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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO .
COMMISSION FILE NO. 0-20570
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SILVER KING COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2712887
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12425 28TH STREET NORTH, ST. PETERSBURG, FLORIDA 33716
(Address of principal executive offices) (Zip Code)
(813) 573-0339
(Registrant's telephone number, including area code)
2425 OLYMPIC BOULEVARD, SANTA MONICA, CALIFORNIA, 90404
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Total number of shares of outstanding common stock as of November 6, 1996:
<TABLE>
<S> <C>
Common Stock............................................. 7,083,132
Class B Common Stock..................................... 2,415,945
</TABLE>
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILVER KING COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------------- -------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUE
Broadcasting................................. $ 10,903 $ 10,884 $ 32,291 $ 32,081
Production................................... 310 774 958 2,402
------------ ------------ ------------ ------------
Net revenue........................ 11,213 11,658 33,249 34,483
COSTS AND EXPENSES
Cost of production........................... 78 168 271 439
General and administrative................... 6,045 8,022 17,819 19,101
Depreciation and amortization................ 3,316 3,589 10,178 10,950
------------ ------------ ------------ ------------
Total costs and expenses........... 9,439 11,779 28,268 30,490
------------ ------------ ------------ ------------
Operating income (loss)............ 1,774 (121) 4,981 3,993
OTHER INCOME (EXPENSE)
Interest income.............................. 925 669 2,135 3,213
Interest expense............................. (2,228) (2,689) (6,861) (8,298)
Dividend income.............................. -- -- -- 463
Miscellaneous................................ (177) 144 154 86
------------ ------------ ------------ ------------
Total other expense................ (1,480) (1,876) (4,572) (4,536)
------------ ------------ ------------ ------------
Income (loss) before income taxes............ 294 (1,997) 409 (543)
Income tax (expense) benefit................. (665) 338 (1,838) (143)
------------ ------------ ------------ ------------
Net loss..................................... $ (371) $ (1,659) $ (1,429) $ (686)
PER SHARE OF COMMON STOCK:
Net loss per common share.................... $ (0.04) $ (0.18) $ (0.15) $ (0.08)
========== ========== ========== ==========
Weighted average shares outstanding.......... 9,494 9,114 9,479 8,979
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 13,900 $ 19,140
Accounts receivable, net.............................................................. 460 1,402
Notes receivable...................................................................... 3,292 2,835
Other assets.......................................................................... 1,440 1,199
Deferred income taxes................................................................. 1,083 1,797
------------- ------------
Total current assets......................................................... 20,175 26,373
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer and broadcast equipment...................................................... 73,543 76,033
Buildings and leasehold improvements.................................................. 18,316 19,520
Furniture and other equipment......................................................... 1,939 2,991
------------- ------------
93,798 98,544
Less accumulated depreciation................................................ (72,516) (72,851)
------------- ------------
21,282 25,693
Land.................................................................................. 2,158 3,334
Construction in progress.............................................................. 237 244
------------- ------------
Net property plant and equipment............................................. 23,677 29,271
OTHER ASSETS
Intangible assets, net................................................................ 52,964 59,984
Capitalized bank fees, net............................................................ 2,664 3,293
Notes receivable, net of current...................................................... 17,130 12,188
Long-term investments................................................................. 5,140 5,135
Other................................................................................. 924 426
------------- ------------
Total other assets........................................................... 78,822 81,026
------------- ------------
$ 122,674 $ 136,670
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations........................................... $ 13,000 $ 12,456
Accrued liabilities:
Payroll and payroll taxes......................................................... 555 1,315
Rent.............................................................................. 617 722
Interest.......................................................................... 21 777
Other............................................................................. 1,618 2,217
Restructuring..................................................................... 204 1,333
------------- ------------
Total current liabilities.................................................... 16,015 18,820
DEFERRED INCOME TAXES................................................................. 14,575 14,399
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES...................................... 83,922 95,980
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, 7,082,332 and 6,996,332
