<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-20570
---------------------
HSN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-2712887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1 HSN DRIVE, ST. PETERSBURG, FLORIDA
(Address of principal executive offices)
33729
(Zip Code)
(813) 572-8585
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Total number of shares of outstanding stock as of November 3, 1997:
<TABLE>
<S> <C>
Common stock......................... 43,663,906
Class B common stock................. 12,227,647
</TABLE>
================================================================================
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
NET REVENUES
Home Shopping Network................................. $240,036 $ -- $752,405 $ --
Ticketmaster.......................................... 67,331 -- 67,331 --
Broadcasting.......................................... 12,815 11,213 38,585 33,249
Other................................................. 6,074 -- 13,172 --
-------- ------- -------- -------
Total net revenues............................ 326,256 11,213 871,493 33,249
Operating costs and expenses:
Cost of sales......................................... 156,041 78 464,159 271
Selling and marketing................................. 66,477 -- 134,987 --
General and administrative............................ 37,491 2,840 84,210 8,583
Engineering and programming........................... 17,859 3,205 54,119 9,236
Depreciation and amortization......................... 25,703 3,316 67,194 10,178
-------- ------- -------- -------
Total operating costs and expenses............ 303,571 9,439 804,669 28,268
-------- ------- -------- -------
Operating profit.............................. 22,685 1,774 66,824 4,981
-------- ------- -------- -------
Other income (expense):
Interest income....................................... 1,460 925 3,973 2,135
Interest expense...................................... (8,611) (2,228) (22,101) (6,861)
Miscellaneous......................................... (3,023) (177) (9,283) 154
-------- ------- -------- -------
(10,174) (1,480) (27,411) (4,572)
-------- ------- -------- -------
Earnings before income taxes and minority interest...... 12,511 294 39,413 409
Income tax expense...................................... (9,078) (665) (29,753) (1,838)
Minority interest....................................... 83 -- 98 --
-------- ------- -------- -------
NET EARNINGS (LOSS)..................................... $ 3,516 $ (371) $ 9,758 $(1,429)
======== ======= ======== =======
Net earnings (loss) per common share.................... $ .06 $ (.04) $ .18 $ (.15)
======== ======= ======== =======
Weighted average shares outstanding..................... 59,497 9,494 54,087 9,479
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE> 3
HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
September 30,
--------------------- December 31,
ASSETS 1997 1996 1996
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 106,121 $ 13,900 $ 42,606
Accounts and notes receivable, net.......................... 98,364 3,752 56,832
Inventories, net............................................ 155,844 -- 100,527
Deferred income taxes....................................... 33,714 1,083 40,842
Other current assets, net................................... 13,381 1,440 7,791
---------- -------- ----------
Total current assets.............................. 407,424 20,175 248,598
PROPERTY, PLANT AND EQUIPMENT
Computer and broadcast equipment............................ 140,136 73,543 95,472
Buildings and leasehold improvements........................ 83,618 18,316 63,739
Furniture and other equipment............................... 36,199 1,939 20,414
---------- -------- ----------
259,953 93,798 179,625
Less accumulated depreciation and amortization.... 113,433 72,516 73,959
---------- -------- ----------
146,520 21,282 105,666
Land........................................................ 17,365 2,158 14,944
Projects in progress........................................ 9,806 237 1,365
---------- -------- ----------
173,691 23,677 121,975
OTHER ASSETS
Intangible assets, net...................................... 1,857,803 52,964 1,545,947
Cable distribution fees, net ($37,462; $0; and $40,892,
respectively, to related parties)......................... 104,137 -- 113,594
Long-term investments ($17,267; $0; and $5,581,
respectively, in related parties)......................... 33,576 5,140 30,121
Notes receivable, net of current portion ($843; $0; and
$1,639, respectively, from related parties)............... 11,552 17,130 17,741
Deferred income taxes....................................... 5,592 -- 1,926
Deferred charges and other, net............................. 43,530 3,588 36,330
---------- -------- ----------
2,056,190 78,822 1,745,659
---------- -------- ----------
$2,637,305 $122,674 $2,116,232
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
September 30,
---------------------- December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 1996
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term obligations................ $ 11,263 $ 13,000 $ 42,906
Accounts payable........................................... 211,264 -- 95,421
Programming fees ($8,474; $0; and $9,051, respectively, to
related parties)......................................... 32,314 -- 40,717
Other accrued liabilities.................................. 96,394 3,015 93,998
---------- --------- ----------
Total current liabilities........................ 351,235 16,015 273,042
LONG-TERM OBLIGATIONS (net of current maturities).......... 428,754 83,922 271,430
DEFERRED INCOME TAXES...................................... -- 14,575 --
OTHER LONG-TERM LIABILITIES, NET........................... 50,423 -- 56,875
MINORITY INTEREST.......................................... 365,355 -- 356,136
COMMITMENTS AND CONTINGENCIES.............................. -- -- --
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value; authorized 15,000,000;
50,000; and 15,000,000 shares, respectively, no shares
issued and outstanding................................... -- -- --
Common stock -- $.01 par value; authorized 150,000,000;
30,000,000; and 150,000,000 shares, respectively; issued
and outstanding 43,646,861; 7,082,332; and 35,992,903
shares, respectively..................................... 436 71 360
Class B -- convertible common stock -- $.01 par value;
authorized 30,000,000; 2,415,945; and 30,000,000 shares,
respectively; issued and outstanding 12,227,647;
2,415,945; and 10,225,056 shares, respectively........... 122 24 102
Additional paid-in capital................................. 1,556,589 127,493 1,285,277
Accumulated deficit........................................ (106,904) (111,552) (116,662)
Unearned compensation...................................... (3,707) (2,876) (5,330)
Note receivable from key executive for common stock
issuance................................................. (4,998) (4,998) (4,998)
