-----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, ogSjEQihUabEUIXQ77GjfZ/ZTDv0wOoLOUqZEks01oFx6fTmtlNdUef/00pO2xwn f2Ts7gpHGF/BBLtw0+e/WA== 0000950144-95-000971.txt : 19950414 0000950144-95-000971.hdr.sgml : 19950414 ACCESSION NUMBER: 0000950144-95-000971 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950407 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME SHOPPING NETWORK INC CENTRAL INDEX KEY: 0000791024 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 592649518 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09118 FILM NUMBER: 95527531 BUSINESS ADDRESS: STREET 1: 2501 118TH AVE NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135728585 10-K/A 1 HSN, FORM 10-K/A; AMENDMENT NO. 1, 12/31/94 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 1 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE YEAR ENDED DECEMBER 31, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 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 (Address of registrant's principal executive offices) 33716 (ZIP CODE) (813) 572-8585 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF NAME OF EXCHANGE EACH CLASS ON WHICH REGISTERED ---------------------------------------------------------------- ------------------- Common Stock $.01 Par Value..................................... NYSE
--------------------- Securities registered pursuant to Section 12(g) of the Act: NONE 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 13, 1995, there were outstanding 70,594,329 shares of Common Stock (net of 6,986,000 shares held in treasury) and 20,000,000 shares of Class B common stock. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 13, 1995 was $477,248,643. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes / / No / / DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENTS FORM 10-K REFERENCE --------------------------------------------------------------------- --------------------- 1994 Annual Report................................................... Part II Items 5-8 Proxy Statement dated March 30, 1995................................. Part III Items 10-13
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 This Amendment is being filed principally in order to reformat Exhibits 10.31 and 13. 3 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Report (1) Financial Statements Independent Auditors' Report -- KPMG Peat Marwick LLP Independent Auditors' Report -- Deloitte & Touche LLP Consolidated Balance Sheets as of December 31, 1994 and 1993. Consolidated Statements of Operations for the years ended December 31, 1994 and 1993, the four months ended December 31, 1992, and the fiscal year ended August 31, 1992. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994 and 1993, the four months ended December 31, 1992, and the fiscal year ended August 31, 1992. Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1993, the four months ended December 31, 1992, and the fiscal year ended August 31, 1992. Notes to Consolidated Financial Statements. (2) Financial Statement Schedule
SCHEDULE PAGE NUMBER NUMBER -------- ------ VIII -- Valuation and Qualifying Accounts............................... 23
The reports of the Company's independent auditors with respect to the above listed financial statement schedules appear on pages 21 and 22. All other financial statements and schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required. (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 3.1 -- Restated Certificate of Incorporation of the Company filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987, is hereby incorporated by reference. 3.2 -- Amendment to Restated Certificate of Incorporation of the Company filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987, is hereby incorporated by reference. 3.3 -- Amendment filed December 17, 1986, to the Restated Certificate of Incorporation of the Company filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987, is hereby incorporated by reference. 3.4 -- Amended Bylaws of the Company filed as Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is hereby incorporated by reference. *10.1 -- Employment Agreement dated March 5, 1986, by and between Roy M. Speer and the Company, filed as Exhibit 10.10 to the Company's Form S-1 Registration Statement #33-4356, dated May 13, 1986, is incorporated herein by reference. *10.2 -- Amended 1986 Stock Option Plan for Outside Directors dated August 1, 1986, filed as Exhibit 10.32 to the Company's Form S-1 Registration Statement #33-8560, dated October 15, 1986, is incorporated herein by reference.
