-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, XadosSx3PiFOqZ9Ct6heDgJ1Hi/lk2yuCNP2+hKJvWW5CzcsIFwY3Zep5j++GVx0 aex8Iu5GbAlJfp7+zyVyOg== 0000950144-94-001460.txt : 19940816 0000950144-94-001460.hdr.sgml : 19940816 ACCESSION NUMBER: 0000950144-94-001460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME SHOPPING NETWORK INC CENTRAL INDEX KEY: 0000791024 STANDARD INDUSTRIAL CLASSIFICATION: 5961 IRS NUMBER: 592649518 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09118 FILM NUMBER: 94543176 BUSINESS ADDRESS: STREET 1: 11831 30TH COURT NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135728585 10-Q 1 HOME SHOPPING NETWORK 10-Q - 6-30-94 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9118 --------------------- HOME SHOPPING NETWORK, INC. (Exact name of registrant as specified in its charter) Delaware 59-2649518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2501 118th Avenue North, St. Petersburg, Florida 33716 (Address of principal executive offices) (Zip Code) (813) 572-8585 (Registrant's telephone number, including area code) Not applicable (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 ----- ----- 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 (net of shares held in treasury) as of August 1, 1994: Common stock.............. 74,388,629 Class B common stock...... 20,000,000
- - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- - ------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 1994 1993 1994 1993 - - ------------------------------------------------------------------------------------------------- (In thousands, except per share data) NET SALES....................................... $274,005 $250,264 $548,220 $489,685 Cost of sales................................... 178,803 162,723 354,418 340,604 -------- -------- -------- -------- Gross profit............................... 95,202 87,541 193,802 149,081 -------- -------- -------- -------- Operating expenses: Selling and marketing......................... 39,078 32,293 77,246 64,036 Engineering and programming................... 24,809 22,923 49,033 45,421 General and administrative.................... 20,134 23,872 40,388 45,305 Depreciation and amortization................. 6,932 5,887 13,027 11,590 -------- -------- -------- -------- 90,953 84,975 179,694 166,352 -------- -------- -------- -------- Operating profit (loss).................... 4,249 2,566 14,108 (17,271) Other income (expense): Interest income............................... 3,628 3,397 7,077 6,853 Interest expense.............................. (2,089) (2,565) (4,176) (6,541) Miscellaneous................................. (2,498) 55 (2,252) (3,209) -------- -------- -------- -------- (959) 887 649 (2,897) -------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary item............................ 3,290 3,453 14,757 (20,168) Income tax expense (benefit).................... 1,382 1,452 6,198 (5,189) -------- -------- -------- -------- Earnings (loss) before extraordinary item....... 1,908 2,001 8,559 (14,979) Extraordinary item -- loss on early extinguishment of long-term obligations, net of taxes...................................... -- (399) -- (7,242) -------- -------- -------- -------- NET EARNINGS (LOSS)............................. $ 1,908 $ 1,602 $ 8,559 $(22,221) ======== ======== ======== ======== Earnings (loss) per common share: Earnings (loss) before extraordinary item..... $ .02 $ .02 $ .09 $ (.17) Extraordinary item, net....................... -- -- -- (.08) -------- -------- -------- -------- Net earnings (loss)........................... $ .02 $ .02 $ .09 $ (.25) ======== ======== ======== ======== Weighted average shares outstanding............. 94,949 92,129 95,008 89,122 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. 1 3 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - ----------------------------------------------------------------------------------------------- JUNE 30, --------------------- DECEMBER 31, ASSETS 1994 1993 1993 - - ----------------------------------------------------------------------------------------------- (In thousands) CURRENT ASSETS Cash and cash equivalents.............................. $ 28,852 $ 21,425 $ 35,566 Accounts receivable, net............................... 29,271 15,274 27,849 Note and interest receivable from related party........ 130,007 5,508 5,707 Inventories, net....................................... 102,421 105,265 110,930 Deferred income taxes.................................. 24,693 18,349 29,279 Other, net............................................. 10,523 9,452 8,070 -------- -------- ------------ Total current assets......................... 325,767 175,273 217,401 PROPERTY, PLANT AND EQUIPMENT, AT COST Computer and broadcast equipment....................... 104,089 105,857 107,439 Buildings and leasehold improvements................... 72,810 70,193 71,283 Furniture and other equipment.......................... 42,467 46,660 48,091 -------- -------- ------------ 219,366 222,710 226,813 Less accumulated depreciation and amortization............................... 108,264 95,440 105,777 -------- -------- ------------ 111,102 127,270 121,036 Land................................................... 17,695 16,617 17,708 Construction in progress............................... 3,321 4,032 2,626 -------- -------- ------------ 132,118 147,919 141,370 OTHER ASSETS Note receivable from related party (net of current maturity)............................................ -- 128,986 126,597 Cable distribution fees, net........................... 32,535 -- -- Long-term investment................................... 10,000 7,589 10,000 Intangible assets, net................................. 2,691 2,565 2,658 Other assets and notes receivable...................... 2,555 4,044 3,117 -------- -------- ------------ 47,781 143,184 142,372 -------- -------- ------------ $505,666 $466,376 $501,143 ======== ======== ============
The accompanying notes are an integral part of these statements. 2 4 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - ----------------------------------------------------------------------------------------------- JUNE 30, --------------------- DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 1993 - - ----------------------------------------------------------------------------------------------- (In thousands) CURRENT LIABILITIES Current maturities of long-term obligations............ $ 85,947 $ 25,325 $ 25,345 Accounts payable....................................... 84,992 80,919 88,858 Income taxes payable................................... 14,732 14,077 15,586 Accrued liabilities: Cable distribution fees ($19,128 to related parties).......................................... 24,368 -- -- Litigation settlements............................... 14,450 -- 16,000 Sales returns........................................ 11,638 11,552 13,632 Sales taxes.......................................... 5,791 7,652 9,481 Other................................................ 41,399 32,998 40,446 -------- -------- ------------ Total current liabilities.................... 283,317 172,523 209,348 LONG-TERM OBLIGATIONS (net of current maturities)...... 1,255 117,199 86,927 DEFERRED INCOME TAXES.................................. 8,978 7,108 8,314 COMMITMENTS AND CONTINGENCIES.......................... -- -- -- STOCKHOLDERS' EQUITY Preferred stock -- $.01 par value; authorized 500,000 shares, no shares issued and outstanding............. -- -- -- Common stock -- $.01 par value; authorized 150,000,000 shares, issued 77,458,979 and 70,204,663 shares at June 30, 1994 and 1993, respectively, and 76,172,890 shares at December 31, 1993.......................... 775 702 762 Class B -- convertible common stock -- $.01 par value; authorized, issued and outstanding, 20,000,000 and 24,159,456 shares at June 30, 1994 and 1993, respectively, and 20,559,456 shares at December 31, 1993................................................. 200 242 206 Additional paid-in capital............................. 166,108 135,656 160,371 Retained earnings...................................... 61,342 53,343 52,783 Treasury stock -- 3,105,700 common shares, at cost..... (14,027) (14,027) (14,027) Unearned compensation.................................. (2,282) (6,370) (3,541) -------- -------- ------------ 212,116 169,546 196,554 -------- -------- ------------ $505,666 $466,376 $501,143 ======== ======== ============
