ (841) (2) 350 (245)
(Increase) decrease in other current
assets................................ (229) (397) 15 (265)
Increase (decrease) in accrued
liabilities........................... 1,300 1,081 (606) 1,471
---------- -------- --------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................ 2,582 17,182 15,088 12,605
---------- -------- --------- -------
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures.......................... (163) (1,703) (1,922) (2,776)
Proceeds from sale of fixed assets............ 66 254 34 --
Investments in long-term notes receivable..... (653) (2,855) (2,300) (3,774)
Repayments from long-term notes receivable.... 999 2,868 3,280 793
---------- -------- --------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES................ 249 (1,436) (908) (5,757)
---------- -------- --------- -------
CASH FLOWS -- FINANCING ACTIVITIES:
Principal payments of long-term
obligation -- other........................ (6,089) (10,475) -- --
Principal payments and retirement of long-term
obligation to HSNCC........................ -- -- (132,909) (2,633)
Proceeds from debt refinancing................ -- -- 125,000 --
Payment of capitalized bank fees.............. -- (283) (4,184) --
Proceeds from issuance of common stock........ -- 5,002 -- --
Proceeds from exercise of stock options....... 188 180 96 82
Net advances from HSN......................... -- -- -- 5,312
---------- -------- --------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................ (5,901) (5,576) (11,997) 2,761
---------- -------- --------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (3,070) 10,170 2,183 9,609
Cash and cash equivalents at beginning of
period........................................ 22,210 12,040 9,857 248
---------- -------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 19,140 $ 22,210 $ 12,040 $ 9,857
============== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ORGANIZATION AND DISTRIBUTION
In July 1986, Silver King Broadcasting Company, Inc. ("SKBC") was
incorporated in Delaware and began acquiring UHF television stations. SKBC was
formed as part of a strategy to broaden the viewership of the retail sales
programming produced by Home Shopping Club, Inc. ("HSC"), a wholly-owned
subsidiary of Home Shopping Network, Inc. ("HSN") and a leader in the electronic
retailing industry. HSC sells a variety of consumer goods and services by means
of HSC's live, customer-interactive retail sales programming, which is received
on a full-time or part-time basis by broadcast television stations, cable
television systems and satellite dish receivers. SKBC subsequently changed its
name to HSN Communications, Inc. ("HSNC") and, on August 25, 1992, HSNC changed
its name to Silver King Communications, Inc. ("SKC" when referring to the parent
company alone, but when referring to SKC and/or one or more of its direct or
indirect wholly-owned subsidiaries, the "Company"). Currently, the Company owns
and operates 12 independent full-power UHF television stations, including one
television satellite station (the "Stations"), which affiliate with and
primarily broadcast HSC retail sales programming. The Stations serve eight of
the 12 largest metropolitan television markets in the United States. As of
January 31, 1996, the Stations reached approximately 28.0 million television
households, which is one of the largest audience reaches of any owned and
operated independent television broadcast group in the United States.
In addition, the Company owns 26 low power television ("LPTV") stations
that broadcast HSC retail sales programming. LPTV stations have lower power
transmitters than conventional television stations and, therefore, the broadcast
signals of LPTV stations do not cover as broad a geographical area as
conventional broadcast television stations.
On December 28, 1992 (the "Distribution Date"), HSN distributed the capital
stock (the "Distribution") of the Company to HSN's stockholders of record as of
December 24, 1992 (the "Record Date"), in the form of a pro-rata stock dividend.
The capital stock of Telemation, Inc. ("Telemation") was contributed to SKC
prior to the Distribution. Telemation is a video production and post-production
company providing a full range of communications services to corporations and
advertising agencies, and Telemation also produces television shows and videos
for the entertainment industry.
Prior to the Distribution Date, SKC and Telemation operated independently
as wholly-owned subsidiaries of HSN. For financial reporting purposes,
information presented prior to the Distribution Date reflects combined financial
statements of these two entities, which are substantially the same as
consolidated financial statements. For periods following the Distribution Date,
the companies, as described above, are consolidated for financial reporting
purposes.
The Distribution resulted in 100% of the outstanding shares of the
Company's Common Stock and the Company's Class B Common Stock being distributed
to holders of HSN Common Stock and HSN Class B Common Stock on a pro-rata basis
as of the Record Date.
Roy M. Speer indirectly controls the Company through the ownership, by RMS
Limited Partnership ("RMSLP"), a Nevada limited partnership, of 100% of the
Company's Class B Common Stock. On February 11, 1993, RMSLP entered into an
agreement granting an assignable option to purchase 2,000,000 shares of its
Class B Common Stock in the Company to Liberty Media Corporation ("Liberty").
This agreement was subsequently amended on September 23, 1994, and Liberty
retained its option to purchase 2,000,000 shares. Liberty and Barry Diller (the
"key executive") have entered into a binding term sheet pursuant to which
Liberty and Mr. Diller have formed Silver Management Company ("SMC" or "Silver
Company") to which Liberty intends to assign the Option. On March 6, 1996, the
Federal Communications Commission ("FCC") granted its approval of the transfer
of control of SKC from Mr. Speer to SMC by the proposed consummation of the
Option. However, the FCC attached certain conditions to the grant and also
adopted a stay order delaying the effectiveness of the approval until the FCC
completed an investigation of allegations raised against SKC by Urban
Broadcasting Corporation ("Urban") that questioned SKC's
6
<PAGE> 8
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
qualifications as an FCC licensee. SMC filed a pleading requesting that the FCC
delete or modify one of the conditions to the grant which required prior FCC
approval if Liberty's parent company, Tele-Communications, Inc. ("TCI"),
materially increases its cable systems' percentage of subscribers in any of the
11 markets served by the Company's Stations. In a Memorandum Opinion and Order
and Notice of Apparent Liability released June 14, 1996, the FCC lifted the stay
order on its approval of the transfer of control applications and deleted the
condition to the grant requiring FCC approval if Liberty's parent company, TCI,
materially increases its cable systems' percentage of subscribers in any of the
11 markets served by the Company's Stations. The ruling provides that the FCC
must be notified at any time TCI acquires subscribers representing more than 50%
of the television households in a Company Station market. The FCC also fined
Urban $25,000 for abdicating control of its station, WTMW(TV), Arlington,
Virginia, to the Company during the station construction period. The Company was
fined $150,000 for assuming unauthorized control of the Station during the
construction period and for violating the FCC's duopoly rules during that time
period as a result of the signal overlap between WTMW(TV) and the Company's
Baltimore, Maryland Station, WHSW-TV, notwithstanding the agency's ruling that
control of WTMW(TV) reverted back to Urban at the time the Station commenced
operations. The FCC also required that certain aspects of the contracts between
Urban and the Company, as Urban's lender and a shareholder, be reformed. If a
sale pursuant to exercise of the option is consummated between RMSLP and Liberty
or its assignee, Mr. Speer will no longer control the Company. For further
information regarding the option, see Note F.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of SKC and all
subsidiaries, all of which are wholly-owned. All intercompany transactions and
accounts have been eliminated.
CHANGE IN FISCAL YEAR
On October 25, 1995, the Board of Directors of the Company changed the
Company's fiscal year effective January 1, 1996, to include the twelve-month
period from January 1, 1996 through December 31, 1996 and each twelve-month
period thereafter.
The Company's significant accounting policies are as follows:
1. REVENUE RECOGNITION
Revenue for the Stations is derived principally through the broadcast of
HSC programming. The Company charges HSC an amount based on the household reach
in each area to which the Stations transmit an acceptable signal (the "Service
Areas"). On December 28, 1992, each of the Station operating subsidiaries
entered into a Television Affiliation Agreement with HSC (the "Affiliation
Agreements"). Thus, commencing on December 28, 1992, HSC began compensating the
Company by paying each Station compensation pursuant to the applicable hourly
affiliation rate for such Station under its Affiliation Agreement. The Station
Affiliation Agreements provide for higher compensation to the Stations if a
Station's Compensation Amount, which is based upon a formula involving HSC's net
sales credited to the Station, exceeds the amount payable pursuant to the hourly
affiliation rate. This determination is made on an annual basis within 30 days
of the anniversary of the Affiliation Agreements. Broadcast revenue from
significant customers is shown separately in Note I. Production revenue includes
fees charged for video production services to outside clients. Production fees
charged to companies related through common ownership in four months of fiscal
year 1993 are shown separately in Note I. Broadcasting and production revenue
are recognized when the products are delivered or the service has been rendered.
7
<PAGE> 9
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments with original maturities of less than 90 days.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable is net of an allowance for doubtful accounts of
approximately $.1 million at December 31, 1995, August 31, 1995 and 1994,
respectively. Approximately $.8 million of the accounts receivable balance at
December 31, 1995 is due from HSN.