---------- --------- ----------
1,441,538 8,162 1,158,749
---------- --------- ----------
$2,637,305 $ 122,674 $2,116,232
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Note
Receivable
from Key
Executive
Class B for
Convertible Additional Unearned Common
Common Common Paid-In Accumulated Compen- Stock
Stock Stock Capital Deficit sation Issuance Total
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996........ $ 70 $ 24 $ 126,119 $(110,123) $(3,621) $(4,998) $ 7,471
Issuance of common stock upon
exercise of stock options....... 1 -- 716 -- -- -- 717
Income tax benefit related to
stock options exercised......... -- -- 658 -- -- -- 658
Amortization of unearned
compensation related to grant of
stock options to key executive
................................ -- -- -- -- 745 -- 745
Net loss for the nine months ended
September 30, 1996.............. -- -- -- (1,429) -- -- (1,429)
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT SEPTEMBER 30, 1996..... $ 71 $ 24 $ 127,493 $(111,552) $(2,876) $(4,998) $ 8,162
==== ==== ========== ========= ======= ======= ==========
BALANCE AT JANUARY 1, 1997........ $360 $102 $1,285,277 $(116,662) $(5,330) $(4,998) $1,158,749
Issuance of common stock upon
exercise of stock options....... 4 -- 5,988 -- -- -- 5,992
Income tax benefit related to
stock options exercised......... -- -- 2,599 -- -- -- 2,599
Issuance of stock in connection
with business acquisition....... 72 20 262,725 -- -- -- 262,817
Amortization of unearned
compensation related to grant of
stock options to key executive
................................ -- -- -- -- 745 -- 745
Expense related to executive stock
award program and stock
options......................... -- -- -- -- 113 -- 113
Expense related to employee equity
participation plan.............. -- -- -- -- 765 -- 765
Net earnings for the nine months
ended September 30, 1997........ -- -- -- 9,758 -- -- 9,758
---- ---- ---------- --------- ------- ------- ----------
BALANCE AT SEPTEMBER 30, 1997..... $436 $122 $1,556,589 $(106,904) $(3,707) $(4,998) $1,441,538
==== ==== ========== ========= ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
HSN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------------
1997 1996
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)......................................... $ 9,758 $ (1,429)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 52,798 10,178
Deferred income taxes.................................. 15,462 1,547
Amortization of cable distribution fees................ 14,327 --
Non-cash operating expense............................. (14,083) --
Equity in losses of unconsolidated affiliates.......... 9,257 --
Non-cash interest expense.............................. 3,163 629
Inventory carrying adjustment.......................... (1,726) --
Amortization of unearned compensation.................. 1,623 745
Provision for losses on accounts and notes
receivable............................................ 433 69
(Gain) loss on retirement or sale of fixed assets...... 125 (19)
Minority interest...................................... (98) --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable........... (13,521) 872
Increase in inventories.............................. (49,310) --
(Increase) decrease in other current assets.......... 4,020 (241)
Increase in accounts payable......................... 23,636 --
Decrease in accrued liabilities...................... (36,115) (2,721)
Increase in cable distribution fees.................... (4,870) --
Decrease in deferred charges and other................. 2,724 25
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 17,603 9,655
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (31,013) (500)
Increase in long-term investments and notes receivable.... (14,786) (8,370)
Capital contributions received............................ 9,000 --
Payment of merger costs................................... (6,349) (791)
Proceeds from long-term notes receivable.................. 5,635 3,234
Proceeds from sale of fixed assets........................ 412 2,328
-------- --------
NET CASH USED IN INVESTING ACTIVITIES............. (37,101) (4,099)
-------- --------
Cash flows from financing activities:
Principal payments on long-term obligations............... (243,784) (11,513)
Proceeds from long-term obligations....................... 231,142 --
Cash acquired in the Ticketmaster Transaction............. 89,663 --
Proceeds from issuance of common stock.................... 5,992 717
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES ...................................... 83,013 (10,796)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 63,515 (5,240)
Cash and cash equivalents at beginning of period............ 42,606 19,140
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $106,121 $ 13,900
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements of HSN, Inc. and
Subsidiaries (the "Company") are unaudited and should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto for the
year ended December 31, 1996.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such Condensed Consolidated Financial Statements have been
included. Such adjustments consist of normal recurring items. Interim results
are not necessarily indicative of results for a full year. The interim Condensed
Consolidated Financial Statements and Notes thereto are presented as permitted
by the Securities and Exchange Commission and do not contain certain information
included in the Company's audited Consolidated Financial Statements and Notes
thereto.
The Condensed Consolidated Financial Statements include the operations of
Savoy Pictures Entertainment, Inc. and subsidiaries ("Savoy") and the operations
of Home Shopping Network, Inc. and subsidiaries ("Home Shopping") from the dates
of acquisition (collectively, the "Mergers"). The Condensed Consolidated
Financial Statements also include the operations and cash flows of Ticketmaster
Group, Inc. and subsidiaries ("Ticketmaster") for the 75 days ending July 31,
1997, see Note C.
NOTE B -- RECLASSIFICATION
Certain amounts in the Condensed Consolidated Financial Statements for
September 30, 1996, were reclassified to conform to the 1997 presentation.
NOTE C -- TICKETMASTER TRANSACTION
On July 17, 1997, the Company announced the consummation of the acquisition
of approximately 49.6% of the outstanding equity of Ticketmaster, from Paul G.
Allen, by issuing 7,238,507 shares of the Company's common stock at a price of
$28.44 per share (the "Ticketmaster Transaction"). Subsequently, the Company
purchased an additional 206,000 shares of Ticketmaster stock, for $3.3 million,
in the open market resulting in a 50.1% interest in Ticketmaster's outstanding
equity. In connection with the issuance of new shares to Mr. Allen, the Company
also issued 2,002,591 shares of the Company's Class B common stock in accordance
with Liberty Media Corporation's contingent right to receive such shares as part
of the Home Shopping merger in 1996.