The accompanying notes are an integral part of these statements. 3 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- - ------------------------------------------------------------------------------------------------------- CLASS B CONVERTIBLE ADDITIONAL UNEARNED COMMON COMMON PAID-IN RETAINED TREASURY COMPEN- STOCK STOCK CAPITAL EARNINGS STOCK SATION TOTAL - - ------------------------------------------------------------------------------------------------------- (In thousands) BALANCE AT JANUARY 1, 1993.................. $671 $ 242 $115,846 $75,564 $(14,027) $(8,147 ) $170,149 Income tax benefit related to executive stock award program and stock options exercised............. -- -- 41 -- -- -- 41 Expense related to executive stock award program............... -- -- -- -- -- 2,720 2,720 Issuance of common stock upon exercise of stock options............... 31 -- 18,811 -- -- -- 18,842 Unearned compensation related to executive stock award program... -- -- 943 -- -- (943 ) -- Issuance of common stock upon conversion of debentures............ -- -- 15 -- -- -- 15 Net loss for the six months ended June 30, 1993.................. -- -- -- (22,221 ) -- -- (22,221) ------ ----------- ---------- -------- -------- -------- -------- BALANCE AT JUNE 30, 1993.................. $702 $ 242 $135,656 $53,343 $(14,027) $(6,370 ) $169,546 ======== ========== ========= ======== ======== ========= ======== BALANCE AT JANUARY 1, 1994.................. $762 $ 206 $160,371 $52,783 $(14,027) $(3,541 ) $196,554 Income tax benefit related to executive stock award program and stock options exercised............. -- -- 1,763 -- -- -- 1,763 Expense related to executive stock award program............... -- -- -- -- -- 1,259 1,259 Issuance of common stock upon exercise of stock options............... 7 -- 3,974 -- -- -- 3,981 Conversion of Class B common stock to common stock................. 6 (6) -- -- -- -- -- Net earnings for the six months ended June 30, 1994.................. -- -- -- 8,559 -- -- 8,559 ------ ----------- ---------- -------- -------- -------- -------- BALANCE AT JUNE 30, 1994.................. $775 $ 200 $166,108 $61,342 $(14,027) $(2,282 ) $212,116 ======== ========== ========= ======== ======== ========= ========
The accompanying notes are an integral part of these statements. 4 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - ---------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, ------------------------ 1994 1993 - - ---------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net earnings (loss)............................................... $ 8,559 $ (22,221) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization.................................. 12,381 11,590 Amortization of cable distribution fees........................ 646 -- Deferred income taxes.......................................... 5,250 (4,378) Increase (decrease) in inventory reserve....................... (3,427) 14,740 Loss on disposition of wholly-owned subsidiary................. 2,854 -- Common stock and stock appreciation rights issued for services provided..................................................... 682 2,720 Provision for losses on accounts and notes receivable.......... 217 (101) (Gain) loss on sale of assets.................................. 144 (7) Equity in (earnings) losses of unconsolidated affiliates....... (93) 532 Loss on retirement of long-term obligations.................... -- 11,637 Liquidation of joint venture operation......................... -- 722 Change in current assets and liabilities: Increase in accounts receivable.............................. (1,605) (2,744) (Increase) decrease in interest receivable from related party....................................................... 18 (1,056) (Increase) decrease in inventories........................... 11,936 (952) Increase in other current assets............................. (2,453) (2,557) Increase (decrease) in accounts payable...................... (3,866) 18,744 Increase (decrease) in accrued liabilities and income taxes payable..................................................... 19,573 (7,773) Increase in cable distribution fees.......................... (33,181) -- -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES................. 17,635 18,896 -------- --------- Cash flows from investing activities: Capital expenditures.............................................. (7,404) (10,133) Proceeds from long-term notes receivable.......................... 2,320 2,024 Proceeds from sale of assets...................................... 2,086 21 Increase in intangible assets..................................... (993) (954) (Increase) decrease in notes receivable and other................. 731 (73) Increase in long-term investment.................................. -- (364) -------- --------- NET CASH USED IN INVESTING ACTIVITIES..................... (3,260) (9,479) -------- --------- Cash flows from financing activities: Principal payments on and redemption of long-term obligations..... (25,070) (166,255) Proceeds from issuance of common stock............................ 3,981 18,842 Proceeds from unsecured credit facility........................... -- 140,000 -------- --------- NET CASH USED IN FINANCING ACTIVITIES..................... (21,089) (7,413) -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ (6,714) 2,004 Cash and cash equivalents at beginning of period.................... 35,566 19,421 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 28,852 $ 21,425 ======== =========
The accompanying notes are an integral part of these statements. 5 7 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements of Home Shopping Network, 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, 1993, the four months ended December 31, 1992 and the year ended August 31, 1992. 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 and nonrecurring items discussed in Notes 5, 7 and 10. 