4. INTEREST RATE PROTECTION AGREEMENTS
In fiscal year 1994, SKTV, Inc., a wholly-owned subsidiary of SKC, entered
into Interest Rate Protection Agreements (the "Cap Agreements") on notional debt
amounts totaling $50.0 million to limit the Company's exposure to increases in
interest rates. The cost of these Cap Agreements is amortized over a three-year
life. Any differential to be received by the Company as a result of the term
loan interest rates exceeding the interest rate under the Cap Agreements is
accrued when earned and is recorded as a reduction to interest expense. See Note
C.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided for in amounts sufficient to allocate the cost of depreciable assets to
operations over their estimated service lives, ranging from three to 39 years,
on a straight-line basis. For income tax purposes, certain assets are
depreciated using allowable accelerated methods.
Depreciation is provided on a straight-line basis to allocate the cost of
depreciable assets to operations over their estimated service lives as follows:
<TABLE>
<S> <C>
Computer and broadcast equipment..................... 6-13 years
Buildings and building improvements.................. 30-39 years
Leasehold improvements............................... Lease term 8-20 years
Furniture and other equipment........................ 3-10 years
</TABLE>
Depreciation expense was approximately $1.6 million, $5.3 million, $5.3
million and $8.0 million for the period September 1, 1995 through December 31,
1995 and the years ended August 31, 1995, 1994 and 1993, respectively.
At least annually, and more often if circumstances dictate, the Company
evaluates the recoverability of the net carrying value of its property, plant
and equipment on a consolidated Company basis. As part of this evaluation, the
fair value of the property, plant and equipment is estimated (in some cases with
the assistance of outside real estate consultants) based on discounted cash
flows. The fair value is compared to the carrying amount in the financial
statements. A deficiency in fair value relative to carrying amount is an
indication of the need for a writedown due to impairment. If the total of these
future undiscounted cash flows were less than the carrying amount of the
property, plant and equipment, the property, plant and equipment would be
written down to its fair value, and a loss on impairment recognized by a charge
to earnings. The Company's accounting policy complies with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
8
<PAGE> 10
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS AND CAPITALIZED BANK FEES
Intangible assets include the costs associated with the acquisition of
certain assets included in the acquisitions of the Stations, which are amortized
using the straight-line method over their estimated lives. The carrying value of
intangible assets is periodically reviewed by the Company on a consolidated
Company basis and impairments are recognized by a charge to earnings when the
expected future operating cash flows derived from such intangibles is less than
carrying value. Capitalized bank fees were originated in the refinancing of the
long-term obligation discussed in Note C and are amortized using the
effective-yield method.
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ------------------- PERIOD OF
1995 1995 1994 AMORTIZATION
------------ ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Intangible Assets:
Federal Communications Commission
("FCC") licenses................... $ 46,287 $47,016 $49,209 30 years
Identified intangibles acquired...... 6,833 9,114 15,986 10 years
Goodwill............................. 6,864 6,973 7,297 30 years
------------ ------- -------
$ 59,984 $63,103 $72,492
========== ======= =======
Capitalized bank fees..................... $ 3,293 $ 3,581 $ 4,118 6-8 years
========== ======= =======
</TABLE>
Intangible assets are net of accumulated amortization of approximately
$83.8 million, $80.6 million and $70.4 million at December 31, 1995, August 31,
1995 and 1994, respectively. Capitalized bank fees are net of accumulated
amortization of approximately $1.2 million, $.1 million and $.9 million at
December 31, 1995, August 31, 1995 and 1994, respectively.
Amortization expense for both intangible assets and capitalized bank fees
was approximately $3.1 million, $9.4 million, $9.7 million and $9.8 million for
the period September 1, 1995 through December 31, 1995 and the years ended
August 31, 1995, 1994 and 1993, respectively.
9
<PAGE> 11
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES RECEIVABLE
The Company has notes receivable as follows:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, -------------------
1995 1995 1994
------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
ROBERTS BROADCASTING COMPANY
Note receivable, interest at 12.8%, principal and
interest payments of $69,055 due monthly and
maturing March 1998................................ $ 1,613 $ 1,815 $ 2,372
ROBERTS BROADCASTING COMPANY OF DENVER
Note receivable, interest at 11.5%, principal and
interest payments of $64,330 due monthly,
commencing during fiscal year 1996................. 3,700 3,048 --
URBAN BROADCASTING CORPORATION
Note receivable, interest at 11.5%, principal and
interest payments of $182,558 due monthly and
maturing October 2000.............................. 8,094 8,703 10,500
JOVON BROADCASTING CORPORATION
Note receivable, interest at 12.8%, principal and
interest payments of $65,100 due monthly and
maturing May 1998.................................. 1,616 1,803 2,317
------------ ------- -------
15,023 15,369 15,189
Less current portion of notes receivable........ 2,835 2,695 1,927
------------ ------- -------
$ 12,188 $12,674 $13,262
========== ======= =======
</TABLE>
The notes receivable are collateralized by stock pledges and security
interests in all of the tangible and intangible assets in the investee companies
to the full extent permitted by law.
On October 2, 1993, Urban defaulted on the note receivable of $10.5 million
(the "Note") held by Silver King Broadcasting of Virginia, Inc. ("SKVA"), a
wholly-owned subsidiary of the Company, with respect to the construction of
Station WTMW (TV), Arlington, Virginia. On April 11, 1994, SKVA filed a Motion
for Judgment in the Circuit Court for the County of Arlington, Virginia against
Urban, Theodore M. White and Page E. Silver. Mr. White is President, sole
director and owner of all the voting stock of Urban, and Ms. Silver is Vice
President, Secretary and Treasurer of Urban. The principal basis for the lawsuit
was SKVA's allegation that Urban had failed to pay $1,195,972 in principal and
interest due on the Note. SKVA sought $11,243,233, consisting of the accelerated
loan principal, interest on the missed payments and default interest. On July 7,
1994, Urban filed an Amended Counterclaim of $6.5 million alleging, among other
things, that the equipment for the station is defective and outdated, that it
was excessively priced and that the Company never made some of the expenditures
for such equipment.
On May 22, 1995, SKVA and Urban settled the lawsuit. Pursuant to the
settlement, SKVA received approximately $3.5 million on May 23, 1995, consisting
of $1.8 million in interest income and $1.7 million in principal on SKVA's $10.5
million loan to Urban. Additionally, SKVA forgave approximately $.1 million of
interest under the terms of the settlement and Urban dismissed its Amended
Counterclaim. Urban remained obligated to repay the outstanding principal
balance of approximately $8.8 million over the remaining term of the loan.
On July 3, 1995, Urban and Mr. White separately filed voluntary Chapter 11
bankruptcy petitions. On September 26, 1995, the bankruptcy court entered a
final cash collateral order with respect to the Urban
10
<PAGE> 12
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bankruptcy executed by Urban and SKVA that lasts until December 31, 1995 and,
thereafter, for successive periods of three months unless Urban or SKVA gives 30
days' notice of termination prior to the end of any such three-month period. To
date, no such notice has been provided. Accordingly, the final cash collateral
order shall remain in effect until at least September 30, 1996. As of May 31,
1996, Urban is current on its loan payment obligations and the remaining
principal balance is $7,558,754. On June 24, 1996, the Court approved the
disclosure statements of both Urban and the Official Committee of Unsecured
Creditors. A hearing on confirmation of both plans of reorganization has been
scheduled for September 5-6, 1996.
On November 5, 1993, the Company simultaneously entered into a loan
agreement and an amended shareholders agreement with the other shareholders of
Blackstar Communications, Inc. ("Blackstar"). Under the terms of the loan
agreement, the Company advanced $2.3 million at 11.5% per annum for seven years
to Blackstar, which assisted Blackstar in purchasing, at a discount, a $2.7
million note, plus accrued interest of approximately $.1 million, held by the
Federal Depository Insurance Corporation. Under the terms of the amended
shareholders agreement, Blackstar and the Company reduced the cumulative
preferred dividend rate from 14% to 9.25% retroactive to April 20, 1988. The
Company received $1.0 million in cash of the total dividends in arrears amount
of approximately $2.8 million on November 5, 1993. Additional scheduled dividend
payments of $.5 million and $.4 million were made on April 4, 1994 and July 1,
1994, respectively. In addition, on August 10, 1994, Blackstar completed a
refinancing and made a dividend payment of $1.5 million to the Company to
satisfy all remaining dividends in arrears, repaid the $2.3 million loan to the
Company and paid the balance of accrued interest at August 10, 1994 of $28,612
to the Company.