shares issued and outstanding, respectively......................................... 71 70
Class B convertible common stock -- $.01 par value; 2,415,945 shares authorized,
issued, and outstanding............................................................. 24 24
Additional paid-in capital............................................................ 127,493 126,119
Note receivable from key executive for common stock issuance.......................... (4,998) (4,998)
Deficit............................................................................... (111,552) (110,123)
Unearned compensation................................................................. (2,876) (3,621)
------------- ------------
Total stockholders' equity................................................... 8,162 7,471
------------- ------------
$ 122,674 $ 136,670
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
FROM
COMMON CLASS B KEY EXECUTIVE
STOCK CONVERTIBLE ADDITIONAL FOR COMMON
$0.01 COMMON PAID-IN STOCK UNEARNED
PAR VALUE STOCK CAPITAL ISSUANCE DEFICIT COMPENSATION TOTAL
--------- ----------- ---------- ------------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE ON JANUARY 1,
1996...................... $70 $24 $126,119 ($4,998) $(110,123) $ (3,621) $ 7,471
Issuance of common stock
upon exercise of stock
options................... 1 -- 716 -- -- -- 717
Income tax benefit relating
to stock options
exercised................. -- -- 658 -- -- -- 658
Amortization of unearned
compensation related to
grant of stock options to
key executive............. -- -- -- -- -- 745 745
Net loss.................... -- -- -- -- (1,429) -- (1,429)
--- --- ---------- ------------- --------- ------------ -------
BALANCE ON SEPTEMBER 30,
1996...................... $71 $24 $127,493 $(4,998) $(111,552) $ (2,876) $ 8,162
======== ========== ========= ============ ========= ============ =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SILVER KING COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER SEPTEMBER
30, 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net loss............................................................ $ (1,429) $ (686)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.................................. 10,178 10,950
Non-cash interest expense...................................... 629 619
Provision for losses on accounts receivable.................... 69 58
Amortization of unearned compensation related to grant of stock
options to key executive...................................... 745 100
Non-cash compensation to key executive......................... -- 926
Gain on retirement or sale of fixed assets..................... (19) (86)
Deferred income taxes.......................................... 1,547 185
Decrease in other assets....................................... 25 8
Changes in current assets and liabilities:
Decrease in accounts receivable................................ 872 2,029
Decrease in other current assets............................... (241) (497)
Increase (decrease) in current liabilities..................... (2,721) 615
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 9,655 14,221
CASH FLOWS -- INVESTING ACTIVITIES:
Capital expenditures........................................... (500) (1,020)
Proceeds from sale of fixed assets............................. 2,328 223
Payment of merger costs........................................ (791) --
Proceeds from long-term notes receivable....................... 3,234 2,922
Investment in long-term notes receivable....................... (8,370) (2,268)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES..................... (4,099) (143)
CASH FLOWS -- FINANCING ACTIVITIES:
Principal payments on long-term obligations.................... (11,513) (7,856)
Proceeds from issuance of common stock......................... 1 5,000
Proceeds from exercise of stock options........................ 716 212
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES..................... (10,796) (2,644)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (5,240) 11,434
Cash and cash equivalents at beginning of period.................... 19,140 12,554
------------ ------------
Cash and cash equivalents at end of period.......................... $ 13,900 $ 23,988
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 13 largest metropolitan television markets in the United States. The
Stations reach approximately 29.0 million television households, which is one of
the largest audience reaches of any owned and operated independent television
broadcasting group in the United States.
In addition, the Company owns 26 low power television ("LPTV") stations
that broadcast HSC retail sales programming. The Company and HSC entered into a
Master Low Power Television Affiliation Agreement as of May 1, 1996 covering all
26 LPTV stations. The Company will be paid up to $550,000 annually under the
agreement.
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. One of the two Telemation facilities was closed in December 1995.
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 ("HSN Common Stock") and HSN Class B common stock
("HSN Class B Common Stock") on a pro-rata basis as of the Record Date.
Barry Diller indirectly controls the Company through the ownership by BDTV
INC., a Delaware corporation, which owns 2,000,000 shares of the Company's Class
B Common Stock.
On August 13, 1996, SKC entered into an Amendment to the merger agreement
entered into as of November 27, 1995 among the Company, Savoy Pictures
Entertainment, Inc. ("Savoy") and a subsidiary of the Company. Pursuant to the
amended merger agreement, upon consummation of the merger, each holder of Savoy
common stock ("Savoy Common Stock") would have the right to receive 0.14 of a
share of SKC Common Stock per share of Savoy Common Stock.