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 ("SEC") and do not contain certain information included in the Company's annual Consolidated Financial Statements and Notes thereto. NOTE 2 -- CABLE DISTRIBUTION FEES During the three months ended June 30, 1994, the Company committed to long-term cable contracts which provide for payments of distribution fees to cable system operators totaling $33.2 million, representing coverage to 9.2 million cable subscribers. These fees are amortized, over the term of the respective contracts, on a straight-line basis over periods ranging from 5 to 15 years. NOTE 3 -- RELATED PARTY TRANSACTIONS Included in "Accrued liabilities -- Cable distribution fees" is $19.1 million, payable by April 1995 to companies that are related to the Company through their ownership interest, voting control, board members or common ownership. The commitment at June 30, 1994, under these agreements, of $19.3 million, will be amortized over periods ranging from 10 to 15 years, and represents coverage to 5.2 million cable subscribers. NOTE 4 -- COMMITMENTS AND CONTINGENCIES On December 27, 1990, a customer of Home Shopping Club, Inc. ("HSC") filed an amended class action complaint against the Company styled Mauger v. Home Shopping Network, Inc., in the Court of Common Pleas, Philadelphia County, Pennsylvania. Plaintiff alleged violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law in relation to the Company's pricing practices with respect to diamond and imitation diamond jewelry. Plaintiff seeks certification of the class, compensatory damages or $100 per class member, treble damages, attorney's fees, costs, interest and other relief. Plaintiff claims that the diamond ring she purchased from HSC was not of the same value stated in the appraisal provided to the customer. On June 22, 1991, another customer of HSC filed a class action complaint against the Company, styled Powell v. Home Shopping Network, Inc., making similar allegations concerning jewelry purchased from HSC and seeking similar relief. On April 19, 1993, the Mauger and Powell cases were consolidated in the Court of Common Pleas of Bucks County, Pennsylvania (Case No. 91-6152-20-1). On May 4, 1993, the Court entered an order granting the plaintiffs' motion for class certification and declared the plaintiffs to be class representatives and the class to be "all Pennsylvania residents who purchased any jewelry containing diamonds or imitation diamonds from Home Shopping Network, Inc.'s subsidiary, Home Shopping Club, Inc., between December 27, 1984 and May 20, 1991." On July 23, 1993, the court denied the Company's motion for interlocutory appeal of the May 4, 1993 order. The Company believes that it has meritorious defenses and intends to continue vigorously defending this action. In 1993, the Company became aware that the SEC entered a formal order of investigation involving matters relating to, among other things, certain of the Company's SEC filings and other public disclosures. The Company has furnished documents in connection with this investigation and is cooperating in the 6 8 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) investigation while maintaining its legal privileges, including the attorney/client privilege. This is a nonpublic investigation and the scope of the investigation is confidential. The Company has been advised that this inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, nor should it be considered a reflection upon any person, entity or security. The Company is a defendant in a number of other class action lawsuits. The Company has agreed to settlements in these lawsuits, but they are subject to certain contingencies, including court approval. The Company accrued $13.0 million at December 31, 1993, to cover anticipated costs and expenses primarily related to such settlements. Effective May 2, 1994, the Company, Liberty Media Corporation ("Liberty"), and Messrs. Roy M. Speer, Gerald F. Hogan and John M. Draper (the "Settling Defendants") entered into a settlement agreement with Mr. Allen P. Allweiss pursuant to which, on May 5, 1994, Mr. Allweiss dismissed all claims against the Settling Defendants, and the Company dismissed its counterclaim against Mr. Allweiss. The terms of the settlement are confidential and were reflected in the Company's financial statements for the quarter ended March 31, 1994. The Company has been informed that the federal grand jury investigation in the Middle District of Florida, relating to the Company, has ended. The Company had previously been advised by the federal government that the Company was not a target of the grand jury investigation. The Company is also involved in various other lawsuits either as plaintiff or defendant. In the opinion of management, the ultimate outcome of these other lawsuits should not have a material adverse impact on the Company's financial condition. NOTE 5 -- OTHER INCOME (EXPENSE) Miscellaneous expense for the three and six month periods ended June 30, 1994, includes a $2.9 million loss on the proposed sale of the common stock of the Company's wholly-owned subsidiary, HSN Mistix, Inc. Miscellaneous expense for the six month period ended June 30, 1993, includes nonrecurring costs of $2.6 million for inventory contributed to charity as a result of the change in management's merchandising philosophy regarding the types of merchandise sold on HSC and additional costs totaling $1.2 million, relating to the curtailment of a joint venture operation. NOTE 6 -- INCOME TAXES The Internal Revenue Service ("IRS") has completed its examination of the Company's federal income tax returns for fiscal years 1986 through 1989. The IRS has proposed various adjustments, the most significant of which include the Company's amortization of acquired Federal Communications Commission broadcast licenses and other broadcasting related intangible assets and the deduction of royalty payments to a related party. The Company has protested all proposed adjustments to the Appellate Division of the IRS. On April 19, 1994, the Company received a formal settlement offer from the IRS relating to all issues under protest, excluding the royalty payments to a related party. The Company accepted this offer on June 8, 1994, and the net assessment (after considering the tax deductibility of interest) is expected to be approximately $15.0 million, covering all periods through June 30, 1994. The Company has previously accrued sufficient amounts relating to these issues. The Company's federal income tax returns for fiscal years 1990 and 1991 are currently under examination by the IRS. No additional proposed adjustments relating to such years have been brought to management's attention. 7 9 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS There was no early extinguishment of long-term obligations during the three or six month periods ended June 30, 1994. For the three and six month periods ended June 30, 1993, the Company recognized extraordinary losses on the early extinguishment of long-term obligations of $.4 million and $7.2 million, net of taxes of $.3 million and $4.4 million, respectively. NOTE 8 -- EARNINGS (LOSS) PER COMMON SHARE The computation of primary earnings (loss) per common share is based on the weighted average number of outstanding shares of common stock for all periods presented. Primary earnings per common share for the three and six month periods ended June 30, 1994 and the three month period ended June 30, 1993, also includes common stock equivalents based on the weighted average balance outstanding. Fully diluted earnings (loss) per common share did not differ significantly from primary earnings (loss) per common share in any period. NOTE 9 -- 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 commercial paper, auction preferred shares, money market funds, repurchase agreements, and certificates of deposit with maturities of less than 91 days. Supplemental disclosures of cash flow information:
-------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, ------------------- 1994 1993 -------------------------------------------------------------------------------------- (In thousands) Cash paid for: Interest......................................................... $4,640 $9,051 Income taxes..................................................... 39 2,803