The Ticketmaster Transaction has been accounted for using the purchase
method of accounting. The acquisition price of $210.0 million, including
expenses, was preliminarily allocated to the assets and liabilities of
Ticketmaster based on their respective values at the acquisition date. The fair
market values of the assets and liabilities consolidated in the statement of
financial position as of September 30, 1997, along with the excess of the
purchase price over the fair value of net assets, which has preliminarily been
assigned to goodwill, are summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Ticketmaster
- ----------------------------------------------------------------------------
(In thousands)
<S> <C>
Current assets.............................................. $139,897
Non-current assets.......................................... 180,375
Goodwill.................................................... 189,493
Current liabilities......................................... 129,525
Non-current liabilities..................................... 149,423
</TABLE>
Ticketmaster is on a fiscal year ending January 31 and accordingly, the
Company has adopted the practice of consolidating Ticketmaster's most recent
quarterly results of operations, adjusted for any significant subsequent
transactions, with those of the Company's current quarterly results. For the
quarter and nine
6
<PAGE> 8
HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
months ended September 30, 1997, the Company has consolidated the operations of
Ticketmaster for the 75 days ended July 31, 1997.
The following unaudited pro forma condensed consolidated financial
information for the quarter and nine months ended September 30, 1997, is
presented to show the results of the Company for the full three and nine month
periods, as if the Ticketmaster Transaction and the Mergers occurred at the
beginning of the years presented. The pro forma results include certain
adjustments, including increased amortization related to goodwill, the reduction
of cable and broadcast fees for fair value adjustments related to purchase
accounting and the elimination of inter-company revenues and expenses, and are
not necessarily indicative of what the results would have been had the
Ticketmaster Transaction and the Mergers actually occurred on the aforementioned
dates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues....................................... $347,198 $328,038 $1,058,457 $1,010,741
Net earnings (loss)................................ 3,323 (1,428) 8,216 (13,882)
Net earnings (loss) per common share............... .05 (.03) .12 (.25)
</TABLE>
NOTE D -- LONG-TERM OBLIGATIONS
In connection with the Ticketmaster Transaction, consolidated long-term
obligations increased by the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
September 30,
1997
- ----------------------------------------------------------------------------
(In thousands)
<S> <C>
$175.0 million revolving note payable, collateralized by
substantially all of Ticketmaster's assets, payable
December 1999; bearing interest at the London Inter-Bank
Offered Rate ("LIBOR"), plus an applicable margin......... $134,000
Term loan, collateralized by a building, principal and
interest payable monthly, maturing May 2007; interest at
9.2%...................................................... 9,000
Term loan, collateralized by substantially all of the assets
of a Ticketmaster subsidiary, interest and principal
payable monthly with balance due June 1999; bearing
interest at prime plus 0.25% or LIBOR plus 225 basis
points.................................................... 7,500
Other....................................................... 49
--------
$150,549
========
</TABLE>
In addition to the above Ticketmaster debt, on May 1, 1997, the Company
entered into a new $275.0 million Revolving Credit Facility (the "New Facility")
with a $35.0 million sub-limit for letters of credit. The New Facility, which
replaced both the Home Shopping Revolving Credit Facility and the Company's
Secured Senior Term Loans, expires on May 1, 2002. The New Facility is unsecured
and the interest rate on borrowings is tied to LIBOR plus an applicable margin.
At September 30, 1997, there were $80.0 million in outstanding borrowings under
the New Facility, and $169.8 million was available for borrowing after taking
into account outstanding letters of credit.
A waiver of certain covenants related to the SF Broadcast Facility was
obtained for the third quarter of 1997. The Company was in compliance with all
other terms and covenants related to its credit facilities and debt instruments
at September 30, 1997.
In connection with the Mergers, the Company became a joint and several
obligor with respect to the Home Shopping Network 5 7/8% Convertible
Subordinated Debentures and to the Savoy Pictures Entertain-
7
<PAGE> 9
HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ment, Inc. 7% Convertible Subordinated Debentures. The liability of Home
Shopping and Savoy is subordinated under these debentures.
NOTE E -- INCOME TAXES
The Company had taxable income for the quarter and nine months ended
September 30, 1997, which was offset in part by net operating loss
carryforwards.
On June 23, 1997, the Internal Revenue Service ("IRS") completed the
examination of Home Shopping's federal income tax returns for fiscal years 1992,
1993 and 1994. The IRS proposed adjustments resulting in a potential tax
deficiency of $9.3 million, primarily related to the disallowance of deductions
pertaining to a legal settlement and stock options exercised under the 1986
Cable Operators Stock Option Plan. On July 23, 1997, the Company made a payment
of $1.3 million of tax and $.3 million of interest for all undisputed issues.
These undisputed issues were related to inter-period allocations of tax
deductions, which will reverse in subsequent periods. To minimize interest
expense in the event of an unfavorable outcome of the disputed items, the
Company deposited $2.8 million with the IRS during July 1997. The Company
maintains it has meritorious positions with respect to the disputed adjustments
and on August 22, 1997, filed a protest with the IRS.
In addition, the IRS reversed its position on an issue with respect to a
former related party, which will result in a refund of $5.0 million in taxes and
interest related to fiscal years 1986 to 1989.
The effects of the settlement of undisputed items, the potential impact of
the disputed items, and the $5.0 million refund were included in previous years'
tax provisions and, accordingly, had no impact on the income tax provision for
the quarter and nine months ended September 30, 1997.
The Company believes it has made adequate provision for all outstanding tax
issues.