On August 25, 1996, SKC, House Acquisition Corp., HSN and Liberty HSN, Inc.
entered into an Agreement and Plan of Exchange and Merger pursuant to which HSN
would become a subsidiary of SKC. This agreement supersedes an earlier agreement
by SKC to acquire the controlling interest in HSN held by Liberty Media
Corporation ("Liberty"). Pursuant to this agreement, upon consummation of the
merger, holders of HSN Common Stock would have the right to receive 0.45 of a
share of SKC Common Stock per share of HSN Common Stock and holders of HSN Class
B Common Stock would have the right to receive 0.54 of a share of SKC Class B
Common Stock per share of HSN Class B Common Stock. Due to FCC regulatory
requirements, it is expected that the merger will be accomplished in two or more
steps, with SKC acquiring at least 80.1% of the HSN voting power and equity at
first and the remaining interest thereafter.
6
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SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- ORGANIZATION AND DISTRIBUTION -- (CONTINUED)
The Company has changed its fiscal year end from August 31st to December
31st effective January 1, 1996.
NOTE B -- BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the
accounts of SKC and its subsidiaries, all of which are wholly-owned. All
intercompany transactions and accounts have been eliminated. The Condensed
Consolidated Financial Statements are unaudited and should be read in
conjunction with the audited Consolidated Financial Statements and notes thereto
for the transition Form 10-Q for the period ended December 31, 1995.
In the opinion of management, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist only of normal recurring items. Interim
results are not necessarily indicative of results for a full year. The Condensed
Consolidated Financial Statements and notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's annual Consolidated Financial Statements and notes
thereto as discussed above. Certain amounts in 1995 have been reclassified to
conform to the 1996 presentation.
NOTE C -- LITIGATION
On May 22, 1995, Silver King Broadcasting of Virginia, Inc. ("SKVA"), a
wholly-owned subsidiary of the Company, and Urban Broadcasting Corporation
("Urban") and its principals settled a lawsuit relating to Urban's default on a
note receivable of $10.5 million to SKVA. 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 $0.1 million of interest under
the terms of the settlement and Urban dismissed its $6.5 million 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 Theodore M. White, the President, sole director
and owner of all the voting stock of Urban, 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 bankruptcy executed by
Urban and SKVA that lasted until December 31, 1995 and will continue 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 at least until December 31, 1996. Under the cash
collateral order, the escrow agreement SKVA and Urban entered into pursuant to
the settlement of SKVA's lawsuit against Urban remains in effect. Under the
escrow agreement, HSC makes affiliation payments due Urban under its affiliation
agreement with HSC into an escrow account. The escrow agents thereafter disburse
the proceeds to SKVA in an amount equal to the loan payment due SKVA from Urban,
and any remaining proceeds are disbursed to Urban. As of November 1, 1996, Urban
was current on its loan payment obligations and the remaining principal balance
is $7.0 million. On September 30, 1996, the Court entered an Order confirming
Urban's Fourth Amended Plan of Reorganization and the Official Committee of
Unsecured Creditors' First Amended Plan of Reorganization, and authorized
Urban's assumption of certain contracts. A post-confirmation hearing is
scheduled for November 19, 1996 to address various fee applications submitted to
the Court which total in excess of $600,000.
On August 26, 1996, after announcement that SKC, House Acquisition Corp,
HSN and Liberty HSN, Inc. had entered into the Agreement and Plan of Exchange
and Merger dated as of August 25, 1996 (the
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SILVER KING COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LITIGATION -- (CONTINUED)
"HSN Merger Agreement"), a class action complaint titled Andre Engle v. Leo J.
Hindery, et. al. was filed in the Court of Chancery of the State of Delaware, in
and for the County of New Castle (the "Delaware Court"), against HSN, Leo J.