NOTE 10 -- SUBSEQUENT EVENTS On August 1, 1994, Silver King Communications, Inc. repaid the outstanding principal and accrued interest of $129.7 million on its obligation to the Company. On the same date, the Company repaid the remaining $85.0 million outstanding balance on its Senior Term Loans. As a consequence, at June 30, 1994, the Company classified the remaining balance of the "Note receivable from related party" as a current asset, and the remaining balance owed on the Senior Term Loans as a current liability. In connection with the term loan repayment, the Company will recognize an extraordinary loss on the early extinguishment of long-term obligations, of $.9 million, net of taxes, in the third quarter of 1994. In August 1994, the Company received a commitment for a revolving credit facility which will amend and increase the Company's current facility from $40.0 million to $100.0 million. Borrowings under the credit facility may be used for general corporate purposes. The interest rate on borrowings under the credit line is tied to the LIBOR plus a margin based on the total debt to operating cash flow ratio. Restrictions contained in the credit agreement include maintenance of various financial covenants and ratios. On August 4, 1994, Liberty and Tele-Communications, Inc. ("Old TCI") consummated a business combination transaction resulting in Old TCI and Liberty becoming wholly-owned subsidiaries of a newly formed holding company, which has been renamed Tele-Communications, Inc. ("New TCI"). Consequently, New TCI beneficially owns 79.3% of the voting power of the Company. 8 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES GENERAL Home Shopping Network, Inc. (the "Company") is a holding company, the subsidiaries of which conduct the day-to-day operations of the Company's various business activities. The Company's primary business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the Company. A. CONSOLIDATED RESULTS OF OPERATIONS The following discussion presents the material changes in the consolidated results of operations of the Company which have occurred in the second quarter and first six months of 1994, compared with the same periods in 1993. Reference should also be made to the Condensed Consolidated Financial Statements included herein. All tables and discussion included herein calculate the percentage changes using actual dollar amounts, versus rounded dollar amounts. NET SALES HSC's retail sales programs are transmitted twenty-four hours a day, seven days a week, via satellite to cable television systems, affiliated broadcast television stations and satellite dish receivers. HSC produces three separate retail sales programs, HSN 1, HSN 2, and HSN Spree. HSN 1 is carried by cable television systems throughout the country and is the original HSC programming network. HSN 2 is carried by independent broadcast television stations. HSN 2 is also carried by cable television systems which primarily retransmit the broadcast television signal of one of the broadcast television stations carrying HSN 2. HSN Spree is carried primarily on a part-time basis by both cable television systems and broadcast television stations. For the quarter and six month periods ended June 30, 1994, net sales for the Company increased $23.7 million, or 9.5%, to $274.0 million from $250.3 million and $58.5 million, or 12.0%, to $548.2 million from $489.7 million, respectively, compared to the same periods in 1993. Net sales of HSC increased $21.8 million, or 9.5%, and $55.2 million, or 12.3%, for the quarter and six months ended June 30, 1994. HSC's sales reflect increases of 28.9% and 20.1% in the number of packages shipped for the quarter and six months ended June 30, 1994, respectively, while the average price per unit sold decreased in both 1994 periods compared to the same periods in 1993. In addition, sales through the Company's retail outlets for the quarter and six months ended June 30, 1994, increased $1.8 million and $4.2 million, respectively, compared to the same periods last year. The increases for the six months ended June 30, 1994 were somewhat offset by a decline in sales attributable to the Company's mail order subsidiary, HSN Mail Order, Inc., of $.8 million. The sales increases in the quarter and six month periods ended June 30, 1994, compared to the same periods last year are the continuation of a trend that began in the latter part of the third quarter of 1993. However, it should be noted that sales for the quarter and six months ended June 30, 1993, were down $7.2 million, or 2.8%, and $43.3 million, or 8.1%, respectively, from the comparable 1992 periods. Nonetheless, management believes that 1994 sales levels have been positively affected by several factors, most significantly the addition of new cable subscribers beginning in September 1993 as a result of the "must carry" provisions of the cable re-regulation law, as further discussed below. An additional factor is the improvements initiated during 1993 in the merchandising management and sales philosophy of HSC. Additional ongoing programs to increase sales include the "FlexPay" program, which allows customers to pay for purchases in several equal installments, changes in show host training and scheduling, enhanced use of promotional selling events, sales incentives, and the recent introduction of a private label credit card which offers customer incentives. Sales increases from ongoing programs were partially offset by increases in cash discounts, which have increased to 2.9% and 2.6% of HSC sales for the quarter and six months ended June 30, 1994, respectively, from 1.4% and 1.8% compared to the same periods in 1993. 9 11 For the quarter and six month periods ended June 30, 1994, the merchandise return percentage remained constant at 21.0% and decreased to 21.9% from 23.8%, respectively, compared to the same periods in 1993. The decrease in the merchandise return percentage during the first six months of 1994 is primarily attributable to an unusually high merchandise return percentage experienced in the first quarter of 1993. The Company believes that future levels of net sales of HSC will be dependent, in large part, on increases in program carriage, market penetration and further improvements in merchandising management. Program carriage is defined as the number of cable systems and broadcast television stations that carry HSC programming. Market penetration represents the level of active purchasers within a market. Cable television systems and affiliated broadcast television stations broadcast HSC programming under affiliation agreements with varying original terms. The Company seeks to increase the number of cable television systems and broadcast television stations that televise HSC programming while evaluating the expected profitability of each contract. During the twelve months ended June 30, 1994, cable television households capable of receiving HSC programming increased by 7.2 million, or 25.2%, to 35.6 million unduplicated cable households. This growth was achieved primarily through increased cable system carriage of signals transmitted by the Company's broadcast affiliates due to the implementation of the "must carry" provisions of the cable re-regulation law beginning in September 1993. As a result, the number of homes classified as cable television households increased and the number classified as broadcast households declined. Because HSC programming is now on a cable channel line-up, these former broadcast households can now more easily access the HSC programming. During the same period, broadcast television households, in areas unduplicated by HSC cable television households, decreased by 5.3 million, or 17.7%, to 24.4 million households. This decrease was primarily attributable to the shift in classification of 6.4 million households from broadcast to cable. This decrease was offset, in part, by an increase of .8 million broadcast television households due to changes in the composition of HSC's affiliated broadcast television station group, and an increase of .3 million households in the updated Nielsen household counts in the areas in which HSC broadcasts. In addition, as of June 30, 1994, HSC's programming was available to 3.8 million households with satellite dish