NOTE F -- EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per common share is based on net earnings (loss)
divided by the weighted average number of common shares outstanding, giving
effect to stock options and convertible debt, when applicable, and the impact of
common stock equivalents of Ticketmaster. Fully diluted earnings (loss) per
common share is considered to be the same as primary earnings (loss) per common
share since the effect of certain potentially dilutive securities is
anti-dilutive in all periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which will become effective in the fourth quarter of 1998. FAS 128 replaces the
presentation of earnings per share reflected on the Statement of Operations with
a dual presentation of Basic Earnings per Share ("Basic EPS") and Diluted
Earnings per Share ("Diluted EPS"). Basic EPS excludes dilution and is computed
by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised resulting in the issuance of common stock that then shared in the
earnings of the Company. FAS 128 does not permit early application; however, it
requires, when implemented in the fourth quarter, the restatement of previously
reported earnings
8
<PAGE> 10
HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
per share for each income statement presented. Pro forma disclosure of earnings
per share information as if the Company implemented FAS 128 are as follows:
PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C>
Net earnings (loss).................................... $ 3,516 $ (371) $ 9,758 $(1,429)
======= ====== ======= =======
Weighted average shares................................ 55,010 9,494 51,008 9,479
======= ====== ======= =======
Basic earnings (loss) per share........................ $ .06 $ (.04) $ .19 $ (.15)
======= ====== ======= =======
Weighted average shares including the effect of stock
options (4,487 and 3,079 for the three and nine
months ended September 30, 1997, respectively)....... 59,497 9,494 54,087 9,479
======= ====== ======= =======
Diluted earnings (loss) per share...................... $ .06 $ (.04) $ .18 $ (.15)
======= ====== ======= =======
</TABLE>
NOTE G -- CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and short-term investments. Short-term investments consist primarily of
auction preferred shares, money market funds and certificates of deposit with
original maturities of less than 91 days.
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------
1997 1996
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH PAID FOR:
Interest.................................................. $17,316 $7,019
Income taxes.............................................. 13,055 295
CASH RECEIVED FOR:
Income tax refund......................................... 201 --
</TABLE>
- - During July 1997, the Company acquired an interest in Ticketmaster by issuing
stock as discussed in Note C.
9
<PAGE> 11
HSN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE H -- SAVOY SUMMARIZED FINANCIAL INFORMATION (UNAUDITED)
The Company has not presented separate financial statements and other
disclosures concerning Savoy because management has determined that such
information is not material to holders of the Savoy debentures, all of which
have been assumed by the Company as a joint and several obligor. The information
presented is reflected at Savoy's historical cost basis.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------
Summarized Operating Information 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Net revenue................................................. $50,816 $ 98,848
Operating expenses.......................................... 52,063 168,543
Operating loss.............................................. (8,309) (69,695)
Net loss.................................................... (6,534) (84,720)
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
September 30,
------------------- December 31,
Summarized Balance Sheet Information 1997 1996 1996
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current assets.............................................. $ 39,777 $124,338 $ 61,901
Non-current assets.......................................... 289,171 317,003 302,195
Current liabilities......................................... 33,563 37,846 60,176
Non-current liabilities..................................... 116,360 177,067 124,198
Minority interest........................................... 119,091 95,170 112,717
</TABLE>
NOTE I -- RELATED PARTY TRANSACTION
The Company deferred repayment of a $5.0 million secured, non-recourse
promissory note due from the Company's Chairman and CEO, from September 5, 1997
to September 5, 2007.
NOTE J -- SUBSEQUENT EVENTS
On October 20, 1997, the Company and Universal Studios, Inc. ("Universal"),
a subsidiary of The Seagram Company, Ltd., announced an agreement to contribute
the majority of Universal's television assets to the Company in a transaction in
which Universal will receive $4.1 billion in value in the form of 45% of the
Company's outstanding common equity equivalents and $1.2 billion in cash. In
addition, upon consummation of the transaction, the Company intends to change
its corporate name to USA Networks, Inc. The transaction, which is expected to
close in the first quarter of 1998, is subject to customary conditions,
including the approval of the Company's stockholders. The Universal assets to be
contributed include all the domestic operations and 50% of the international
operations of USA Network and the Sci-Fi Network, as well as Universal's
domestic production and distribution operations.
On October 31, 1997, the Company announced its proposal to acquire all
publicly held shares of common stock of Ticketmaster in a tax-free merger
transaction in which each share of Ticketmaster would be exchanged for .506 of a
share of the Company's common stock, subject to adjustment in certain
circumstances. The Company and Ticketmaster have not entered into a definitive
agreement regarding the Company's proposal.
On November 12, 1997, the Company invested $20.0 million for an 11.0%
interest in City Search, Inc., an Internet based company. The investment will be
accounted for using the cost method.
10
<PAGE> 12
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
HSN, Inc. (the "Company" or "HSNi") is a holding company, the subsidiaries
of which conduct the operations of the Company's various business activities.
During the third quarter of 1997, the Company acquired 50.1% of the outstanding
equity of Ticketmaster Group, Inc. and subsidiaries ("Ticketmaster") (the
"Ticketmaster Transaction"). During 1996, the Company merged with Savoy Pictures
Entertainment, Inc. ("Savoy") and Home Shopping Network, Inc. ("Home Shopping")
(collectively, the "Mergers"). The Ticketmaster Transaction and the Mergers were
accounted for using the purchase method of accounting. The Company's principal
areas of business are electronic retailing, ticketing operations and television
broadcasting. The electronic retailing business operates two services, The Home
Shopping Network ("HSN") and America's Store, through an indirect wholly-owned
subsidiary, Home Shopping Club, Inc. ("HSC"). The ticketing operations business
sells over 70 million tickets a year through 2,900 retail center outlets, 25
telephone call centers and an Internet site and is the leading provider of
automated ticketing services in the U.S. The television broadcasting business
owns and operates twelve full-power UHF television stations (the "SKTV
Stations") and four full-power VHF television stations ("SF Broadcasting"). SF
Broadcasting is 50% owned by each of Savoy and Fox Broadcasting Company ("Fox").