On October 31, 1994, the Company closed on a loan agreement with Roberts
Broadcasting Company of Denver ("RBD") for $3.7 million at 11.5% interest per
annum for seven years. The first interest payment is due 60 days after
commencement of operations of Station KTVJ(TV), Boulder, Colorado. The first of
84 consecutive equal monthly installments of principal and interest is due 90
days after the commencement of station operations. Construction of the station
began in the first quarter of fiscal year 1995 and is scheduled to be completed
by December 31, 1995. As of November 10, 1995, the Company loaned RBD the $3.7
million towards construction of the station required by the loan agreement. No
repayments were classified as current in the financial statements at August 31,
1995. The Station commenced operations on February 22, 1996. For purposes of the
table below, the Company began to receive payments from RBD in June 1996 and the
December 31, 1995 balance sheet includes a portion of the note receivable
classified as current.
Scheduled principal and interest payments on the notes receivable are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-------------------------------------------------------------------------
<S> <C>
1996................................................................... $ 4,351
1997................................................................... 4,573
1998................................................................... 3,495
1999................................................................... 2,963
2000................................................................... 2,598
Thereafter............................................................. 1,800
-------
19,780
Less interest portion.................................................. 4,757
-------
$15,023
=======
</TABLE>
11
<PAGE> 13
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM INVESTMENTS
The Company has long-term investments accounted for under the cost method
in the following companies:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ---------------
1995 1995 1994
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
BLACKSTAR COMMUNICATIONS, INC.
1,000 shares Preferred Stock, $5,000 per share,
nonvoting, 14% per annum cumulative dividend
restructured to 9.25% per annum on November 5, 1993.... $5,000 $5,000 $5,000
4,500 shares Series 1 Class B nonvoting Convertible
Common Stock, $10 per share, convertible on a
one-to-one basis to Series 2 voting Common Stock....... 45 45 45
ROBERTS BROADCASTING COMPANY
4,500 shares Series 1 Class B nonvoting Convertible
Common Stock, $10 per share, convertible on a
one-to-one basis to Series 2 voting Common Stock....... 45 45 45
ROBERTS BROADCASTING COMPANY OF DENVER
45 shares Series 1 Class B nonvoting Convertible Common
Stock, $10 per share, convertible on a one-to-one basis
to Series 2 voting Common Stock........................ -- -- --
URBAN BROADCASTING CORPORATION
4,500 shares Series 1 Class B nonvoting Convertible
Common Stock, $10 per share, convertible on a
one-to-one basis to Series 2 voting Common Stock....... 45 45 45
------------ ------ ------
$5,135 $5,135 $5,135
========== ====== ======
</TABLE>
Use of the cost method of accounting for the Company's long-term
investments is considered appropriate because the Company's common stock
investments are nonvoting common stock. The Company has the option to convert
these nonvoting interests into voting common stock investments. The Company does
not presently intend to convert the Class B nonvoting Convertible Common Stock
into voting Common Stock. Assuming conversion of the Company's nonvoting stock
and elimination of the FCC overlap rules with respect to Urban, the Company
would hold a 45% voting interest in each of the companies listed in the table
above.
The Company evaluates the recoverability of these long-term investments
through such procedures, among others, as analyzing the investees' financial
statements and estimating the fair market value of these investments, which
includes consideration of internally and externally prepared valuations of
television stations. The purpose of these procedures is to identify and
recognize a loss on these investments in the period in which a decline in value
is determined to be other than temporary. Included in the various agreements,
the Company is granted certain limited approval rights related to enumerated
investee corporate actions.
In the case of dissolution or liquidation, the holders of Preferred Stock
and Class B Convertible Common Stock are entitled to receive payment of the par
value and all accumulated and unpaid dividends before any payment is made to the
holders of any other class of stock. See Note B-7 for additional information.
The Company also has an option to purchase a 45% nonvoting common stock
interest in Station WJYS (TV), Hammond, Indiana, serving the Chicago, Illinois
television market (which station no longer carries
12
<PAGE> 14
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HSC programming). On October 21, 1994, the Company provided written notice of
its election to exercise this option. The purchase of the nonvoting common stock
subject to the option has not been consummated however. On November 7, 1995, the
licensee of station WJYS(TV) filed a petition for declaratory ruling with the
FCC arguing that consummation of the acquisition would result in a violation of
agency rules and policies concerning local television station ownership. In a
Memorandum Opinion and Order and Notice of Apparent Liability released June 14,
1996, the FCC ruled that the Company may exercise that portion of the option
which will provide it with a 33% nonvoting common stock interest in Station
WJYS(TV). The FCC also required that certain aspects of the loan documents
between the licensee of WJYS(TV) and the Company be reformed.
On April 26, 1996, an entity in which the Company holds a 49% nonvoting
common stock interest consummated the acquisition of Station KPST-TV, Vallejo,
California which serves the San Francisco Market. The Company loaned the buyer
$7.9 million to finance the acquisition and the proceeds were provided by an SKC
subsidiary, SKC Investments, Inc. ("SII"). SII may also fund an additional $1.0
million for the construction of a new television studio.
On June 27, 1995, the Company, the Class A shareholders of Blackstar
Communications, Inc. ("BCI") and Fox Television Stations, Inc. ("Fox") executed
a Limited Liability Company Agreement (the "LLC"), a side agreement to the LLC
and a Funding Agreement establishing the rights and obligations of the parties
pursuant to a new venture, Blackstar L.L.C., formed to acquire television
stations in the United States which may affiliate with Fox. Effective December
15, 1995, the FCC granted applications of subsidiaries of Blackstar L.L.C. to
acquire Station KHGI-TV, Kearney, Nebraska and its satellite stations KWNB-TV
and KSNB-TV, licensed to Hayes Center and Superior, Nebraska, respectively; and
Station KEVN-TV, Rapid City, South Dakota and its satellite station KIVV-TV,
licensed to Lead-Deadwood, South Dakota. The KHGI-TV/KWNB-TV/KSNB-TV transaction
has since been abandoned. On February 7, 1996, the LLC was amended, which, in
part, modified the Company's preferred stock and dividend rights in BCI, and the
Company agreed to permit BCI to defer payment of current dividends. Also on
February 7, 1996, the Company contributed its common stock interest in BCI to
Blackstar L.L.C. and Blackstar L.L.C. consummated the acquisition of Stations
KEVN-TV and KIVV-TV.
9. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Statement 109 required a change from the deferred method of
accounting for income taxes of Accounting Principles Board Opinion No. 11 ("APB
Opinion 11") to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
During the fiscal year 1994, the Company adopted Statement 109 and reported
the cumulative effect of the change in the method of accounting for income taxes
in the Consolidated Statement of Operations. The cumulative effect of the
accounting change resulted in a charge of approximately $3.0 million. Prior
years' financial statements were not restated. Prior to the implementation of
Statement 109, the Company accounted for income taxes using APB Opinion No. 11.
13
<PAGE> 15
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EARNINGS (LOSS) PER SHARE
The earnings (loss) per share for the period ended December 31, 1995 and
the year ended August 31, 1995 is computed based on the weighted average number
of common shares outstanding of 9,394,696 and 9,144,772, respectively. The
earnings per common share is calculated by dividing the net earnings by the
weighted average number of shares of common stock outstanding plus common
equivalent shares arising from dilutive stock options at August 31, 1995. Since
the Company reported a net loss for the period ended December 31, 1995, the loss
per share calculation does not include common stock equivalents, such as stock
options, because their inclusion would be anti-dilutive. For the year ended
August 31, 1995, the weighted average shares outstanding used in the calculation
of primary earnings per share and earnings per share assuming full dilution is
9,144,772 and 9,227,626, respectively. Fully diluted net earnings per common
share for the year ended August 31, 1995 is not materially different from
primary earnings per common share. The net loss per share for the years ended
August 31, 1994 and 1993 is computed based on the weighted average number of
common shares outstanding of 8,881,380 and 8,851,339, respectively. Since the
Company reported a net loss in fiscal years 1994 and 1993, the loss per share
calculation does not include common stock equivalents, such as stock options,
because their inclusion would be anti-dilutive.
11. RECLASSIFICATIONS
Certain amounts in the Company's December 31, 1995 balance sheet have been
reclassified to reflect more recent information than was available when the
transition Form 10-Q for the period ended December 31, 1995 was filed.