receivers. Broadcast affiliation agreements generally call for fixed hourly payments to stations for broadcasting HSC's programming and, with proper notice, with the exception of affiliated broadcast television stations owned and operated by Silver King Communications, Inc. ("SKC"), are generally cancelable or provide for adjustments in the hourly rate paid, at HSC's or the affiliated station's option. The affiliation agreements with SKC expire in December 1997 but are automatically renewable at SKC's option for a five-year term, unless written notice is given at least 18 months prior to the expiration date. As discussed in Note 10 to the Condensed Consolidated Financial Statements, included herein, and in "Financial Position, Liquidity and Capital Resources" SKC repaid the outstanding principal and accrued interest owed to the Company with proceeds from a bank financing. The terms of SKC's bank financing contain restrictive covenants with regard to amendment or modification of material contracts. SKC's loan agreement further provides that cancellation, suspension or termination of any affiliation agreement is an event of default. HSN is not a party to such loan agreements and, therefore, would not be entitled to enforce such restrictive provisions. During the remainder of 1994, 1.3 million cable subscribers, or 3.8% of the total number of unduplicated cable households receiving HSC programming, exclusive of "must carry" subscribers, are subject to termination or renewal. The Company is pursuing both renewals and additional cable television system contracts, but channel availability, competition, cost of carriage and cable re-regulation 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 is optimistic that a majority of the contracts will be renewed. During the six months ended June 30, 1994, the Company continued several incentive programs designed to increase the total number of cable subscribers able to receive HSC programming and to increase penetration in both cable and broadcast television markets. Overall, as a result of these incentive programs the Company has successfully, on a long-term basis, renewed expiring contracts, contracted a majority of the "must carry" households and secured contracts for new cable carriage exclusive of "must carry." During this period, however, market penetration levels weakened somewhat. Management believes that one reason for the 10 12 weakened market penetration is that it typically lags behind increases in program carriage. As most of the increase in program carriage levels occurred in the latter part of 1993 and early 1994, management expects some improvement in market penetration during the remainder of 1994. Management believes that providing incentive compensation to cable operators is a factor in securing program carriage. HSC has, in certain markets, guaranteed a minimum level of commissions to cable operators which agree to carry HSC programming or offered additional performance bonus commissions based upon the sales levels of HSC programming in the cable operator's franchise area. In addition, beginning in April 1994, the Company signed agreements with certain cable system operators wherein the Company agreed to make payments of cable distribution fees in exchange for the cable system operators' commitments to carry HSC's programming for a period of up to fifteen years. Such payments are being amortized, on a straight-line basis, over the lives of the contracts. See "Depreciation and Amortization" and "Financial Position, Liquidity and Capital Resources." Another form of incentive compensation is the purchase of cable advertising time, which has resulted in an increase in marketing payments for the six months ended June 30, 1994 compared to the same period in 1993. These are further discussed in "Selling and Marketing." Programs to increase market penetration included buyer incentives which provide Club Members with discounts on merchandise purchased from HSC. For example, the Company targets existing Club Members through the "Bargaineer" magazine which, among other features, offers discounts on HSC purchases and provides a schedule of HSC's retail sales television programs. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). The signal carriage or "must-carry" provisions of the 1992 Cable Act require cable operators to carry the signals of local commercial and noncommercial television stations. The Federal Communications Commission (the "FCC") adopted rules to implement these "must-carry" provisions and, on July 2, 1993, the FCC extended "must-carry" eligibility to television stations that are predominantly utilized for the transmission of sales presentations or program length commercials, which would include shop-at-home programs such as those distributed by HSC. Litigation has been initiated challenging, among other matters, the constitutionality of the mandatory broadcast signal carriage requirements of the new law. On April 8, 1993, a special three-judge panel of the federal district court for the District of Columbia issued a decision upholding the constitutional validity of the mandatory signal carriage requirements of the 1992 Cable Act. In a multi-opinion decision released on June 27, 1994, the Supreme Court declined to rule on the constitutionality of the "must-carry" rules. Instead, the Court remanded the case to the District Court to permit development of a full, factual record concerning the need for these rules. The Court is expected to resolve the rules' constitutionality after this record is complete. The Company is considering a variety of strategies to further increase carriage of HSC programming and continues to evaluate the impact of the "must carry" provisions on its broadcast relationships. The cable re-regulation law and its interpretation, which is still forthcoming, will have a broad impact upon the Company and its ability to contract new program carriage. The Company is aggressively pursuing new contracts for program carriage in the event "must carry" is ruled unconstitutional and, as of June 30, 1994, the Company had executed contracts with cable operators covering 6.5 million "must carry" households. As of the same date, there were 2.2 million "must carry" households not under contract, but management believes the Company will be able to secure contracts for the continued carriage of a majority of these remaining households, in the event "must carry" is reversed. Recently, the Company announced the formation of two ventures, one an infomercial company which will produce and air infomercials worldwide, and the other which will test a new television shopping program in conjunction with another cable television programmer. The Company is also engaged in discussions with various entities to explore other new business opportunities. The pursuit of these potential business opportunities may include the creation of new business entities, development and distribution of broadcast and cable television programming, changes in the Company's broadcast relationships and/or expansion in the carriage of the Company's programming by operators of cable television systems. There can be no assurance that the Company will be able to reach agreements with the necessary parties to pursue these business opportunities. As in the past, the Company intends to continue to explore ways to develop and enhance its 11 13 business. Accordingly, it will continue to discuss various business opportunities with media, cable programming, broadcast television, cable television, retail and entertainment entities. COST OF SALES For the quarter and six month periods ended June 30, 1994, cost of sales increased $16.1 million, or 9.9%, to $178.8 million from $162.7 million and $13.8 million, or 4.1%, to $354.4 