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS. THESE ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE," "OPTIMISTIC," "INTEND," "AIM," "WILL," AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY UNDERTAKES NO OBLIGATION
TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS,
AS WELL AS AFFECT THE COMPANY'S ABILITY TO ACHIEVE ITS GOALS REFERRED TO HEREIN,
INCLUDE BUT ARE NOT LIMITED TO, THE FOLLOWING: BUSINESS AND GENERAL ECONOMIC
CONDITIONS, MEDIA COVERAGE WHICH MIGHT DISRUPT VIEWERSHIP PATTERNS, COMPETITIVE
FACTORS, CHANNEL SPACE AVAILABILITY, THE COST AND AVAILABILITY OF APPROPRIATE
MERCHANDISE AND DELIVERY SERVICES, CONSOLIDATION WITHIN THE CABLE INDUSTRY, COST
OF CARRIAGE OF THE COMPANY'S PROGRAMMING AND CHANGES IN THE REGULATORY
ENVIRONMENT.
A. CONSOLIDATED RESULTS OF OPERATIONS
The following discussions present the material changes in the consolidated
results of operations of the Company for the quarter and nine months ended
September 30, 1997, compared with the same periods in 1996. The operations for
the quarter and nine months ended September 30, 1996, consist solely of the
operations of the SKTV Stations. To provide a more meaningful comparison of
operating results, a separate pro forma section is included as supplemental
information. These pro forma results are not necessarily indicative of what the
results would have been had the Ticketmaster Transaction and the Mergers
actually occurred at the beginning of 1997 and 1996. Reference should also be
made to the Condensed Consolidated Financial Statements included herein.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1996
NET REVENUES
For the quarter and nine months ended September 30, 1997, total revenues of
the Company increased $315.0 million and $838.2 million, respectively, compared
to the same periods in 1996. These significant increases were primarily the
result of the Company's acquisition of its interests in Ticketmaster in the
third quarter of 1997 and Home Shopping in late December 1996.
11
<PAGE> 13
OPERATING COSTS AND EXPENSES
For the quarter and nine months ended September 30, 1997, total operating
costs and expenses increased $294.1 million and $776.4 million, respectively,
compared to the same periods in 1996. As shown in the table below, operating
costs and expenses for Home Shopping for the quarter and nine months ended
September 30, 1997, excluding purchase accounting effects and including the
elimination of intercompany engineering and programming expenses, accounted for
75.7% and 87.8%, respectively of the increases.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
-------------------- --------------------
Increase Increase
from Home from Home
1996 Shopping 1996 Shopping
- ----------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating costs and expenses:
Cost of sales....................................... $156.0 $144.3 $463.9 $444.0
Selling and marketing............................... 66.5 33.5 135.0 100.9
General and administrative.......................... 34.6 23.2 75.6 70.6
Engineering and programming......................... 14.6 13.0 44.9 39.3
Depreciation and amortization....................... 22.4 8.6 57.0 26.5
------ ------ ------ ------
Total operating costs and expenses.......... $294.1 $222.6 $776.4 $681.3
====== ====== ====== ======
</TABLE>
The increases in selling and marketing expense for the quarter and nine
months ended September 30, 1997, include $32.6 million of Ticketmaster expense
in both periods. The increases in depreciation and amortization expense for the
quarter and nine months ended September 30, 1997, also include $12.7 million and
$28.1 million, respectively, of goodwill amortization associated with the
Company's acquisitions of Ticketmaster, Home Shopping and Savoy.
OTHER INCOME (EXPENSE), NET
For the quarter and nine months ended September 30, 1997, interest income
increased $.5 million and $1.8 million, respectively, due to higher combined
cash balances of the consolidated and merged entity.
For the quarter and nine months ended September 30, 1997, interest expense
increased $6.4 million and $15.2 million, respectively, compared to the same
periods in 1996, due to the higher combined debt balance of the consolidated and
merged entity and non-cash interest expense related to preliminary purchase
accounting adjustments arising from the Mergers.
For the quarter and nine months ended September 30, 1997, the Company had
net miscellaneous expense of $3.0 million and $9.3 million, respectively,
primarily due to equity losses relating to the Company's investments in Home
Order Television GmbH & Co. KG ("HOT") and Jupiter Shop Channel Co;. Ltd.
INCOME TAXES
The Company's effective tax rate for the quarter and nine months ended
September 30, 1997, of 73% and 75%, respectively, calculated on earnings before
income taxes and minority interest, is higher than the statutory rate due
primarily to the amortization of non-deductible goodwill and other acquired
intangibles, the non-recognition of net operating losses from less than 80%
owned subsidiaries and state income taxes. The Company's effective tax rate is
expected to exceed the statutory rate for the remainder of 1997.
MINORITY INTEREST
For the quarter and nine months ended September 30, 1997, minority interest
represents Liberty HSN, Inc.'s ("Liberty HSN") 19.9% interest in Home Shopping's
results of operations, Fox's 50% interest in SF Broadcasting's results of
operations and 49.9% of Ticketmaster's results of operations for the 75 days
ended July 31, 1997.
12
<PAGE> 14
PRO FORMA NET REVENUES AND COST OF REVENUES FOR THE QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 VS. PRO FORMA NET REVENUES AND COST OF REVENUES FOR THE
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
The Ticketmaster Transaction and the Mergers resulted in significant
changes in the Company's results of operations. Accordingly, the following
discussion of revenues and cost of revenues is presented for illustrative
purposes only. The pro forma information is not necessarily indicative of the
revenues and cost of revenues which would have actually been reported had the
Ticketmaster Transaction and the Mergers occurred on the dates described below,
nor is it necessarily indicative of future revenues and cost of revenues.
The pro forma revenues and cost of revenues for the three and nine months
ended September 30, 1997 and 1996, have been prepared to show results of the
Company for the full three and nine month periods, as if the Ticketmaster
Transaction and the Mergers had occurred at the beginning of 1997 and 1996.
Revenues and cost of revenues specifically related to Savoy's motion picture
operations are excluded from the 1996 pro forma amounts as these activities
ceased prior to the Mergers. Any future revenue or expense from Savoy's motion
picture operations will relate to the winding up of these operations and are
expected to be insignificant.