14
<PAGE> 16
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ---------------------
1995 1995 1994
------------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Secured Senior Term Loan -- Tranche A (the "Tranche
A Loan"); payable in quarterly installments and
maturing July 31, 2000. The interest rate (the
"Rate") was 7.875% at December 31, 1995. At the
Company's option, the Rate is tied to the London
Interbank Offered Rate ("LIBOR"), or the greater
of the Federal Funds Rate ("FFR"), the Prime Rate
("Prime") or base CD rate ("CD"), plus an
applicable margin adjustment. ................... $ 60,399 $ 65,025 $ 75,000
Secured Senior Term Loan -- Tranche B (the "Tranche
B Loan"); payable in quarterly installments and
maturing July 31, 2002. The Rate was 8.875% at
December 31, 1995. At the Company's option, the
Rate is tied to LIBOR, or the greater of the FFR,
Prime or CD, plus an applicable margin
adjustment. ..................................... 48,037 49,500 50,000
------------ -------- --------
108,436 114,525 125,000
Less current portion............................... 12,456 16,588 10,475
------------ -------- --------
$ 95,980 $ 97,937 $114,525
========== ======== ========
</TABLE>
On August 1, 1994, the Company consummated a senior secured credit facility
syndicated by Chemical Securities, Inc. ("Chemical") in an aggregate principal
amount of $140.0 million (the "Facility"). The Facility consists of two Secured
Senior Term Loans (as described above) and a Secured Senior $15.0 million
Revolving Credit Facility (the "RCF"). The RCF is available to the Borrowing
Group (as defined below) for general corporate purposes. Borrowings under the
RCF are on terms identical to those listed above for the Tranche A Loan. The RCF
requires a commitment fee of 50 basis points per annum on the unused portion. On
August 1, 1994, the Facility was used to pay off approximately $128.6 million of
a long-term obligation plus $1.1 million of accrued interest owed by the Company
to HSNCC. The Company drew down $75.0 million from the Tranche A Loan and $50.0
million from the Tranche B Loan and used approximately $4.7 million of available
cash to satisfy its obligation to HSNCC. As of July 2, 1996, the Company has no
borrowings outstanding on the RCF.
In order to consummate the Facility, the Company formed a wholly-owned
subsidiary, SKTV, Inc., as the borrower. All Company entities, with the
exception of SKC and SII, became subsidiaries of SKTV, Inc. (SKTV, Inc. and
those companies are hereinafter referred to collectively as the "Borrowing
Group.") SII is a wholly-owned subsidiary of SKC. The Facility is secured by all
of the assets of the Borrowing Group to the full extent permitted by law. Under
the terms of the Credit Agreement, the Borrowing Group is restricted from
entering into certain corporate transactions such as the sale or issuance of
debt and/or equity securities, and the payment of dividends. SKC and SII are not
restricted by the Credit Agreement from entering into any corporate
transactions. However, SKC is required by the Credit Agreement to make a capital
contribution of $300,000 per year to the Borrowing Group. Under certain
conditions (the "Conditions"), the Borrowing Group is required to fund
prepayments in advance of scheduled principal payments to the Bank Group. As of
December 31, 1995, the Company satisfied one of the Conditions and made a
mandatory principal prepayment of approximately $3.1 million. The Borrowing
Group may at any time fund optional prepayments in advance of scheduled
principal payments to the Bank Group. The Company's Credit Agreement was amended
as of August 31, 1994 to correct immaterial drafting errors. By a waiver dated
December 14, 1995, Chemical
15
<PAGE> 17
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
waived the change in control default provision with respect to the change in
control of the Company discussed in Note A. Effective December 31, 1995, a
second amendment and waiver was granted by Chemical with respect to various
default covenant provisions. As of July 2, 1996, the Company was in full
compliance with all Credit Agreement covenants. The Borrowing Group will make a
mandatory prepayment of approximately $2.3 million upon receipt of such funds
upon the closing of the sale of the Corporate headquarters land and building
(See Note L.)
In June and August 1994, SKTV, Inc. entered into Cap Agreements with two
financial institutions to limit the Company's exposure to increases in interest
rates. The notional principal amounts are $25 million, $10 million and $15
million with interest rate caps if LIBOR exceeds 6.83% until July 1997, 6.8125%
until August 1997, and 6.8125% until August 1997, respectively.
Prior to the Distribution, the Company received support from HSN in the
form of intercompany advances as discussed in Note G. On the Distribution Date,
HSN cancelled a portion of the intercompany advances as a contribution of
capital to the Company. The remaining intercompany indebtedness was converted
into the secured long-term senior loan with HSNCC shown in the above table.
Beginning in fiscal year 1992, the Stations were charged interest expense based
on the historical cost of the Stations to HSN and HSN's then cost of long-term
borrowings. In fiscal year 1993, the Stations were charged interest expense on
the Company's note payable to HSNCC at a rate of 9.5% per annum.
Aggregate maturities of long-term obligations are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------------------------------------------------------------------
<S> <C>
1996.................................................................. $ 12,456
1997.................................................................. 13,131
1998.................................................................. 13,769
1999.................................................................. 14,931
2000.................................................................. 15,487
Thereafter............................................................ 38,662
--------
$108,436
========
</TABLE>
16
<PAGE> 18
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- INCOME TAXES
Effective September 1, 1993, the Company adopted Statement 109 and has
reported the cumulative effect of the change in the method of accounting for
income taxes in the Consolidated Statements of Operations.
A reconciliation of total income tax expense to the amount computed by
applying the statutory federal income tax rate to the earnings (loss) before
income taxes and cumulative effect of change in accounting principle for income
taxes is shown as follows:
<TABLE>
<CAPTION>
PERIOD
SEPTEMBER 1,
1995
THROUGH YEARS ENDED AUGUST 31,
DECEMBER 31, -------------------------
1995 1995 1994 1993
------------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income tax expense (benefit) at the federal
statutory rate of 34%.......................... $ (1,107) $ 426 $ 206 $(1,199)
Amortization of goodwill and other acquired
intangibles.................................... 61 192 188 1,380
Dividends received deduction..................... -- (110) (260) --
State income taxes, net of effect of federal tax
benefit........................................ 22 558 837 125
Nondeductible portion of executive
compensation................................... 426 321 -- --
Provision recorded for settlement with the
Internal Revenue Service ("IRS") net of related
valuation allowance............................ -- -- 143 --
Increase (decrease) in valuation allowance for
deferred tax assets............................ 264 (212) 491 --
Other, net....................................... (39) (37) (100) --
------------ ------ ------ -------
Income tax provision............................. $ (373) $1,138 $1,505 $ 306
========== ====== ====== =======
</TABLE>
17
<PAGE> 19
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of income tax expense attributable to operations are as follows:
<TABLE>
<CAPTION>
PERIOD
SEPTEMBER 1,
1995 THROUGH YEARS ENDED AUGUST 31,
DECEMBER 31, ----------------------------
1995 1995 1994 1993
------------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Income Tax Expense
Federal.................................... $ 104 $ 110 $ -- $ --
State...................................... 233 809 639 77
------------ ------ ------ ------
Current income tax expense.............. 337 919 639 77
------------ ------ ------ ------
Deferred Income Taxes:
Depreciation for tax in excess of (less
than) financial statements.............. (201) (608) (344) (115)
Amortization of goodwill and other
broadcast related intangibles........... (1) 3 (365) 342
Provision for uncollectible amounts........ -- (3) 63 --
Provision for accrued expenses............. (691) -- -- --
Income recognized for book purposes for
minority owned investment treated as
return on investment for tax purposes... -- -- 886 --
Provision recorded for settlement with the
IRS..................................... -- -- 143 --
Utilization of NOL carryover............... (412) 845 -- --
Increase (decrease) in valuation allowance
for deferred tax assets................. 264 (212) 491 --
Stock option compensation deferred for tax
purposes................................ -- (122) -- --
Other, net................................. (102) (52) (8) 2
------------ ------ ------ ------
Change in net deferred tax liability.... (1,143) (149) 866 229
Deferred income tax effect of stock option
compensation recorded as additional
paid-in capital......................... 433 368 -- --
------------ ------ ------ ------
Deferred income tax expense (benefit)... (710) 219 866 229
------------ ------ ------ ------
Total income tax provision
(benefit)........................ $ (373) $1,138 $1,505 $ 306
========= ====== ====== ======
</TABLE>
18
<PAGE> 20
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of cumulative temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995, August 31, 1995 and 1994 are presented below. The valuation
allowance represents that portion of deferred tax assets recorded for net
operating losses and basis differences on intangible assets for which it is more
likely than not that the tax benefit will not be realized.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 AUGUST 31, 1995 AUGUST 31, 1994
----------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Tax Assets after valuation
allowance:
Net federal operating loss
carryforward.......................... $ 719 $ 183 $ 1,028
Stock option compensation deferred for
tax s purposes........................ -- 122 --
Provision for accrued expenses........... 1,136 445 421
Amortization of broadcast related
intangibles........................... 7,900 7,637 6,820
Other.................................... 35 97 37
----------------- --------------- ---------------
Total gross deferred tax assets..... 9,790 8,484 8,306
Less valuation allowance............ (7,993) (7,729) (7,941)
----------------- --------------- ---------------
Deferred Tax Assets after valuation
allowance -- current............. $ 1,797 $ 755 $ 365
============= =========== ===========
Deferred Tax Liabilities:
Depreciation for tax in excess of
financial statements.................. $ 3,596 $ 3,797 $ 4,405
Amortization of FCC licenses............. 10,038 9,775 8,955
Basis difference in minority interest.... 808 809 794
Other.................................... (43) 121 107
----------------- --------------- ---------------
Deferred Tax
Liabilities -- noncurrent........ $14,399 $14,502 $14,261
============= =========== ===========
</TABLE>
The Company recognized income tax deductions related to the issuance of
common stock pursuant to the exercise of stock options for which no compensation
expense was recorded for accounting purposes. The related income tax benefit of
$.6 million was recorded as an increase to additional paid-in capital.