1 4
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- *10.3 -- 1986 Stock Option Plan for Employees dated August 1, 1986, filed as Exhibit 10.33 to the Company's Form S-1 Registration Statement #33-8560, dated October 15, 1986, is incorporated herein by reference. 10.4 -- Form of 1987 Cable Operators Stock Option Plan, filed as Exhibit 10.48 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.5 -- Form of Affiliation Agreement by and between the Company and Cable Operators under the 1987 Cable Operators Stock Option Plan, filed as Exhibit 10.49 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.6 -- Form of Cable Operators Stock Option Agreement by and between the Company and Cable Operators under the 1987 Cable Operators Stock Option Plan, filed as Exhibit 10.50 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.7 -- Lease Agreement dated December 1, 1986, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.53 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.8 -- Option Agreement dated December 1, 1986, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.54 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.9 -- Lease Agreement dated January 30, 1987, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.55 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.10 -- Lease Agreement dated January 30, 1987, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.56 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.11 -- License Agreement dated as of July 16, 1986, between Home Shopping Network, Inc., and Canadian Home Shopping Network, Ltd., filed as Exhibit 10.61 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. *10.12 -- Form of 1990 Executive Stock Award Program dated October 17, 1990, as amended, filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended August 31, 1991, is hereby incorporated by reference. *10.13 -- Third and Fourth Amendments to 1986 Stock Option Plan for Outside Directors, filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended August 31, 1991, is hereby incorporated by reference. 10.14 -- Distribution Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.1 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference. 10.15 -- Tax Sharing Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.3 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference.
2 5
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- 10.16 -- Software License Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.4 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference. 10.17 -- Software Development Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.6 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference. 10.18 -- Stock Purchase Agreement by and between Home Shopping Network, Inc. and The National Registry Inc. dated April 28, 1992 filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended August 31, 1992, is incorporated herein by reference. 10.19 -- Form of Distribution Agreement between Home Shopping Network, Inc. and Silver King Communications, Inc. ("SKC") dated as of December 28, 1992 filed as Exhibit 10.1 to the SKC Registration Statement on Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by reference. 10.20 -- Form of Affiliation Agreements between Home Shopping Club, Inc. and SKC dated as of December 28, 1992 filed as Exhibit 10.2 to the SKC Registration Statement on Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by reference. 10.21 -- Form of Tax Sharing Agreement between Home Shopping Network, Inc. and SKC dated as of December 28, 1992 filed as Exhibit 10.4 to the SKC Registration Statement on Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by reference. 10.22 -- Amended and Restated System Maintenance and Support Agreement effective as of February 2, 1993 between Home Shopping Network, Inc. and Precision Systems, Inc. filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.23 -- MCI Special Customer Arrangement between MCI Telecommunications Corporation and Home Shopping Network, Inc. filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.24 -- Credit Card Program Agreement, dated as of February 16, 1994, by and among Home Shopping Network, Inc., participating subsidiaries and General Electric Capital Corporation filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.25 -- First, Second, Third and Fourth Amendments to the 1986 Stock Option Plan for Employees filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, are hereby incorporated herein by reference. *10.26 -- Employment Agreement between Home Shopping Network, Inc. and Gerald F. Hogan, dated as of February 23, 1993 filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is hereby incorporated herein by reference. *10.27 -- First Amendment, effective as of August 4, 1994, to Employment Agreement between Home Shopping Network, Inc. and Gerald F. Hogan. 10.28 -- Second Amended and Restated Credit Agreement $100,000,000 Three-Year Revolving Credit Facility, dated as of August 30, 1994 among Home Shopping Network, Inc., Home Shopping Club, Inc., the signatory banks, LTCB Trust Company as Agent, Bank of Montreal and The Bank of New York, each as a Co-Agent, and LTCB Trust Company as Administrative Agent, as amended.