For the quarter and nine months ended September 30, 1997 pro forma net
revenues for the Company increased $19.2 million, or 5.8%, to $347.2 million
from $328.0 million and $47.7 million, or 4.7%, to $1.1 billion from $1.0
billion, respectively, compared to the same periods in 1996. For the quarter and
nine months ended September 30, 1997, pro forma cost of revenues increased $13.0
million, or 8.9%, to $158.1 million from $145.1 million, and $1.0 million, or
.2%, to $480.7 million from $479.7 million, respectively, compared to the same
periods in 1996.
The discussion that follows provides an analysis of the aforementioned
increases in pro forma revenues and cost of revenues by significant component.
HOME SHOPPING NETWORK
Net sales for Home Shopping increased $5.7 million, or 2.4%, and $18.5
million, or 2.5%, respectively, for the quarter and nine months ended September
30, 1997, compared to the same periods in 1996. Net sales of HSC, the primary
source of Home Shopping revenues, increased $17.2 million, or 8.3%, and $56.4
million, or 8.7% for the quarter and nine months ended September 30, 1997,
respectively, compared to the same periods in 1996. HSC's sales reflect
increases of 7.9% and 11.2% in the number of packages shipped and decreases of
2.5% and 7.1% in the average price per unit sold for the quarter and nine months
ended September 30, 1997, respectively, compared to the same periods in 1996.
The increase in HSC net sales was offset by planned decreases in net sales of
wholly-owned subsidiaries, HSN Mail Order, Inc. ("Mail Order"), and the retail
outlet stores of $8.7 million and $2.6 million, respectively, for the quarter
ended September 30, 1997, and $25.8 million and $7.8 million, respectively, for
the nine months then ended, compared to the same periods in 1996.
The Company believes that the improved sales for the quarter and nine
months ended September 30, 1997, compared to the same periods in 1996, were
primarily the result of ongoing changes made to the Company's merchandising and
programming strategies. Management is continuing to take additional steps to
improve sales by changing the mix of products sold, introducing new products,
optimizing the average price per unit, creating exciting programming, taking
measures to increase the frequency of the customer's purchases and attracting
new customers. Additional personnel have been hired to assist in implementing
these new merchandising and programming strategies. There can be no assurance
that the additional changes to the Company's merchandising and programming
strategies will achieve management's intended results.
For the quarter and nine months ended September 30, 1997, HSC's merchandise
return percentage decreased to 22.8% from 23.2% and to 22.7% from 24.3%,
respectively, compared to the same periods in 1996. Management believes that the
lower return rate is primarily attributable to the decrease in the average price
per unit and the mix of products sold, which may vary in subsequent quarters.
At September 30, 1997 and 1996, HSC had approximately 4.6 million active
customers. An active customer is one who has completed a transaction within the
last eighteen months or placed an order within the
13
<PAGE> 15
last seven months. In addition, 61.3% of active customers have made more than
one purchase in the last eighteen months, compared to 59.4% at September 30,
1996.
The following table highlights the changes in the estimated unduplicated
television household reach of HSN, the Company's primary service, for the twelve
months ended September 30, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Cable* Broadcast Satellite Total
- -----------------------------------------------------------------------------------------------------
(In thousands of households)
<S> <C> <C> <C> <C>
Households -- September 30, 1996............................ 46,956 18,921 3,788 69,665
Net additions/(deletions)................................... 3,220 (1,017) -- 2,203
Shift in classification..................................... 449 (449) -- --
Change in Nielsen household counts.......................... -- (701) -- (701)
------ ------ ----- ------
Households -- September 30, 1997............................ 50,625 16,754 3,788 71,167
====== ====== ===== ======
</TABLE>
- ---------------
* Households capable of receiving both broadcast and cable transmissions are
included under cable and therefore are excluded from broadcast to present
unduplicated household reach. Cable households included 3.8 million and 1.8
million direct broadcast satellite ("dbs") households at September 30, 1997
and 1996, respectively, and therefore, these households are excluded from
satellite.
According to industry sources, as of September 30, 1997, there were 96.9
million homes in the United States with a television set, 64.4 million basic
cable television subscribers and 3.8 million homes with satellite dish
receivers, excluding dbs.
In addition, as of September 30, 1997, approximately 10.4 million cable
television households could be reached by America's Store, of which 3.8 million
are on a part-time basis. Of the total cable television households receiving
America's Store, 9.0 million also receive HSN.
During the remainder of 1997, cable system contracts covering 2.3 million
cable subscribers are subject to termination or renewal. This represents 4.5% of
the total number of unduplicated cable households receiving HSN. The Company is
pursuing both renewals and additional cable television system contracts, but
channel availability, competition, consolidation within the cable industry and
cost of carriage are some of the factors affecting the negotiations for cable
television system contracts. Although management cannot determine the percentage
of expiring contracts that will be renewed or the number of households that will
be added through new contracts, management believes that a majority of these
contracts will be successfully renegotiated.
The Company, as part of its disengagement strategy, has selected its Miami,
Florida station as the initial station which will cease broadcasting HSN and
commence broadcasting its new local programming format in the Spring of 1998.
Management is continuing to evaluate the effects that the disaffiliation will
have on Home Shopping's ability to reach some of its existing customers in the
Miami area including a reduction in revenues or additional expenses to secure
carriage of HSN. The Company believes that the process of disaffiliation can be
successfully managed to minimize adverse consequences. Upon disaffiliation, the
Company plans on carrying predominantly its own local programming. There can be
no assurance that the Company will be successful in its strategy to develop and
broadcast its new programming format.