At December 31, 1995, August 31, 1995 and 1994, the Company has net
operating loss carryforwards for federal income tax purposes of approximately
$1.8 million, $.5 million and $2.6 million, respectively, which are available to
offset future federal taxable income, if any, through 2010. Prior to the
Distribution Date, the Company was included in the consolidated income tax
returns of HSN. Therefore, there are no net operating loss carryforwards
available from periods prior to the Distribution Date. Of the total net
operating loss carryforwards at December 31, 1995, approximately $1.4 million is
subject to limitations brought about by the approval of the tax year end change.
Accordingly, only 1/6 of the approximately $1.4 million may be used per year for
the next six years to offset income.
During 1994, a settlement agreement was reached between HSN and the IRS
with regard to proposed audit adjustments related to amortization of acquired
broadcast licenses and other broadcasting-related intangible assets. As a result
of this settlement, the Company paid HSN approximately $.1 million in accordance
with the Tax Sharing Agreement in place at that time. In addition, the IRS audit
relating to 1988 and 1989 was settled at the same time with no material effect
on the Company.
NOTE E -- COMMITMENTS AND CONTINGENCIES
The Company leases broadcast and production facilities and equipment used
in connection with its operations under various operating leases, many of which
contain escalation clauses.
19
<PAGE> 21
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASE COMMITMENTS:
Future minimum payments under non-cancellable leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------
<S> <C>
1996........................................................................ $1,910
1997........................................................................ 1,178
1998........................................................................ 1,077
1999........................................................................ 1,082
2000........................................................................ 807
Thereafter.................................................................. 1,917
------
$7,971
======
</TABLE>
Rent and lease expenses charged to operations for the period ended December
31, 1995 was approximately $.8 million.
Rent and lease expenses charged to operations were as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31,
- -----------
<S> <C>
1995......................................................................... $2,669
1994......................................................................... $3,214
1993......................................................................... $3,594
</TABLE>
FEDERAL GOVERNMENT REGULATION OF TELEVISION BROADCASTING
Television broadcasting is subject to the jurisdiction of the FCC under the
Communications Act of 1934 (the "Communications Act"), as amended. The
Communications Act prohibits the transmission of television broadcasts except in
accordance with a license issued by the FCC and empowers the FCC, among other
things, to issue, revoke or modify broadcasting licenses, to determine the
location of stations, to regulate the equipment used by stations, to adopt such
rules and regulations as may be necessary to carry out the provisions of the
Communications Act and to impose penalties for violations of such rules and
regulations.
The Communications Act provides that a broadcast television license may be
granted to any applicant if the public interest, convenience and necessity will
be served thereby, subject to certain limitations. Pursuant to the
Communications Act and pertinent rules and regulations of the FCC, the FCC's
prior consent must be obtained before any entity may acquire or operate a
television station. Applications requesting such consent must be filed with the
FCC and are subject to public notice. The Communications Act permits any party
in interest to file a petition to deny such applications within 30 days
following the issuance of public notice by the FCC of the acceptance for filing
of such applications or of any substantial amendment thereof. These formal
notice and consent procedures do not apply to "pro forma" changes which do not
involve a substantial change in ownership, and which can be approved by the FCC
pursuant to pro forma application procedures.
On February 8, 1996, the President signed into law the Telecommunications
Act of 1996 (the "Act"). The Act provides that television broadcasting licenses
may be granted or renewed for a maximum of eight years and the Act requires a
broadcast license to be renewed if the FCC finds that (i) the station has served
the public interest, convenience and necessity; (ii) there have been no serious
violations of either the Communications Act or the FCC's rules and regulations
by the licensee; and (iii) there have been no other violations, which taken
together would constitute a pattern of abuse. The FCC currently is conducting a
rulemaking proceeding to implement the Act's directive.
20
<PAGE> 22
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is engaged in various lawsuits either as plaintiff or
defendant. In the opinion of management, the ultimate outcome of these various
lawsuits should not have a material impact on the Company's financial condition
or results of operations. To the best of the Company's knowledge, only seven
complaints (including two related to one fact situation) are pending against the
Company based on events after the Distribution Date, and, in the opinion of
management, the ultimate outcome of these complaints should not have a material
impact on the financial condition and results of operations of the Company. HSN
has agreed to indemnify the Company against any losses or liability resulting
from lawsuits initiated or based upon events that occurred prior to the
Distribution Date.
See Note B-7 for a description of the bankruptcy proceedings related to
Urban Broadcasting Corporation.
EMPLOYMENT/TERMINATION AGREEMENTS
On August 24, 1995, the Company and Barry Diller entered into a binding
term sheet pursuant to which the Company agreed to sell Mr. Diller 220,994
shares of Common Stock at $22.625 per share in cash (the "Initial Shares") and
for the same per share price, an additional 220,994 shares of Common Stock (the
"Additional Shares") payable by means of a cash payment of $2,210 and an
interest free, nonrecourse promissory note in the amount of $4,997,779. The
promissory note is secured by the Additional Shares and by that portion of the
Initial Shares having a fair market value on the purchase date of 20% of the
principal amount of the promissory note. In addition, the Company granted Mr.
Diller an option (the "Diller Option") to acquire 1,895,847 shares of Common
Stock at an exercise price of $22.625 per share. The Diller Option was granted
in tandem with conditional stock appreciation rights which become exercisable
only in the event of a change in control of the Company and in lieu of exercise
of the Diller Option.
Mr. Diller also was granted a bonus arrangement, contractually independent
from the promissory note, pursuant to which he will receive bonus payments of
approximately $2.5 million on August 24, 1996 and August 24, 1997, except that
the bonuses will be paid immediately upon a change in control of the Company or
upon termination of Mr. Diller's employment either by the Company other than for
cause or by Mr. Diller prior to the change of control with good reason. Mr.
Diller also received approximately $1.0 million for payment of taxes by Mr.
Diller by virtue of the compensation expense which resulted from the difference
in the per share fair market value of the Company's Common Stock and the per
share purchase price of the Initial Shares and Additional Shares.
If Mr. Diller's employment is terminated by the Company other than for
cause prior to August 24, 1996, Mr. Diller will receive a severance payment
equal to two times the amount, if any, by which $4,999,989 exceeds the fair
market value of the Additional Shares, provided that, in no event, shall such
severance payment exceed $2.0 million in the aggregate.
The Company has entered into termination agreements with James M. Lawless,
President, Steven H. Grant, Executive Vice President, Chief
Financial/Administrative Officer and Treasurer, Michael Drayer, Executive Vice
President, General Counsel and Secretary, and Joan E. Halfaker, Vice President,
Controller and Assistant Secretary/Treasurer. These agreements provide that upon
termination other than for cause, Messrs. Lawless, Grant and Drayer, and Ms.
Halfaker will receive a lump sum cash payment equal to their effective annual
salary as of the date of their termination, plus any earned and unused vacation
and sick time, plus the amount of any contribution otherwise payable for their
benefit under the Company's 401(k) Retirement Savings Plan for the year in which
termination occurs, plus any additional severance as provided for under the
Company's standard executive severance policy. The agreements also provide that
Messrs. Lawless, Grant and Drayer, and Ms. Halfaker will receive paid medical
benefits for a one-year period following termination or until alternative
medical coverage is obtained. For the period ended December 31, 1995, the
Company recognized $2.0 million of expense for restructuring charges, all of
which relate to
21
<PAGE> 23
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination benefits (including severance and out placement assistance) except
for $100,000 which is the estimated charge to relocate the corporate
headquarters. There were 95 total employees terminated related to the
restructuring. The actual termination benefits paid and charged against the
accrual as of December 31, 1995 are approximately $.7 million. As of July 2,
1996, all amounts payable to Mr. Lawless and Ms. Halfaker have been paid.
NOTE F -- STOCKHOLDERS' EQUITY (DEFICIT) AND STOCK OPTION PLANS
The holders of both classes of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available for the payment of dividends. In the event of the
liquidation, dissolution or winding up of the Company, the holders of both
classes of Common Stock are entitled to share ratably in all assets of the
Company remaining after provision for payment of liabilities. Shares of Class B
Common Stock are convertible at the option of the holder into shares of Common
Stock of the Company on a share-for-share basis. Upon conversion of the Class B
convertible Common Stock, the Class B shares so converted will be retired and
not be subject to reissue.