3 6
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------- *10.29 -- Amended and Restated Home Shopping Network, Inc. Retirement Savings Plan and Trust Agreements, which incorporate by reference the Home Shopping Network, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *10.30 -- Home Shopping Network, Inc. Employee Stock Purchase Plan and Part-Time Employee Stock Purchase Plan +*10.31 -- Home Shopping Network, Inc. Employee Equity Participation Plan and Agreement and Declaration of Trust *10.32 -- Employment Agreement between Home Shopping Network, Inc. and David F. Dyer, dated as of August 16, 1994. *10.33 -- Employment Agreement between Home Shopping Network, Inc. and Barry S. Augenbraun, dated as of September 1, 1994. *10.34 -- Employment Agreement between Home Shopping Network, Inc. and Honore A. Le Brun III, dated as of November 2, 1993. *10.35 -- Letter Agreement between Home Shopping Network, Inc. and Michael W.D. McMullen, dated as of July 28, 1993. 10.36 -- Form of Amendment dated as of July 28, 1994 to Affiliation Agreements between Home Shopping Club, Inc. and SKC. 11 -- Computation of net earnings (loss) per share. +13 -- Annual Report to Stockholders. 21 -- List of Subsidiaries of the Company. 27 -- Financial Data Schedule.
- --------------- * Reflects management contracts and compensatory plans. + Reflects reformatted Exhibit. (b) Reports on Form 8-K Not applicable. 4 7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. HOME SHOPPING NETWORK, INC. By: /s/ KEVIN J. McKEON Kevin J. McKeon Senior Vice President Accounting and Fiance April 6, 1995 5 EX-10.31 2 EMPLOYEE EQUITY PARTICIPATION PLAN 1 EXHIBIT 10.31 HOME SHOPPING NETWORK, INC. EMPLOYEE EQUITY PARTICIPATION PLAN 2 HOME SHOPPING NETWORK, INC. EMPLOYEE EQUITY PARTICIPATION PLAN M Table Of Contents ARTICLE I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II Name and Purpose of the Plan and the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE III Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IV Eligibility and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE V Contributions to the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VI Participants' Account and Allocation of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VII Top Heavy Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE VIII Benefits Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE IX Payment of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE X Voting and Exercising Other Rights of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE XI Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE XII Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE XIII Trust Fund and Expenses of Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE XIV Amendment and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE XV Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
i 3 HOME SHOPPING NETWORK, INC. EMPLOYEE EQUITY PARTICIPATION PLAN This HOME SHOPPING NETWORK, INC. EMPLOYEE EQUITY PARTICIPATION PLAN hereby adopted this 28th day of December 2, 1994, by HOME SHOPPING NETWORK, INC., a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company desires to establish and maintain an employee stock ownership plan for the benefit of its employees and the employees of its Affiliates which adopt this Plan and who shall qualify as participants hereunder; and WHEREAS, the Company's securities are traded on an established securities market; and WHEREAS, the Company intends to contribute its securities to the Trust Fund solely for the benefit of its employees and those of its Affiliates who adopt this plan and who qualify hereunder. NOW, THEREFORE, the Company hereby establishes an employee stock ownership plan upon the following terms: ARTICLE I Definitions (a) "Account" means the Participant's Company Stock Account. (b) "Allocation Date" means December 31 of such Plan Year. (c) "Administrator" shall mean the Plan Administrator. (d) "Affiliate" or "Affiliates" shall mean, with respect to an Employer, any corporation other than such Employer that is a member of a controlled group of corporations, within the meaning of Section 414(b) of the Code, of which such Employer is a member; all other trades or businesses (whether or not incorporated) under common control, within the meaning of Section 414(c) of the Code, with such Employer; any service organization other than such Employer that is a member of an affiliated service group, within the meaning of Section 414(m) of the Code, of which such Employer is a member; and any other organization that is required to be aggregated with such Employer under Section 414(o) of the Code. For purposes of determining the limitations on Annual Additions, the special rules of Section 415(h) of the Code shall apply. (e) "Annual Additions" shall mean, with respect to a Limitation Year, the sum of: 1 4 (1) the amount of Employer contributions (including elective contributions) allocated to the Participant under any defined contribution