As a percentage of net sales, Home Shopping's cost of sales increased to
60.1% from 58.4% and decreased to 59.0% from 61.8%, for the quarter and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. Cost of sales of HSC increased $15.5 million and $18.1 million,
respectively, for the quarter and nine months ended September 30, 1997, due to
increases in sales. This was offset by decreases for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996, of $9.1 million
and $26.2 million, respectively, in cost of sales of Mail Order and the retail
outlet stores as a result of the planned reduction in revenues for these
subsidiaries. As a percentage of HSC's net sales, cost of sales for the quarter
and nine months ended September 30, 1997, increased to 61.5% from 59.1% and
decreased to 60.2% from 62.6%, respectively, compared to the same periods in
1996. These increases were due to planned product mix changes and promotional
activities related to Home Shopping's 20th Anniversary celebration. In addition,
Home Shopping had special promotional pricing in reaction to the temporary
decrease in viewership resulting from television coverage of the death of
Princess Diana and anticipated customer reluctance to order during the UPS
strike.
14
<PAGE> 16
TICKETMASTER
For the quarter and nine months ended September 30, 1997, pro forma
Ticketmaster revenues increased $7.7 million, or 9.6% and $14.9 million, or
6.2%, respectively, compared to the same periods in 1996 and can be attributed
primarily to increases in the number of tickets sold and the average per ticket
operations revenue. Ticketmaster's primary source of revenue is ticketing
operations which are primarily comprised of convenience charges which
Ticketmaster generates by providing clients with access to Ticketmaster's
extensive distribution capabilities, including Ticketmaster-owned call centers,
an independent network of sales outlets remote to the client's box office and
non-traditional distribution channels such as the Internet. Other components of
ticket operations revenue include handling fees attributed to the sale and
distribution of tickets through channels other than remote sales outlets, credit
card fee reimbursements and licensing fees. Through continued acquisitions and
growth, management expects continued increases in ticketing operations revenues.
Other sources of Ticketmaster revenue, are relatively consistent, on a pro
forma basis, when comparing the same periods for 1997 to 1996, and include
revenues from concession control system sales; publications; and merchandising
businesses. Concession inventory control systems and associated service
contracts are marketed to movie theaters, stadiums, arenas and general admission
facilities. Ticketmaster produces and distributes publications, primarily the
Live! magazine, and the Entertainment Guide included therein, and recognizes
revenue from the sale of subscriptions. The merchandising business,
Entertainment To Go, is designed to leverage Ticketmaster's inbound call center
traffic, its database of consumers, and its relationships with the music and
entertainment industries to effectively sell, at retail prices, music, tour, and
entertainment related merchandise products to consumers.
The pro forma costs of revenues associated with ticketing operations and
publications were $8.0 million and $22.4 million, respectively, for the quarter
and nine months ended September 30, 1997 and were consistent when compared to
the same periods in 1996.
BROADCASTING
For the quarter and nine months ended September 30, 1997, pro forma
broadcasting revenues of $12.8 million and $38.6 million, respectively, and cost
of revenues of $1.3 million and $3.3 million, respectively, were consistent when
compared to the same periods in 1996. Broadcasting operations relates to the
operations of the SKTV Stations and SF Broadcasting.
OTHER
For the quarter and nine months ended September 30, 1997, $6.1 million and
$13.2 million, respectively, of pro forma other revenue related to the Savoy
motion picture business which was discontinued in 1996. The costs associated
with these revenues were $4.5 million and $10.3 million, respectively, for the
quarter and nine months ended September 30, 1997. The Company does not expect
significant additional revenues or costs from the motion picture business.
EBITDA AND ATTRIBUTABLE EBITDA
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") is defined as operating profit plus depreciation and amortization.
EBITDA is presented here as a management tool and as a valuation methodology for
the companies in the media, entertainment and communications industries. EBITDA
does not purport to represent cash provided by operating activities. EBITDA
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. The Company owns 50% of the common equity and 100% of the voting
stock of SF Broadcasting and 50.1% of both the common equity and voting stock of
Ticketmaster. As a result of voting and management control, the operating
results of Ticketmaster and SF Broadcasting are consolidated with the Company's
operating results. For the quarter and nine months ended September 30, 1997,
EBITDA for the Company was $48.4 million and $134.0 million, respectively,
compared to $44.7 million and $117.2 million, respectively, for the same periods
in 1996 on a pro forma basis. Attributable EBITDA reflects 50.1% of
Ticketmaster's pro rata share of EBITDA of its consolidated businesses and
unconsolidated joint
15
<PAGE> 17
ventures and 50% of SF Broadcasting's EBITDA based on the Company's common
equity ownership. Attributable EBITDA for the Company for the quarter and nine
months ended September 30, 1997, was $42.7 million and $125.9 million,
respectively, compared to $38.0 million and $99.7 million, respectively, for the
same periods in 1996 on a pro forma basis.
B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $19.9 million for the twelve
months ended September 30, 1997. In addition, the Company acquired cash of
$142.4 million in connection with the Ticketmaster Transaction and the Mergers
and received capital contributions of $9.0 million. These cash proceeds were
used to reduce outstanding borrowings by $40.9 million, pay for capital
expenditures of $31.7 million and pay cable distribution fees of $12.3 million.
Net earnings adjusted for non-cash items totaled $92.6 million and working
capital increased by $52.0 million for the twelve months ended September 30,
1997.
Net cash provided by operating activities was $17.6 million for the nine
months ended September 30, 1997. In addition, the Company acquired cash of $89.7
million in connection with the Ticketmaster Transaction and received capital
contributions of $9.0 million. These cash proceeds were used principally to
reduce outstanding borrowings by $12.6 million, pay for capital expenditures of
$31.0 million and pay cable distribution fees of $10.2 million. Net earnings
adjusted for non-cash items totaled $91.0 million and working capital increased
by $80.6 million for the nine months ended September 30, 1997.
Capital expenditures for the nine months ended September 30, 1997,
primarily relate to Home Shopping's plan to improve and expand the capabilities
of its computer systems. Consolidated capital expenditures are expected to range
from $20.0 million to $30.0 million for the remainder of 1997.