As long as at least 2,280,000 shares of Class B Common Stock remain
outstanding, the approval of the requisite majority of both Class B Common Stock
and Common Stock, each voting separately as a class, is required for approval of
major corporate actions. In the event that less than 2,280,000 shares of Class B
Common Stock are outstanding, each such Class B share is entitled to 10 votes,
voting together with the common shares, each of which will have one vote.
Holders of Common Stock have the right to elect, and the holder of Class B
Common Stock has no vote on, 25% of the entire Board of Directors, rounded
upward to the nearest whole number of directors. As to the election of the
remaining directors, the holder of Class B Common Stock is entitled to 10 votes
for each Class B share, and the holders of the Common Stock are entitled to one
vote per share. There are no cumulative voting rights.
On February 11, 1993, RMS Limited Partnership ("RMSLP"), a Nevada limited
partnership and the controlling shareholder of the Company, and Liberty Media
Corporation ("Liberty"), a Delaware corporation, entered into an Option
Agreement pursuant to which RMSLP granted an irrevocable assignable option (the
"Option") to Liberty (together with any assignee under the Option, the
"Optionee") to purchase from RMSLP 2,000,000 shares (the "Subject Shares") of
Class B Common Stock of the Company, par value $.01 per share, for $2,000,000
plus interest from February 11, 1993.
On September 23, 1994, RMSLP and Liberty entered into an Option Amendment
Agreement (the "Option Amendment") whereby RMSLP agreed to extend the Exercise
Period (as defined below) of the Option Agreement to February 11, 1999. RMSLP
and Liberty further agreed to modify the exercise price of the Option to provide
for an initial exercise price of $1.25 per share through February 11, 1995, with
such exercise price increasing in increments of $.25 each year thereafter
through February 11, 1999. The Option Amendment also eliminates certain
covenants that required RMSLP to cause the Company to take or refrain from
taking certain actions and required RMSLP to cause the Company to furnish
certain financial and operating data to Liberty and to afford Liberty and its
authorized representatives reasonable access to the Company's personnel,
properties, books and records.
The Option Amendment also eliminated RMSLP's obligation to use its best
efforts to cause each member of the Company's Board of Directors to resign
immediately prior to the date of the purchase of the Subject Shares by the
Optionee (the "Closing Date"). RMSLP agreed, however, to refrain from voting the
Subject Shares in favor of any amendment to the Certificate of Incorporation of
the Company. RMSLP also agreed that upon receipt of written notice from the
Optionee, RMSLP would call a special meeting of stockholders to be held on or
after the Closing Date to vote on such matters as may be designated by the
Optionee.
22
<PAGE> 24
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Option Amendment, the Option may be exercised by the
Optionee, in whole but not in part, at any time during the period commencing on
the date of the Option Agreement and ending on the later of (1) February 11,
1999 or (2) the 30th day after all government (including FCC) approvals have
been obtained; provided, however, that the termination date will be extended for
the period specified in clause (2) of this sentence only in the event that (i)
the Optionee has filed an application with the FCC seeking the FCC's consent to
the transfer of control of the Company from RMSLP to the Optionee resulting from
the purchase of the Subject Shares by the Optionee and (ii) the Optionee uses
its reasonable efforts to pursue FCC approval and in good faith possesses
reasonable belief that such FCC consent can be obtained.
On August 24, 1995, the Company and Barry Diller entered into a binding
term sheet pursuant to which the Company agreed to sell Mr. Diller 220,994
shares of Common Stock at $22.625 per share in cash (the "Initial Shares") and
for the same per share price, an additional 220,994 shares of Common Stock (the
"Additional Shares") payable by means of a cash payment of $2,210 and an
interest free, nonrecourse promissory note in the amount of $4,997,779. The
promissory note is shown in the balance sheet as a reduction of stockholders'
equity in a manner similar to a stock subscription receivable. The note may be
prepaid in whole or in part at any time without penalty; upon payment of the
first $2,498,890 principal amount of the note, the security interest on 50% of
the Additional Shares and on all of the Excess Shares (as defined below) will be
released. All amounts outstanding under the note will mature on the earlier to
occur of (i) the termination of Mr. Diller's employment (x) by the Company for
cause (which shall be the only basis for the Company's termination of Mr.
Diller's employment) or (y) by Mr. Diller without good reason prior to Liberty
exercising full ownership and control over all Company Securities (as defined
below) owned by it and the Silver Company (as defined below) pursuant to a
Change in Law (as defined below), or (ii) the second anniversary of the issuance
of the note. The promissory note is secured by the Additional Shares and by that
portion of the Initial Shares having a fair market value on the purchase date of
20% of the principal amount of the promissory note (the "Excess Shares"). The
Company recognized approximately $.9 million of compensation expense, during the
year ended August 31, 1995, with a corresponding increase in additional paid-in
capital, related to issuance of both the Initial Shares and Additional Shares.
The compensation expense resulted from the difference in the $24.72 per share
fair market value of the Company's stock and the $22.625 per share purchase
price.
In addition, the Company granted Mr. Diller an option (the "Diller Option")
to acquire 1,895,847 shares of Common Stock at an exercise price of $22.625 per
share. As a result of the Diller Option, the Company recorded unearned
compensation of approximately $4.0 million, which is shown in the balance sheet
as a reduction of stockholders' equity, offset by a $4.0 increase to additional
paid-in capital. The unearned compensation resulted from the difference in the
exercise price and the fair market value of the Common Stock at the date of
grant. Under the terms of the Diller Option, the options vest in four equal
annual installments commencing on the first anniversary of the date of grant,
and the options are exercisable until the tenth anniversary of the date of grant
(and are subject to earlier termination upon certain conditions). Over the next
four years, the Company will recognize approximately $1.0 million annually of
non-cash compensation expense related to this unearned compensation. Mr. Diller
was also named Chairman of the Board and Chief Executive Officer of the Company.
See Note E.
In addition to the sale of the Initial Shares and the Additional Shares and
the grant of the Diller Option, on that same date (and following approval of the
transactions set forth in the term sheet by the Board of Directors of the
Company, including approval for purposes of Section 203 of the Delaware General
Corporation Law), Mr. Diller and Liberty entered into a binding term sheet (the
"Stockholders Agreement") with respect to their ownership of equity securities
of the Company ("Company Securities"). As disclosed in filings with the SEC,
pursuant to the Stockholders Agreement, Liberty and Mr. Diller have formed
Silver Company to which Liberty intends to assign the Option and contribute the
cash necessary to exercise the Option. Mr. Diller will initially own all of the
voting equity securities of Silver Company and will control all of the Company
Securities held by Silver Company, except that the approval of both Liberty and
Mr. Diller will
23
<PAGE> 25
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be required in connection with certain fundamental matters as set forth in the
Stockholders Agreement (the "Fundamental Matters").
At such time as Liberty may be permitted to exercise full ownership and
control over the Company Securities owned by it (a "Change in Law"), including
its pro rata share of Company Securities held by the Silver Company, Liberty's
equity interest in the Silver Company will be converted into voting common
equity of the Silver Company having the same pro rata rights, powers and
preferences as Mr. Diller's interest in the Silver Company, and Liberty or its
designees will purchase Mr. Diller's equity interest in the Silver Company for
an amount equal to the amount invested by Mr. Diller in the Silver Company plus
interest thereon at the prime rate in effect from time to time from the date of
such investment to the date of such purchase.
The Stockholders Agreement also provides that Mr. Diller is entitled to
exercise voting authority and authority to act by written consent over all
Company Securities owned by any of Liberty, its parent company,
Tele-Communications, Inc. ("TCI"), and certain of their affiliates (the "TCI
Group") on all matters submitted to a vote of the Company's stockholders or by
which the Company's stockholders may act by written consent. In connection
therewith, Liberty has agreed to provide Mr. Diller with a conditional proxy,
which proxy shall be valid for the full term of the Stockholders Agreement and
will be irrevocable. Mr. Diller, Silver Company and the TCI Group have agreed to
take, and to cause certain of their affiliates to take, all reasonable actions
required, subject to applicable law, to prevent the taking of any action by the
Company with respect to a Fundamental Matter without the consent of each of Mr.
Diller and Liberty and, following a Change in Law, to elect a slate of directors
of the Company, two of whom will be designated by Liberty and the remainder of
whom will be designated by Mr. Diller. Subject to applicable law and fiduciary
duties, Liberty will use its reasonable best efforts to cause its designees on
the Board of Directors of the Company to vote in the manner instructed by Mr.
Diller with respect to any matter presented to the Board of Directors, except
with respect to Fundamental Matters and certain matters relating to Mr. Diller's
employment with the Company.
In addition, pursuant to the Stockholders Agreement, Mr. Diller may
exchange shares of Common Stock owned by him and certain of his affiliates for
shares of Class B Common Stock owned by Liberty or held by the Silver Company,
provided that, after such exchange, Liberty will not cease to own Company
Securities (including its pro rata portion of any Company Securities held by the
Silver Company) constituting at least 50% of the total voting power of the
Company. The Stockholders Agreement also contains provisions applicable to Mr.