Hindery Jr., Gen. H. Norman Schwarzkopf, Eli J. Segal, Peter R. Barton, Robert
R. Bennett, Barry Diller, James G. Held, SKC, Liberty Media Corporation
("Liberty") and Tele-Communications, Inc. by a shareholder of HSN on behalf of a
purported class consisting of all public shareholders of HSN (other than Liberty
and its controlled affiliates). Shortly thereafter, four other class action
complaints were filed against the foregoing defendants with the Delaware Court
by shareholders of HSN on behalf of a purported class consisting of all public
shareholders of HSN (other than Liberty and its controlled affiliates); one of
these actions also named as defendants, J. Anthony Forstmann and Victor Kaufman.
Plaintiffs allege, among other things, that, by approving the HSN Merger
Agreement, SKC's director defendant, Barry Diller, in his capacity as a director
of HSN, and, by supporting the merger, Liberty breached their fiduciary duties
to the HSN stockholders and that the consideration to be paid to HSN
stockholders in the HSN Merger is unfair and inadequate. Plaintiffs further
allege that SKC has knowingly aided and abetted the breaches of fiduciary duty
committed by the other defendants. Plaintiffs seek, among other things, an
injunction preventing the defendants from taking actions toward consummation of
the HSN Merger and related transactions, rescission or rescissory damages
(should the transactions proceed), and an award of unspecified compensatory
damages to the members of the plaintiff class. On October 7, 1996, the five
class action lawsuits were consolidated for all purposes in an action titled In
Re: Home Shopping Network, Inc. Shareholders Litigation, Consolidated Civil
Action No. 15179.
NOTE D -- RESTRUCTURING
In 1995, the Company accrued $2.0 million in restructuring charges (the
"Restructuring"), all of which related to termination benefits (including
severance and out placement assistance) except $0.1 million which related to the
estimated charge to relocate the corporate headquarters to Los Angeles,
California. The total number of employees to be terminated related to this
Restructuring is 95. The actual termination benefits and relocation expenses
paid and charged against the accrual as of September 30, 1996 were approximately
$1.8 million. There were no adjustments to the original $2.0 million accrual for
the Restructuring during the transition period.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A. RESULTS OF OPERATIONS
The following is a discussion of material changes in the consolidated
results of operations of the Company which occurred in the three and nine months
ended September 30, 1996 compared to the three and nine months ended September
30, 1995. The Company's primary business is the operation of 12 independent
full-power television stations which primarily broadcast HSC.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1995
The operations and financial position of the Company will not be indicative
of future financial results or conditions if one or both of the Savoy and HSN
transactions discussed in Note A is consummated.
NET REVENUE
Net revenue decreased $0.5 million to $11.2 million in the three months
ended September 30, 1996 from $11.7 million in the three months ended September
30, 1995. Net revenue decreased $1.2 million to $33.3 million in the nine months
ended September 30, 1996 from $34.5 million in the nine months ended September
30, 1995. The decrease for both three and nine months ended September 30, 1996
primarily relates to a decrease in production revenue due to the closing of the
Denver Telemation facility in December 1995.
Each of the Company's Stations and then-owned LPTV stations entered into
Affiliation Agreements with HSC on the Distribution Date. The Company has since
entered into a Master Low Power Television Affiliation Agreement with HSC
covering all 26 of its LPTV stations. The Affiliation Agreements with the
Stations, which provide for payment to the Stations of a minimum affiliation fee
for carriage of HSC programming, are the primary source of the Company's
revenue. Station revenue can exceed the hourly affiliation fee if HSC's net
sales credited to the Stations meet certain criteria. The Affiliation
Agreements, as amended November 30, 1995, provide for the broadcast by each
Station of HSC's electronic retail sales programming for 159 hours per week and
the availability to the Stations of two and one-half minutes of broadcast time
each hour. Each Affiliation Agreement has an initial term of five years and is
renewable for two additional five-year terms at each Station's sole option. The
Affiliation Agreements are cancelable by the Stations with 18 months' written
notice prior to the end of any scheduled term. The Company and HSC have amended
the Affiliation Agreements to extend the date by which the Stations must give
notice of nonrenewal with respect to the next five-year term from June 28, 1996
until December 28, 1996. Under the Affiliation Agreements, each Station has nine
hours per week available for non-HSC programming, which are currently used for
one hour Monday through Friday and four hours each Sunday morning for the
broadcast of issue-responsive, children's, ethnic, religious and/or paid
informational programming. Additionally, under the Affiliation Agreements, the
Stations may use two and one-half minutes of each broadcast hour for advertising
inserts and public service programming. Each Station may also preempt HSC
programming for an additional three hours per week (i.e., 156 hours per year)
subject to forfeiture of twice the applicable hourly affiliation fee provided
for in such Station's Affiliation Agreement. Notwithstanding anything else to
the contrary, a Station may also preempt any amount of HSC programming for
public interest reasons and in such event, such Station will forfeit twice the
hourly affiliation fee for such preemption period.