As discussed in Pro Forma Net Revenues and Cost of Revenues, in connection
with the new broadcasting of independent programming in the Miami, Florida area,
the Company expects to incur capital expenditures for the buildout of the Miami
station. These amounts, which are included above, are anticipated to range from
$10.0 million to $13.0 million for the remainder of 1997.
On May 1, 1997, the Company entered into a new $275.0 million Revolving
Credit Facility (the "New Facility") with a $35.0 million sublimit for letters
of credit. The New Facility, which replaced both the Home Shopping Revolving
Credit Facility and the Company's Secured Senior Term Loans, expires on May 1,
2002. The New Facility is unsecured, and the interest rate on borrowings is tied
to the London Interbank Offered Rate, plus an applicable margin. At November 1,
1997, there were $80.0 million of outstanding borrowings under the New Facility
and $173.2 million was available for borrowing after taking into account
outstanding letters of credit.
Amounts available to Ticketmaster under its credit agreement are limited to
the lower of the $175.0 million commitment amount or a borrowing base calculated
as a multiple of cash flows as defined. At November 1, 1997, Ticketmaster had
$134.0 million in outstanding borrowings under its credit agreement and $41.0
million was available for borrowing. The maximum amount available under the
credit agreement will decrease to $165.0 million as of December 31, 1997 and
will further decrease to $150.0 million at December 31, 1998.
In September 1997, the Company paid the final $5.0 million of subscriptions
payable related to its investment in HOT. The Company also has certain ongoing
funding obligations.
During the remainder of 1997, management expects to pay cable distribution
fees of $11.0 million to $14.0 million, relating to new and current contracts
with cable systems operators to carry Home Shopping's programming.
During the nine months ended September 30, 1997, the Company received cash
proceeds of $6.0 million from the exercise of .4 million options to purchase the
Company's common stock. At October 31, 1997, 16.6 million options to purchase
the Company's common stock were outstanding and exercisable at prices ranging
between $2.00 and $148.21. The exercise of such options would result in a cash
inflow to the Company of $71.2 million.
16
<PAGE> 18
During July and August 1997, the Company purchased a total of 206,000
shares of Ticketmaster stock in the open market for $3.3 million.
On November 12, 1997, the Company invested $20.0 million for an 11% equity
interest in City Search, Inc., a company that produces and delivers
comprehensive local city guides on the Worldwide Web of the Internet, providing
up-to-date information regarding arts and entertainment, community activities
and events, recreation, business and news/sports/weather to consumers in major
metropolitan areas. The funds to make this investment were obtained from
borrowings under the New Facility.
Ticketmaster spent $9.0 million in connection with business acquisitions
using existing funds.
In management's opinion, available cash, internally generated funds and
available borrowings will provide sufficient capital resources to meet the
Company's foreseeable needs.
During the quarter and nine months ended September 30, 1997, the Company
did not pay any cash dividends, and none are permitted under the Company's
existing credit facility.
SEASONALITY
The Company believes seasonality does impact its retailing segment but not
to the same extent it impacts the retail industry in general and does not
significantly impact its other businesses.
17
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
2(c)-On July 17, 1997, the Company acquired from Paul G. Allen 12,283,014
shares of Ticketmaster common stock, no par value, in exchange for 7,238,507
shares for the Company's common stock, par value $.01 per share ("Common
Stock"), subject to the issuance of up to an additional 3,257,328 shares of
Common Stock to be reserved for contingent issuance in July 1998 if the average
market price of Common Stock over a specified period prior to such date is below
$29 per share, pursuant to the terms of a Stock Exchange Agreement between Mr.
Allen and the Company dated May 20, 1997 (the "Stock Exchange Agreement"). The
issuance of Common Stock by the Company to Mr. Allen was a private placement
under Section 4(2) of the Securities Act of 1933, as amended, which did not
involve any public offering of the Common Stock. The full text of the Stock
Exchange Agreement was filed as Exhibit 1 to the Company's Current Report on
Form 8-K dated July 17, 1997, and is incorporated herein by reference.
ITEM 6(A) -- EXHIBITS
Exhibit 27 -- Financial Data Schedule (for SEC use only).
ITEM 6(B) -- REPORTS ON FORM 8-K
A report on Form 8-K filed July 29, 1997, reported completion on July 17,
1997, of the acquisition by the Company of Paul G. Allen's interest in
Ticketmaster in a stock-for-stock transaction.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirement 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.
<TABLE>
<C> <S>
/s/ HSN, INC.
------------------------------------------------
(Registrant)
Dated November 13, 1997 /s/ BARRY DILLER
- ---------------------------------------------- ------------------------------------------------
Barry Diller
Chairman of the Board and Chief Executive
Officer
Dated November 13, 1997 /s/ VICTOR A. KAUFMAN
- ---------------------------------------------- ------------------------------------------------
Victor A. Kaufman
Office of the Chairman and Chief Financial
Officer (Principal Financial Officer)
Dated November 13, 1997 /s/ BRIAN J. FELDMAN
- ---------------------------------------------- ------------------------------------------------
Brian J. Feldman
Controller
(Chief Accounting Officer)
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS ON FORM 10-Q FOR THE QUARTER AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 106,121
<SECURITIES> 0
<RECEIVABLES> 98,364
<ALLOWANCES> 0
<INVENTORY> 155,844
<CURRENT-ASSETS> 407,424
<PP&E> 287,124
<DEPRECIATION> 113,433
<TOTAL-ASSETS> 2,637,305
<CURRENT-LIABILITIES> 351,235
<BONDS> 428,754
0
0
<COMMON> 436
<OTHER-SE> 1,441,102
<TOTAL-LIABILITY-AND-EQUITY> 2,637,305
<SALES> 871,493
<TOTAL-REVENUES> 871,493
<CGS> 464,159
<TOTAL-COSTS> 464,159
<OTHER-EXPENSES> 340,510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,101
<INCOME-PRETAX> 39,413
<INCOME-TAX> 29,753
<INCOME-CONTINUING> 9,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,758
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