million from $340.6 million, respectively, compared to the same periods in 1993. As a percentage of net sales, cost of sales increased to 65.3% from 65.0% and decreased to 64.6% from 69.6% for the quarter and six months ended June 30, 1994, respectively, compared to the same periods in 1993. Cost of sales of HSC increased $16.0 million and $14.8 million, for the quarter and six months ended June 30, 1994, respectively. As a percentage of HSC sales, cost of sales remained relatively constant for the quarter ended June 30, 1994 and decreased to 66.3% from 71.2% for the six months ended June 30, 1994, compared to the same periods in 1993. For the quarter ended June 30, 1994, the increase in the consolidated cost of sales percentage was primarily attributable to the liquidation of merchandise and increased sales through the Company's retail outlets, which were partially offset by an inventory reserve reduction of $4.9 million. The decreases in consolidated and HSC's cost of sales percentages for the six months ended June 30, 1994 relate primarily to an additional provision of $20.1 million made to HSC's inventory reserve in the quarter ended March 31, 1993, in connection with the change in management's merchandising philosophy. The remaining change in cost of sales for the six months ended June 30, 1994, compared to the six months ended June 30, 1993, is attributable to other subsidiary operations. OPERATING EXPENSES For the quarter and six month periods ended June 30, 1994, operating expenses increased $6.0 million, or 7.0%, to $91.0 million from $85.0 million and $13.3 million, or 8.0%, to $179.7 million from $166.4 million, respectively, compared to the same periods in 1993. As a percentage of net sales, these expenses decreased to 33.2% from 34.0% and to 32.8% from 34.0% for the quarter and six month periods ended June 30, 1994, respectively, compared to the same periods in 1993. The following table highlights the operating expense section from the Company's Condensed Consolidated Statements of Operations, including the dollar and percentage changes for the quarter and six month periods ended June 30, 1994, compared to the same periods in 1993:
------------------------------------------------------------------------------------- CHANGES IN OPERATING EXPENSES --------------------------------------- THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1994 JUNE 30, 1994 ----------------- ----------------- $ % $ % CHANGE CHANGE CHANGE CHANGE ------------------------------------------------------------------------------------- (In millions, except %) Selling and marketing....................... $ 6.8 21.0 % $13.2 20.6 % Engineering and programming................. 1.9 8.2 3.6 8.0 General and administrative.................. (3.7 ) (15.7 ) (4.9 ) (10.9 ) Depreciation and amortization............... 1.0 17.8 1.4 12.4 ------ ------ $ 6.0 $13.3 ======= =======
SELLING AND MARKETING For the quarter and six month periods ended June 30, 1994, selling and marketing expenses increased $6.8 million, or 21.0%, to $39.1 million from $32.3 million, and $13.2 million, or 20.6%, to $77.2 million from $64.0 million, respectively, compared to the same periods in 1993. As a percentage of net sales, these expenses increased to 14.3% from 12.9% and to 14.1% from 13.1%, respectively, compared to the same periods in 1993. 12 14 The changes in the major components of selling and marketing expenses are detailed below in dollar and percentage terms for the quarter and six month periods ended June 30, 1994, compared to the same periods in 1993:
------------------------------------------------------------------------------------- CHANGES IN CERTAIN SELLING AND MARKETING EXPENSES --------------------------------------- THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1994 JUNE 30, 1994 ----------------- ----------------- $ % $ % CHANGE CHANGE CHANGE CHANGE ------------------------------------------------------------------------------------- (In millions, except %) Telephone, operator and customer service.... $2.9 26.9% $4.3 19.8% Commissions to cable system operators....... 3.5 45.6 6.5 42.7 Marketing payments for cable advertising.... -- -- .8 5.3
Telephone, operator and customer service expenses are typically related to sales, call volume and the number of packages shipped, and for the quarter and six month periods ended June 30, 1994, compared to the same periods last year, these expenses increased as a result of these factors. These expenses are expected to fluctuate in relation to sales, call volume and package volume in future periods. For the quarter and six month periods ended June 30, 1994, commissions to cable system operators increased primarily as a result of higher sales volume, compared to the same periods in 1993. However, commissions to cable system operators increased at a higher rate than sales as a result of increased cable system carriage of signals transmitted by the Company's broadcast affiliates due to the implementation of the "must carry" provisions of the cable re-regulation law, and due to additional performance bonus commissions based upon the sales levels of HSC programming in the cable operator's franchise area, as discussed in "Net Sales." Such sales performance compensation is expected to increase in future periods. In addition, cable operators which have executed affiliation agreements to carry HSN 2 are compensated for all sales of HSN 2 within their franchise areas, regardless of whether a customer's order results from watching the program via cable, satellite dish, or on a broadcast television station. Thus, with the advent of "must carry," HSC is paying commissions to cable operators in addition to the hourly affiliation payments made to broadcast television stations resulting in higher commission expense and higher total operating expenses. As a result of the above factors, cable carriage expense is expected to remain at higher levels in future periods. As discussed in "Net Sales," management believes that because HSC programming is now available on a cable channel line-up, these former broadcast households can more easily access the HSC programming. Although marketing payments for cable advertising increased for the six months ended June 30, 1994, these expenses remained constant for the quarter ended June 30, 1994, compared to the same periods in 1993, as cable advertising purchases primarily relate to previous contractual commitments. As new cable carriage agreements are executed, contractual commitments to purchase cable advertising are being replaced by other forms of incentive compensation to cable operators. These include payment of cable distribution fees, as discussed in "Depreciation and Amortization," and performance bonus commissions, as discussed above. Accordingly, marketing payments are expected to decrease and depreciation and amortization is expected to increase in future periods. The remaining net increase in selling and marketing expenses is attributable to other advertising and promotional expenses and the Company's other subsidiary operations. Management believes that total selling and marketing expenses in future periods will be at higher levels as the Company maintains its efforts to increase the number of cable systems carrying HSC programming, increase market penetration and develop new electronic retailing opportunities. ENGINEERING AND PROGRAMMING For the quarter and six month periods ended June 30, 1994, engineering and programming expenses increased $1.9 million, or 8.2%, to $24.8 million from $22.9 million and $3.6 million, or 8.0%, to $49.0 million 13 15 from $45.4 million, respectively, compared to the same periods in 1993. As a percentage of net sales, these expenses decreased to 9.1% from 9.2% and