plan maintained by an Employer or an Affiliate; (2) the amount of the Employee's contributions (other than rollover contributions, if any) to any contributory defined contribution plan maintained by an Employer or an Affiliate; (3) any Forfeitures allocated to the Participant under any defined contribution plan maintained by an Employer or an Affiliate; and (4) amounts allocated to an individual medical account, as defined in Section 415(l)(2) of the Code that is part of a pension or annuity plan maintained by an Employer or an Affiliate, and amounts derived from contributions that are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee (as defined in Section 419A(d)(3) of the Code) under a welfare benefit plan (as defined in Section 419(e) of the Code) maintained by an Employer or an Affiliate; provided, however, the percentage limitation set forth in paragraph (e)(1) of Article VI shall not apply to: (A) any contribution for medical benefits (within the meaning of Section 419A(f)(2) of the Code) after separation from service which is otherwise treated as an "Annual Addition," or (B) any amount otherwise treated as an "Annual Addition" under Section 415(l)(1) of the Code. (f) "Authorized Leave of Absence" shall mean an unpaid temporary cessation from active employment with the Employer pursuant to a nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. (g) "Beneficiary" or "Beneficiaries" shall mean the person or persons to whom the share of a deceased Participant is payable as provided in paragraph (d)(2) of Article VIII. (h) "Board of Directors" and "Board" shall mean the board of directors of the Company or, when required by the context, the board of directors of an Employer other than the Company. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute. Reference to a specific section of the Code shall include a reference to any successor provision. (j) "Company" shall mean Home Shopping Network, Inc., and its successors. (k) "Company Stock" means common stock issued by the Company (or by a corporation which is a member of the controlled group of corporations of which the Company is a member) which is readily tradeable on an established securities market. If there is no common stock which meets the foregoing requirement, the term "Company Stock" 2 5 means common stock issued by the Company (or by a corporation which is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of: (A) that class of common stock of the Company (or of any such corporation) having the greatest voting power, and (B) that class of stock of the Company (or any other such corporation) having the greatest dividend rights. Noncallable preferred stock shall be deemed to be "Company Stock" if such stock is convertible at any time into stock which constitutes "Company Stock" hereunder and if such conversion is at a conversion price which (as of the date of the acquisition by the Trust) is reasonable. For purposes, of the preceding sentence, pursuant to regulations, preferred stock shall be treated as noncallable if after the call there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence. (l) "Company Stock Account" means the account of a Participant which is credited with the shares of Company Stock purchased and paid for by the Trust Fund or contributed to the Trust Fund pursuant to paragraph (a) of Article V. (m) (1) "Compensation" shall mean the regular salaries and wages, commissions, bonuses and overtime pay paid by an Employer (as determined for federal income tax purposes and reported on IRS Form W-2) and elective contributions under a Section 401(k) plan or a plan described in Section 125 of the Code, but shall not include disability payments, stock options, stock awards, relocation expense payments, credits or benefits under this Plan, any amount contributed to any pension, employee welfare, life insurance or health insurance plan or arrangement, or any other fringe benefits, deferred compensation or welfare benefits. Compensation shall be determined based on the Plan Year. (2) To the extent required by law, no Compensation in excess of $150,000.00 (adjusted under such regulations as may be issued by the Secretary of the Treasury) shall be taken into account for any Employee. For purposes of determining whether Compensation exceeds $150,000.00, if any Employee is a Family Member of a Highly Compensated Employee who is (i) a 5% owner of an Employer, or (ii) one of the ten Highly Compensated Employees paid the greatest amount of Compensation during the Plan Year, then such Family Member shall not be considered as a separate Employee and any Compensation paid to such Family Member shall be treated as if it were paid to or on behalf of the related Highly Compensated Employee. (3) For purposes of making allocations of Company contributions pursuant to Article VI with respect to any Plan Year, no Compensation paid by an Employer with respect to an Employee prior to the Employee's first day of participation shall be taken into account. 