Diller and Liberty relating to rights of first refusal on permitted sales of
Company Securities and, under certain limited circumstances, the right of Mr.
Diller to require Liberty to purchase his Company Securities.
Mr. Diller and the Company filed applications with the FCC for the transfer
of control of the Company to the Silver Company in which Mr. Diller will
exercise voting control and, according to filings made by Mr. Diller and TCI,
upon receipt of such approval and such other regulatory approvals as may be
required (including under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, which approvals have been obtained), Mr. Diller intends to
cause the exercise of the Option and to acquire voting control of the Company.
Mr. Diller has also indicated that he intends to seek majority representation on
the Board of Directors of the Company. On March 6, 1996, the FCC granted its
approval of the transfer of control of SKC from Mr. Speer to SMC by the proposed
exercise of the Option. However, the FCC attached certain conditions to the
approval and also adopted simultaneously a stay order delaying the effectiveness
of the approval until the agency completed an investigation of allegations
raised against SKC by Urban that questioned SKC's qualifications as an FCC
licensee. SMC filed a pleading requesting that the FCC delete or modify one of
the conditions to the grant which requires prior FCC approval if Liberty's
parent company, TCI, materially increases its cable systems' percentage of
subscribers in any of the 11 markets served by the Company's Stations. In a
Memorandum Opinion and Order and Notice of Apparent Liability released June 14,
1996, the FCC lifted the stay order on its approval of the transfer of control
applications and deleted
24
<PAGE> 26
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the condition to the grant requiring FCC approval if Liberty's parent company,
TCI, materially increases its cable systems' percentage of subscribers in any of
the 11 markets served by the Company's Stations. The ruling provides that the
FCC must be notified at any time TCI acquires subscribers representing more than
50% of the television households in a Company Station market. The FCC also fined
Urban $25,000 for abdicating control of its station, WTMW(TV), Arlington,
Virginia, to the Company during the station construction period. The Company was
fined $150,000 for assuming unauthorized control of the station during the
construction period and for violating the FCC's duopoly rules during that time
period as a result of the signal overlap between WTMW(TV) and the Company's
Baltimore, Maryland Station, WHSW-TV, notwithstanding the agency's ruling that
control of WTMW(TV) reverted back to Urban at the time the station commenced
operations. The FCC also required that certain aspects of the contracts between
Urban and the Company, as Urban's lender and a shareholder, be reformed. If a
sale pursuant to exercise of the Option is consummated between RMSLP and SMC,
Mr. Speer will no longer control the Company.
Upon exercise of the Option and purchase of the Subject Shares, Mr. Diller
would effectively control the Company by virtue of the voting power of the
Subject Shares and Mr. Diller's controlling interest in Silver Company. The
Company is unable to determine with any degree of certainty what the impact will
be on the Company if a transfer of control of the Company pursuant to the Option
occurs or if no change in control occurs because the Option is allowed to expire
or the requisite governmental approvals cannot be obtained.
The Company has also granted options to purchase stock, other than the
Diller Option, under option plans as follows:
The Stock Option and Restricted Stock Plan (the "Employee Plan")
provides for the grant of options to employees to purchase Common Stock at
the fair market value on the date of grant. The options become exercisable
in five equal, annual installments beginning on the date of grant. The
options expire five years from the date they vest and become exercisable.
In connection with the downsizing of the Company's staff and the pending
change in ownership of the Company, on October 25, 1995, the
Compensation/Benefits Committee of the Board of Directors of the Company
resolved to accelerate the vesting date of all existing unvested employee
stock options granted under the Employee Plan, effective December 1, 1995.
The expiration dates for the accelerated options shall remain five years
from the date of their original scheduled vesting.
The Stock Option Plan for Outside Directors provides for the grant of
options to purchase Common Stock at the fair market value on the date of
grant. The options become exercisable in five equal, annual installments
beginning on the date of grant. All options expire five years from the date
they vest and become exercisable.
25
<PAGE> 27
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of changes in outstanding options under the stock option plans,
including the key executive's option, is as follows:
<TABLE>
<CAPTION>
OUTSIDE KEY FAIR MARKET
EMPLOYEES DIRECTORS EXECUTIVE TOTAL VALUE
--------- --------- --------- ----- --------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE)
<S> <C> <C> <C> <C> <C>
Authorized:
December 28, 1992.............. 2,000 500 -- 2,500
August 24, 1995................ -- -- 1,896 1,896
--------- --------- --------- -----
2,000 500 1,896 4,396
======== ======= ======= =====
Outstanding:
Outstanding -- August 31, 1992
Granted........................ 255 150 -- 405 $ 2.00 - 2.88
Exercised...................... (12) (15) -- (27) $11.00 - 17.75
Cancelled...................... (16) -- -- (16) $ 2.00
--------- --------- --------- -----
Outstanding -- August 31, 1993... 227 135 -- 362
Granted........................ 56 25 -- 81 $11.75 - 18.25
Exercised...................... (13) (35) -- (48) $ 9.50 - 17.50
Cancelled...................... (20) (30) -- (50) $ 2.00 - 18.00
--------- --------- --------- -----
Outstanding -- August 31, 1994... 250 95 -- 345
Granted........................ 85 50 1,896 2,031 $ 9.75 - 25.75
Exercised...................... (13) (20) -- (33) $ 2.00 - 18.00
Cancelled...................... (16) (30) -- (46) $ 2.00
--------- --------- --------- -----
Outstanding -- August 31, 1995... 306 95 1,896 2,297
Granted........................ 10 -- -- 10 $32.75
Exercised...................... (38) -- -- (38) $28.25 - 37.00
Cancelled...................... -- -- -- --
--------- --------- --------- -----
Outstanding -- December 31,
1995........................... 278 95 1,896 2,269
======== ======= ======= =====
Shares exercisable at December
31, 1995....................... 278 35 -- --
======== ======= ======= =====
</TABLE>
As of December 31, 1995, the Company had 1,918,000 shares of Common Stock
available for grant under the above option plans.
NOTE G -- RELATED PARTY TRANSACTIONS
HSN and certain of its subsidiaries have provided a variety of services to
the Company. The principal transactions between HSN and the Company are
summarized below:
1. The Company participated in HSN's centralized cash management
system which financed working capital and operational requirements, and
capital expenditures through the Distribution Date. Subsequent to the
Distribution, the Company has funded its cash needs from its own resources.
In addition, as discussed in items 2-3 below, the Company has provided to,
and received support from, HSN and its subsidiaries. Prior to the
Distribution these transactions were settled through intercompany accounts.
26
<PAGE> 28
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of significant advances between the Company and
HSN through the Distribution:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
AUGUST 31,
1993
------------
<S> <C>
Net advances from HSN.................................................. $ 5,312
Transfer of deferred income taxes...................................... 200
Establish long-term obligation......................................... (135,172)
Capital contribution................................................... (99,386)
Transfer of fixed assets............................................... 2,135
Other, net............................................................. (360)
------------
Total financing from HSN..................................... $ (227,271)
===========
</TABLE>
Amounts included in the above table represent activity through both the
intercompany equity and long-term obligation account to HSN.
2. The Company received revenue from HSC as follows and as highlighted
in Note I:
Broadcasting revenue consists of a fee per hour of broadcast time based
on each Station's household reach and a commission equal to 5% of HSC
net sales in each Station's service area. Production revenue consists of
amounts charged for video production and post-production services.
3. In fiscal year 1993, the Stations were charged interest expense on
the Company's note payable to HSNCC at a rate of 9.5% per annum.
The Company has recorded an interest-bearing note receivable and is also a
nonvoting common stockholder in Roberts Broadcasting Company ("RBC"), as more
fully described in Notes B-7 and B-8. Steven C. Roberts, President of RBC, was
appointed to the Board of Directors of the Company on November 15, 1992 and
served as a member of its Audit Committee and as a Board member until January
13, 1995.
During the period September 1, 1995 through December 31, 1995 and fiscal
years 1994 and 1993, the Company advanced approximately $.7 million, $.1 million
and $.1 million, respectively, to Roberts Broadcasting Company of Denver ("RBD")
to cover costs associated with the acquisition of Station KTVD(TV), Denver,
Colorado. In fiscal year 1994, the Company and RBD determined that Station
KTVD(TV) was no longer a viable acquisition, but an opportunity existed to
redirect RBD's efforts to acquire the construction permit for Station KTVJ(TV),
Boulder, Colorado, which will serve the Denver metropolitan area, and construct
and operate that station. The Board subsequently approved redeployment of RBD's
efforts to acquire the permit, and construct and operate Station KTVJ(TV) for
$3.7 million upon similar terms and conditions as the Station KTVD(TV) proposal,
with advances of approximately $.2 million previously expended becoming part of
the Station KTVJ(TV) loan, subject to oversight of the project by the Company's
Audit Committee. As of November 10, 1995, the Company has loaned RBD the $3.7
million towards construction of Station KTVJ(TV) required by the loan agreement.