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 minimum
affiliation fee based upon that Station's hourly affiliation rate. The
determination is made on an annual basis within 30 days of each anniversary of
the Affiliation Agreements. As a result of the July 2, 1993 Federal
Communications Commission ruling that television stations with home shopping
formats are eligible for "must carry" status, the Company believes that its
Stations increased their viewership due to an increase in the number of cable
systems that carried the Stations. Management believes this increased
viewership, to some degree, increased the sales by HSC credited to the Stations
during calendar year 1994, resulting in a portion of the additional affiliation
fees received by the Company in January 1995. Based upon reported HSC sales
performance for calendar year 1995, the Company received $0.8 million of
additional
9
<PAGE> 10
affiliation fees in January 1996 accrued in December 1995 for sales by HSC
credited to the Stations in calendar year 1995.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $2.0 million to $6.0 million
in the three months ended September 30, 1996 from $8.0 million in the three
months ended September 30, 1995 and decreased $1.3 million to $17.8 million in
the nine months ended September 30, 1996 from $19.1 million in the nine months
ended September 30, 1995. The decrease in general and administrative expenses
for the three and nine months ended September 30, 1996 is primarily attributable
to a reduction in payroll and other benefit costs due to the Restructuring (as
described in Note D). These decreases are partially offset by additional
consulting and other expenses associated with the terms of the Equity and Bonus
Compensation Agreement (the "Compensation Agreement") between the Company and
its Chairman of the Board and Chief Executive Officer, Barry Diller. The Company
recognized for the three and nine months ended September 30, 1996 $0.9 million
and $2.6 million, respectively of charges under the terms of the Compensation
Agreement. The Company has recently hired certain experienced broadcast
executives which will increase general and administrative expenses in future
periods.
In the event one or both of the Savoy and HSN transactions (as discussed in
Note A) are not consummated, transaction costs of approximately $4.0 million
will be charged to operations and will increase general and administrative
expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $0.3 million to $3.3 million in the
three months ended September 30, 1996 from $3.6 million in the three months
ended September 30, 1995 and decreased $0.8 million to $10.2 million in the nine
months ended September 30, 1996 from $11.0 million in the nine months September
30, 1995. The decrease for the three and nine months ended September 30, 1996
was primarily due to the closure of the Denver Telemation facility in December
1995. The Company sold many of the assets of Telemation thereby decreasing the
depreciation expense for the first nine months of 1996.
OTHER INCOME (EXPENSE)
Other expense decreased $0.4 million to $1.5 million in the three months
ended September 30, 1996 from $1.9 million in the three months ended September
30, 1995 and increased $0.1 to $4.6 million in the nine months ended September
30, 1996 from $4.5 million in the nine months ended September 30, 1995. The
decrease for the three months ended September 30, 1996 is primarily attributable
to a reduction in the Company's long-term debt. The increase for the nine months
ended September 30, 1996 is primarily attributable to a reduction in interest
income and dividends received which was partially offset by a reduction in
interest expense.
INCOME TAXES
The Company's effective tax rate for periods presented differed from the
statutory rate due primarily to the amortization of goodwill and other acquired
intangible assets relating to acquisitions from prior years, other nondeductible
items, and state income taxes.
State taxes are more significant than federal taxes for the Company as some
of the Company's subsidiaries generate taxable income while others generate net
operating losses. For federal tax purposes, the net operating losses offset the
taxable income as the corporations file a consolidated federal tax return.
10
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B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $4.2 million as of September 30, 1996,
compared with working capital of $7.6 million as of December 31, 1995.
The Company historically has generated sufficient cash flow to fund its
operating, investing and financing activities.