3 6 (n) "Effective Date" shall mean December 31, 1994, except as may otherwise be noted herein. (o) "Eligible Person" is any Employee other than an Employee who has been granted stock options under the Company's employee stock option plan or who has been granted any stock appreciation rights by the Company. Any Employee who became a Participant and thereafter is granted stock options pursuant to the Company's stock option plan or is granted any stock appreciation rights shall continue to vest in any shares allocated to his Account under this Plan but shall not share in future allocations of Company stock as provided in Article VI(b) and (e). (p) "Eligible Participant" means a Participant who has worked at least one thousand (1,000) Hours of Service with the Employer or an Affiliate during a Plan Year and is in the employ of an Employer on the Allocation Date. (q) "Entry Date" shall mean either June 30 or December 31. (r) "Employee" shall mean any person employed by an Employer or an Affiliate other than: (1) a member of a collective bargaining unit if retirement benefits were a subject of good faith bargaining between such unit and an Employer, and (2) a non-resident alien who does not receive earned income from sources within the United States. The term "Employee" shall also include any individual required to be treated as an Employee by reason of Section 414(n) or Section 414(o) of the Code (but only for the purposes specified in such Sections). (s) "Employer" shall mean the Company and any Affiliate that adopts this Plan with the consent of the Company. (t) "Employment Commencement Date" means the date on which an Employee performs his first Hour of Service for an Employer. (u) "Family Member" of a Highly Compensated Employee shall mean such Employee's spouse, lineal descendant or ascendant, or the spouse of his lineal descendant or ascendant; provided, however, that for purposes of determining the limit on a Highly Compensated Employee's Compensation under Section 401(a)(17) of the Code, the term "Family Member" shall include only the Employee's spouse and his lineal descendants who have not attained age 19 before the close of the Plan Year. (v) "Forfeiture" or "Forfeitures" means that portion of a Participant's Company Stock Account that is not vested, and which is reallocated (under paragraph (e) of Article VI) on the dates specified in paragraph (c)(3) and (4) of Article VIII. Restoration 4 7 of forfeited amounts shall occur pursuant to paragraph (c)(4)(C) of Article VIII. (w) (1) "Highly Compensated Employee" shall mean any Employee during the Plan Year or the immediately preceding Plan Year (or calendar year, if elected by the Employer in accordance with Treasury regulations) (A) who was a 5% owner of an Employer; (B) whose Section 415 Compensation was more than $75,000.00 (adjusted under such regulations as may be issued by the Secretary of the Treasury); (C) whose Section 415 Compensation was more than $50,000.00 (adjusted under such regulations as may be issued by the Secretary of the Treasury), and who was a member of the "top paid group"; provided, that as used herein, "top paid group" shall mean all Employees who are in the top 20% of the Employer's work force on the basis of Section 415 Compensation paid during the year; provided, further, that for purposes of determining the number of Employees in the top paid group, Employees described in Section 414(q)(8) of the Code shall be excluded; or (D) who was an officer of an Employer and received compensation in excess of 50% of the amount in effect under Section 415(b)(1)(A) of the Code for any such Plan Year. (i) The number of officers shall be limited to the lesser of (a) 50 Employees; or (b) the greater of three (3) Employees or 10% of all Employees. For purposes of determining the number of officers, Employees described in Section 414(q)(8) of the Code shall be excluded, but such Employees shall still be considered for the purpose of identifying particular Employees who are officers. (ii) If an Employer does not have at least one officer whose Section 415 Compensation is in excess of 50% of the amount in effect in Section 415(b)(1)(A) of the Code, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. (2) In determining who is a Highly Compensated Employee, Employees who are nonresident aliens and who receive no earned income (within the meaning of Section 911(d)(2) of the Code) from an Employer constituting United States source income (within the meaning of Section 861(a)(3) of the Code) shall not be treated as Employees. 