to 8.9% from 9.3%, respectively, compared to the same periods in 1993. Increases in expense related to additional broadcast affiliates totaled $1.0 million and $2.3 million, respectively, compared with the quarter and six months ended June 30, 1993. In addition, under affiliation agreements with SKC, based on sales within their markets for the quarter and six months ended June 30, 1994, the Company has accrued additional broadcast commission expense. The payment of this additional amount, however, is dependent on sales levels for the remainder of 1994. Broadcast costs are expected to be at these higher levels for the remainder of 1994. Moreover, as the Company develops new programming and telemarketing opportunities and attempts to expand its broadcast television reach for existing programming, overall engineering and programming expenses are expected to increase in future periods. GENERAL AND ADMINISTRATIVE For the quarter and six month periods ended June 30, 1994, general and administrative expenses decreased $3.7 million, or 15.7%, to $20.1 million from $23.9 million and $4.9 million, or 10.9%, to $40.4 million from $45.3 million, respectively, compared to the same periods in 1993. As a percentage of net sales, these expenses decreased to 7.3% from 9.5% and to 7.4% from 9.3%, respectively, compared to the same periods in 1993. For the quarter and six month periods ended June 30, 1994, consulting and stockholder relations expenses decreased $.2 million and $3.2 million, respectively, due to expenses incurred in the same periods in 1993, in connection with a merger proposal by Liberty Media Corporation ("Liberty") following the acquisition, in February 1993, of a controlling interest in the Company by a wholly-owned subsidiary of Liberty. Expenses in connection with the Company's executive stock award program, stock appreciation rights granted in 1993, reserves for potential sales tax issues, legal expense, repairs and maintenance and equipment rental decreased $4.4 million and $7.0 million for the quarter and six month periods ended June 30, 1994, respectively, compared to the same periods in 1993. The above decreases were partially offset by increases for the quarter and six month periods ended June 30, 1994 totaling $.7 million and $2.1 million, respectively, in payroll expense and settlement of litigation. Management expects general and administrative expenses to remain at these lower levels during the remainder of 1994 compared to the same period in 1993. DEPRECIATION AND AMORTIZATION For the quarter and six month periods ended June 30, 1994, depreciation and amortization increased $1.0 million, or 17.8%, to $6.9 million from $5.9 million and $1.4 million or 12.4% to $13.0 million from $11.6 million, respectively, compared to the same periods in 1993. The increases were primarily attributable to the amortization of cable distribution fees, which totaled $.7 million for both the quarter and six months ended June 30, 1994, and which are expected to total approximately $1.0 million per quarter for the remainder of 1994. The balance of the increases was attributable to capital asset additions during the twelve months ended June 30, 1994. Accordingly, depreciation and amortization will be higher for the remainder of 1994 compared to the same period in 1993. OTHER INCOME (EXPENSE) For the quarter and six month periods ended June 30, 1994, the Company had net other expense of $(1.0) million and net other income of $.6 million, respectively, compared to net other income of $.9 million and net other expense of $(2.9) million for the same periods in 1993. Interest income did not change significantly for the quarter and six months ended June 30, 1994 compared to the same periods in 1993. However, as discussed in "Financial Position, Liquidity and Capital Resources," subsequent to June 30, 1994, SKC repaid its indebtedness to the Company. Accordingly, interest income is expected to decline significantly in future periods. 14 16 Interest expense decreased $.5 million and $2.4 million for the quarter and six months ended June 30, 1994, primarily relating to the redemption and refinancing of the Company's 11 3/4% Senior Notes (the "Senior Notes") in 1993. As discussed in "Financial Position, Liquidity and Capital Resources," on June 15, 1994, the Company made a scheduled repayment of $25.0 million on a term loan and subsequent to June 30, 1994, the Company repaid its remaining $85.0 million term loan balance. Accordingly, interest expense will decline significantly in future periods unless the Company utilizes existing financing arrangements or obtains new financing. For the quarter and six months ended June 30, 1994, net miscellaneous expense includes a $(2.9) million loss on the proposed sale of the common stock of the Company's wholly-owned subsidiary, HSN Mistix, Inc. ("Mistix"). The sale of Mistix should not have a significant impact on the Company's statement of operations in future periods. Net miscellaneous expense for the six months ended June 30, 1993 includes nonrecurring costs totaling $3.8 million. See Note 5 to the Condensed Consolidated Financial Statements included herein. INCOME TAXES The Company's effective tax rate was 42.0% for the quarters ended June 30, 1994 and 1993 and for the six months ended June 30, 1994, and a benefit of (25.7%) for the six months ended June 30, 1993. The Company's effective tax rate for these periods differed from the statutory rate due primarily to the amortization of goodwill and other acquired intangible assets relating to acquisitions from prior years, state income taxes and the provision for interest on adjustments proposed by the Internal Revenue Service, as discussed in Note 6 to the Condensed Consolidated Financial Statements included herein. The Company's effective tax rate is expected to vary from the statutory rate for the remainder of 1994. EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS The Company refinanced and retired the remaining $143.3 million of its Senior Notes in the six months ended June 30, 1993. In addition, the Company retired the remaining $16.9 million of its 5 1/2% Convertible Subordinated Debentures in the quarter ended June 30, 1993. These transactions resulted in an extraordinary item -- loss on early extinguishment of long-term obligations, net of taxes for the quarter and six months ended June 30, 1993, as discussed in Note 7 to the Condensed Consolidated Financial Statements included herein. NET EARNINGS (LOSS) The Company had net earnings of $1.9 million, or $.02 per share, for the quarter ended June 30, 1994, compared to a net earnings of $1.6 million, or $.02 per share, for the same quarter in 1993. For the six month period ended June 30, 1994, the Company had net earnings of $8.6 million, or $.09 per share, compared to a net loss of $(22.2) million, or $(.25) per share, in the same period in 1993. The increases in net earnings for the quarter and six months ended June 30, 1994, were primarily attributable to increases in net sales of $23.7 million and $58.5 million, respectively, and increases in gross profit of $7.7 million and $44.7 million, respectively, compared to the same periods in 1993. As discussed in "Cost of Sales," the results for the six months ended June 30, 1993, include an increase in the inventory reserve, which affected "Cost of Sales" and "Other Income (Expense)." As previously discussed, the Company has recorded the loss on the proposed sale of the common stock of Mistix. Included in the results for the quarter and six months ended June 30, 1994, are pre-tax losses for Mistix of $(.4) million and $(1.4) million, respectively. In addition, for the quarter and six months ended June 30, 1993, the consolidated results include extraordinary losses, net of taxes, of $(.4) million, with no per share effect, and $(7.2) million, or $(.08) per share. SEASONALITY The Company believes that seasonality does impact its business but not to the same extent it impacts the retail industry in general. 15 17 B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The following table highlights various balances and ratios from the Condensed Consolidated Financial Statements included herein:
---------------------------------------------------------------------------------------- JUNE 30, JUNE 30, DECEMBER 31, 1994 1993 1993 ---------------------------------------------------------------------------------------- Working capital (millions).......................... $ 42.5 $ 2.8 $ 8.1 Current ratio....................................... 1.15:1 1.02:1 1.04:1 Accounts receivable, net (millions)................. $ 29.3 $ 15.3 $ 27.8 Inventories, net (millions)......................... $102.4 $105.3 $110.9 Inventory turnover for quarter (annualized for June periods only)................ 6.95 6.48 6.12 Inventory turnover for six months (annualized for June periods only)................ 6.64 6.07 6.12
The increase in working capital from June 30, 1993, to June 30, 1994, primarily relates to net earnings, adjusted for non-cash items, of $53.9 million, proceeds from the issuance of Common Stock upon the exercise of employee and cable operator stock options of $17.0 million and a $128.8 million net decrease in long-term notes receivable and other assets, which were offset by a net reduction of $115.9 million in long-term obligations, and capital expenditures and increases in cable distribution fees and intangible assets of $48.0 million. The increase in working capital from December 31, 1993, to June 30, 1994, primarily relates to net earnings adjusted for non-cash items of $27.5 million, proceeds from the issuance of Common Stock upon the exercise of employee and cable operator stock options of $4.0 million and a $127.4 million net decrease in long-term notes receivable and other assets, which were offset by a net reduction of $85.7 million in long-term obligations, and capital expenditures and increases in cable distribution fees and intangible assets of $41.6 million. Accounts receivable increased to $29.3 million at June 30, 1994, from $15.3 million at June 30, 1993, and from $27.8 million at December 31, 1993. The primary reason for the increase is "FlexPay" sales which resulted in accounts receivable totaling $17.9 million at June 30, 1994, compared to $4.8 million and $15.3 million at June 30, 1993, and December 31, 1993, respectively. The Company's financing of "FlexPay" accounts receivable has not had a significant impact on its liquidity position. Receivables from customer sales using the Company's private label credit card are sold to a third party under a non-recourse financing arrangement. The financial impact of this financing arrangement is similar to customer purchases on other third party cards. On August 1, 1994, SKC repaid the outstanding principal and accrued interest of $129.7 million on its obligation to the Company, which bore interest at 9.5%. On the same date, the Company repaid the remaining $85.0 million outstanding balance on its Senior Term Loans. As a result of the above repayments, the Company's interest income and interest expense are expected to decline in future periods and its cash position has been significantly improved. Under terms of affiliation agreements with SKC, the broadcast stations are still obligated to carry the Company's programming until December 1997. See "Net Sales." Inventories decreased to $102.4 million at June 30, 1994, from $105.3 million at June 30, 1993, and from $110.9 million at December 31, 1993. The inventory balance is net of a reserve of $21.8 million at June 30, 1994, which represents a decrease from $27.8 million at June 30, 1993, and from $25.2 million at December 31, 1993. The reserve decrease from June 30, 1993 and December 31, 1993 to June 30, 1994, relates primarily to the liquidation of merchandise, as discussed in "Cost of Sales." The decreases in the gross inventory balance at June 30, 1994, from June 30, 1993, and December 31, 1993, were $8.9 million and $11.9 million, respectively. Inventory levels are expected to remain relatively constant with last year's levels. Capital expenditures for the quarter ended June 30, 1994, were $3.6 million. These expenditures were primarily for additional telecommunications equipment, technological upgrades and development of 16 18 telemarketing opportunities. The Company estimates capital expenditures will range between $6.4 and $8.4 million for the remainder of 1994. The Company's working capital needs and capital expenditure requirements for the quarter ended June 30, 1994, were met from funds provided by operations. Surplus funds were invested in short-term investments. As of July 31, 1994, the Company had $35.0 million of bank credit lines which back letters of credit and are used exclusively to facilitate inventory importation. Presentation of letters of credit by vendors results in an immediate charge to the Company's account with no interest charges incurred. Outstanding letters of credit amounted to $26.3 million at July 31, 1994, leaving $8.7 million available. The Company believes that its recurring working capital needs and capital expenditure requirements will continue to be met primarily through internally generated funds. On June 15, 1994, the Company repaid a $25.0 million term loan using available cash. During the remainder of 1994 and early 1995, management expects to pay the Company's portion of litigation settlements, the IRS settlement, as discussed in Note 6 to the Condensed Consolidated Financial Statements included herein, and cable distribution fees relating to current and potential future contracts with cable system operators to carry HSC programming. The Company intends to use available cash, internally generated funds, or its amended bank facility to meet these obligations. As discussed above, the repayment by SKC of its indebtedness to the Company and the repayment by the Company of the balance of its Senior Term Loans generated $44.0 million in additional available cash subsequent to June 30, 1994. In August 1994, the Company received a commitment for a $100.0 million revolving credit facility which will amend the Company's existing bank facility. Once finalized, the new bank facility would expire three years from the effective date. For the quarter ended June 30, 1994, the Company did not pay any cash dividends and does not anticipate paying cash dividends in the immediate future. As previously discussed, the Company recorded the proposed sale of the common stock of Mistix. As of June 30, 1994, Mistix assets accounted for less than 2% of consolidated total assets. The proposed sale will not have a significant impact on the financial position of the Company. At July 31, 1994, .7 million options to purchase the Company's common stock were outstanding and exercisable at prices ranging between $3.25 and $14.75. The exercise of such stock options would result in a cash inflow of $3.2 million to the Company. 17 19 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. HOME SHOPPING NETWORK, INC. ------------------------------------------- (Registrant) Dated August 11, 1994 /s/ GERALD F. HOGAN ----------------- ------------------------------------------- Gerald F. Hogan President and Chief Executive Officer Dated August 11, 1994 /s/ KEVIN J. McKEON ----------------- ------------------------------------------- Kevin J. McKeon Senior Vice President, Accounting & Finance and Treasurer (Principal Financial and Accounting Officer)
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