The Company has used its internally generated cash flow for investing
activities to fund capital expenditures and investments in television
broadcasting companies controlled by FCC-recognized minority groups. During the
quarter ended September 30, 1996, the Company had capital expenditures of $0.2
million. The Company expects to fund additional expenditures of approximately
$0.3 million during the 1996 calendar year, although the Company has no
contractual commitments with any parties.
The Company has used its internally generated cash flow for financing
activities to service principal obligations under its Credit Agreement with The
Chase Manhattan Bank and other named Lenders (the "Bank Group"). During the nine
months ended September 30, 1996, the Company paid approximately $11.5 million of
principal obligations to the Bank Group and paid approximately $3.3 million in
October 1996. No principal payments are scheduled for the remainder of 1996.
Under certain conditions, the Company's Borrowing Group, which consists of all
Company entities with the exception of SKC, Silver King Investment Holdings,
Inc., Thames Acquisition Corp. (which will be merged into Savoy if such
transaction is consummated), House Acquisition Corp. (which will be merged into
HSN if such transaction is consummated) and SKC Investments, Inc., is required
to fund mandatory principal prepayments in advance of scheduled principal
payments to the Bank Group. The Borrowing Group may at any time fund optional
principal prepayments in satisfaction of mandatory principal prepayments or in
advance of scheduled principal payments to the Bank Group.
Based on current projections, the Company expects that all operating,
investing and financing activities for calendar year 1996 will be met from
either internally generated cash flows or available cash. However, in the event
that these projections are not met, the Borrowing Group has a revolving credit
facility available from the Bank Group of $15.0 million.
On, June 26, 1996, the Company sold its corporate headquarters building in
St. Petersburg, Florida for $2.3 million, net of expenses, all of which was held
in a cash collateral account for purposes of the mandatory prepayment to the
Bank Group. The Company recorded a gain on the sale of the building of
approximately $.2 million.
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. SKC Investments, Inc., a
subsidiary of the Company, loaned the purchasing entity $7.9 million on similar
terms to other loans of this nature to finance the acquisition. As of November
1, 1996, the Company funded an additional $0.7 million and may fund an
additional $0.3 million for construction of a new studio.
On May 8, 1996, the Company received a prepayment of approximately $1.4
million in full satisfaction of the note receivable from RBC. The Company still
retains a 45% nonvoting convertible common stock interest in RBC. In addition,
during the nine months ended September 30, 1996, collections from other notes
receivable were $1.8 million.
11
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Part I, Item 1. Financial Statements. Note C -- Litigation
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
2.1 Agreement and Plan of Exchange and Merger, dated as of August 25, 1996 among Silver
King Communications, Inc., House Acquisition Corp., Home Shopping Network, Inc. and
Liberty HSN, Inc. (Filed as Exhibit (c)(1) to the Schedule E-3 filed by Home
Shopping Network, Inc., Silver King Communications, Inc., Tele-Communications,
Inc., House Acquisition Corp. and Barry Diller on October 10, 1996.)
27 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 28, 1996 in connection
with the execution of the Agreement and Plan of Exchange and Merger between SKC,
House Acquisition Corp., HSN and Liberty HSN, Inc.
12
<PAGE> 13
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SILVER KING COMMUNICATIONS, INC.
--------------------------------------
(REGISTRANT)
Date: November 13, 1996
/s/ JAMES J. MILLER
--------------------------------------
JAMES J. MILLER
ACTING CHIEF FINANCIAL OFFICER
VICE PRESIDENT AND CONTROLLER
13
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,900
<SECURITIES> 0
<RECEIVABLES> 3,844
<ALLOWANCES> 92
<INVENTORY> 0
<CURRENT-ASSETS> 20,175
<PP&E> 96,193
<DEPRECIATION> 72,516
<TOTAL-ASSETS> 122,674
<CURRENT-LIABILITIES> 16,015
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 8,067
<TOTAL-LIABILITY-AND-EQUITY> 122,674
<SALES> 0
<TOTAL-REVENUES> 33,249
<CGS> 0
<TOTAL-COSTS> 271
<OTHER-EXPENSES> 27,997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,861
<INCOME-PRETAX> 409
<INCOME-TAX> 1,838
<INCOME-CONTINUING> (1,429)
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<EXTRAORDINARY> 0
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<NET-INCOME> (1,429)
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