The Station commenced operations as of February 22, 1996. See Note B-7.
In fiscal year 1994, the Audit Committee approved a consulting agreement
whereby Vincent F. Barresi, a member of the Company's Board of Directors and
Audit and Compensation/Benefits Committees, would seek to enhance Company
revenue through the increased sale of Station airtime and satellite earth
station uplink time, and the leasing of station tower and building space. Mr.
Barresi was compensated at the rate of $6,000 per month plus a 10% commission on
net receipts directly attributable to his efforts, and reasonable and
27
<PAGE> 29
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prudent expenses. The consulting agreement was effective March 4, 1994 and
terminated December 31, 1994. Mr. Barresi remains entitled to a 10% commission
on net receipts directly attributable to his efforts. As of August 31, 1995, Mr.
Barresi has been compensated in the amount of $94,924. Mr. Barresi received
compensation of $12,600 in the period September 1, 1995 through December 31,
1995 and $70,924 and $24,000 in fiscal years 1995 and 1994, respectively.
Effective August 31, 1995, the Company initiated several transactions with
its new Chairman of the Board and Chief Executive Officer. See Notes E and F for
additional information.
NOTE H -- STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information:
Cash paid for interest was approximately $3.2 million, $10.0 million, $12.4
million and $12.8 million for the period September 1, 1995 through December 31,
1995 and for the years ended August 31, 1995, 1994, and 1993, respectively. Cash
paid for income taxes was approximately $.1 million, $1.5 million and $.3
million for the period September 1, 1995 through December 31, 1995 and for the
years ended August 31, 1995 and 1994, respectively. No cash was paid for income
taxes for fiscal year 1993.
Supplemental information of non-cash investing and financing activities:
The consolidated statement of cash flows for fiscal year 1993 excludes
the effects of certain non-cash financing and investing activities relating
to the Distribution of the Company from HSN on the Distribution Date. The
following is a summary of the non-cash effects of this transaction (in
thousands of dollars):
<TABLE>
<S> <C>
Increase in long-term obligations........................ $ 135,172
Adjustment to equity caused by distribution of Company
stock to HSN........................................... 99,386
Reverse unearned compensation -- HSN's executive stock
award program.......................................... 360
Transfer of deferred taxes from HSN...................... (200)
Transfer property to the Company from HSN................ (2,135)
Elimination of intercompany debt......................... (227,271)
---------
Net advances from HSN.................................... $ 5,312
=========
</TABLE>
Effective August 24, 1995, the Company issued 220,994 shares of the
Company's Common Stock to Barry Diller in exchange for $2,210 in cash and a
note receivable for $4,997,779. In addition, the Company issued the Diller
Option. See Notes E and F for additional information.
28
<PAGE> 30
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- SIGNIFICANT CUSTOMERS
For the period September 1, 1995 through December 31, 1995 and the fiscal
years ended August 31, 1995, 1994 and 1993, net revenue from a significant
customer, HSC, accounted for more than 10% of the Company's net revenue. The
dollar and percentage amounts are as follows:
<TABLE>
<CAPTION>
PERIOD YEARS ENDED
SEPTEMBER 1, 1995 AUGUST 31,
THROUGH ---------------------------
DECEMBER 31, 1995 1995 1994 1993
------------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Broadcasting............................ $14,300 $42,488 $41,128 $39,506
Production.............................. -- -- -- 34
---------- ------- ------- -------
$14,300 $42,488 $41,128 $39,540
============== ======= ======= =======
Percentage of significant customer revenue
to net revenue.......................... 89.7% 88.7% 88.3% 85.7%
</TABLE>
NOTE J -- INDUSTRY SEGMENTS
The Company operates principally in two industry segments -- television
broadcasting and video production. The broadcasting segment includes the
operations of 12 broadcast television stations (including one television
satellite station), located in eight of the 12 largest television markets in the
United States. The production segment provides a variety of production and
post-production services to corporations, advertising agencies, television
networks and cable operators throughout the country.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEARS
SEPTEMBER 1, 1995 ENDED AUGUST 31,
THROUGH ------------------------------
DECEMBER 31, 1995 1995 1994 1993
------------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
Broadcasting........................ $ 15,061 $ 44,563 $ 42,682 $ 41,249
Production.......................... 919 3,355 3,881 4,887
------------------ -------- -------- --------
$ 15,980 $ 47,918 $ 46,563 $ 46,136
============== ======== ======== ========
Operating profit (loss)
Broadcasting........................ $ 30 $ 9,368 $ 10,384 $ 8,111
Production(1)....................... (710) (1,132) (2,273) (2,406)
------------------ -------- -------- --------
$ 680 $ 8,236 $ 8,111 $ 5,705
============== ======== ======== ========
Assets
Broadcasting........................ $135,082 $140,563 $142,808 $149,605
Production.......................... 1,588 2,354 2,680 4,113
------------------ -------- -------- --------
$136,670 $142,917 $145,488 $153,718
============== ======== ======== ========
Depreciation and amortization
Broadcasting........................ $ 4,531 $ 13,833 $ 14,523 $ 16,733
Production.......................... 170 841 477 1,116
------------------ -------- -------- --------
$ 4,701 $ 14,674 $ 15,000 $ 17,849
============== ======== ======== ========
</TABLE>
29
<PAGE> 31
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE YEARS
SEPTEMBER 1, 1995 ENDED AUGUST 31,
THROUGH ------------------------------
DECEMBER 31, 1995 1995 1994 1993
------------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital expenditures
Broadcasting........................ $ 163 $ 998 $ 1,304 $ 1,873
Production.......................... -- 705 618 903
------------------ -------- -------- --------
$ 163 $ 1,703 $ 1,922 $ 2,776
============== ======== ======== ========
</TABLE>
- ---------------
(1) Includes a $1.2 million charge to operations to close the Chicago unit of
Telemation, Inc. in fiscal year 1994.
The Company operates entirely within the United States and has an
immaterial amount of inter-segment sales. The Company's assets are primarily
property and other broadcasting-related intangible assets.
NOTE K -- BENEFIT PLANS
The Company has a 401(k) Retirement Savings Plan (the "401(k) Plan")
covering substantially all employees. The Company's share of the matching
employer contributions is set at the discretion of the Board of Directors or the
applicable committee thereof. Contributions were $14,000, $.1 million, $.1
million and $.2 million for the period September 1, 1995 through December 31,
1995 and the years ended August 31, 1995, 1994 and 1993, respectively.
In connection with the downsizing of the Company's staff and the pending
change in ownership of the Company, on October 25, 1995, the Board of Directors
resolved to accelerate the vesting date of all Company contributions to employee
accounts under the 401(k) Plan, effective December 1, 1995.
NOTE L -- FAIR VALUE OF FINANCIAL INSTITUTIONS
The estimated fair value of amounts reported in the consolidated financial
statements have been determined by using available market information and
appropriate valuation methodologies. The carrying value of all current assets
and current liabilities approximates fair value because of their short-term
nature. The fair value of long-term investments and long-term debt approximate
their carrying value.
NOTE M -- SUBSEQUENT EVENTS
On June 26, 1996, the Company sold its Corporate headquarters land and
building for approximately $2.5 million. There is no gain or loss related to the
sale.
NOTE N -- PENDING TRANSACTIONS
On November 27, 1995, the Company entered into agreements to acquire a
controlling interest in HSN from Liberty Media Corporation and to merge Savoy
Pictures Entertainment, Inc. into a new SKC subsidiary. The Company plans to
issue new Common Stock to effect the Savoy transaction and new Common Stock and
Class B Common Stock to effect the HSN transaction. Both transactions are
subject to SKC stockholder approval.
NOTE O -- PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which
will be effective for the Company beginning January 1, 1996. SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts baed on the price of the
employer's stock. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements
30
<PAGE> 32
SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply Accounting Principles Board Opinion
("APB") No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Statement requires that an employer's
financial statements include certain disclosures about stock-based employee
compensation arrangements regardless of the method used to account for them.
Certain accounting requirements of the Statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995, though they may
be adopted on issuance.
The disclosure requirements of this Statement are effective for financial
statements for fiscal years beginning after December 15, 1995, or for an earlier
fiscal year for which this Statement is initially adopted for recognizing
compensation cost. The Company has chosen not to apply the provisions of SFAS
123 early and the Company's management has made the decision not to adopt the
optional accounting requirements of the Statement when the Statement is adopted.
The Company will continue to apply APB No. 25 to its stock-based compensation
awards to employees and will disclose the required proforma effect on net income
and earnings per share. The disclosure requirements of the Statement will be
adopted for the year ending December 31, 1996.
31