5 8 (3) For purposes of determining who is a Highly Compensated Employee, an Employer and any Affiliate shall be taken into account as a single Employer. (4) For purposes of this paragraph, the determination of Section 415 Compensation shall be based only on Section 415 Compensation that is actually paid and shall be made by including elective or salary reduction contributions to a plan described in Section 125 of the Code, a plan described in Section 401(k) of the Code, a simplified employee pension described in Section 408(k) of the Code or a plan described in Section 403(b) of the Code. (5) The term "Highly Compensated Employee" shall also mean any former Employee who separated from service (or was deemed to have separated from service) prior to the Plan Year, performs no service for an Employer during the Plan Year, and was an actively employed Highly Compensated Employee in the separation year or any Plan Year ending on or after the date the Employee attained age 55. (6) For purposes of determining whether a Participant is a Highly Compensated Employee, if any Employee is a Family Member of a Highly Compensated Employee who is (A) a 5% owner of an Employer, or (B) one of the ten Highly Compensated Employees paid the greatest amount of Compensation during the Plan Year, then such Family Member shall not be considered as a separate Employee and any Compensation paid to such Family Member (and any applicable benefit or contribution on behalf of such Family Member) shall be treated as if it were paid to or on behalf of the related Highly Compensated Employee. (x) "Key Employee" shall mean any Employee or former Employee who is at any time during the Plan Year (or was at any time during the four preceding Plan Years) (1) an officer of an Employer (within the meaning of Section 416(i)(1) of the Code) having an aggregate annual compensation from the Employer and its Affiliates in excess of 50% of the amount in effect under Section 415(b)(1)(A) of the Code for any Plan Year, (2) one of the ten Employees owning (or considered as owning) the largest interests in an Employer, owning more than a 1/2% interest in the Employer, and having an aggregate annual compensation from the Employer and its Affiliates of more than the limitation in effect under Section 415(c)(1)(A) of the Code for the calendar year that includes the last day of the Plan Year (if two Employees have equal interests in an Employer, the Employees having the greater annual compensation from the Employer shall be deemed to have a larger interest), (3) a 5% owner of an Employer (within the meaning of Section 416(i)(1)(B) of the Code) or (4) a 1% owner of an Employer (within the meaning of Section 416(i)(1)(B) of the Code) having an aggregate annual compensation from the Employer and its Affiliates of more than $150,000.00. For purposes of this paragraph the term "compensation" shall mean an Employee's Section 415 Compensation. The determination of Section 415 Compensation shall be based only on Section 415 Compensation that is actually paid 6 9 and shall be made by including elective or salary reduction contributions to a plan described in Section 125 of the Code, a plan described in Section 401(k) of the Code, a simplified employee pension described in Section 408(k) of the Code or a plan described in Section 403(b) of the Code. (y) "Limitation Year" shall mean the Plan Year. (z) "Non-Key Employee" shall mean, with respect to any Plan Year, an Employee or former Employee who is not a Key Employee (including any such Employee who formerly was a Key Employee). (aa) "Normal Retirement Date" shall mean the date on which a Participant attains the age of 65 years. (ab) "Participant" shall mean any Eligible Person who participates in the Plan as provided in Article IV and shall include any former employee of an Employer who was participating in the Plan and who still has a balance in his Account under the Plan. (ac) "Plan" shall mean the Home Shopping Network, Inc. Employee Equity Participation Plan as herein set forth, as it may be amended from time to time. (ad) "Plan Administrator" shall mean the Company. (ae) "Plan Year" shall mean the 12-month period ending on December 31. (af) "Section 415 Compensation" shall mean wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c) of the Income Tax Regulations), and excluding the following: (1) Employer contributions to a plan of deferred compensation which are not includable in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (2) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; 7 10 (3) Amounts realized from the sale, exchange or other disposition of stock acquired from an Employer under a qualified stock option plan; and (4) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). (ag) "Service" means: (1) "Hour of Service" is defined as: (A) Any hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These Hours will be credited to the Employee for the computation period in which the duties are performed; and (B) Any hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; provided, however, that no more than 501 Hours of Service shall be credited under this paragraph (1)(B) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period), and no credit shall be awarded for any payment required by applicable worker's compensation, unemployment compensation or disability insurance laws or for payments which solely reimburse an Employee for medical or medical-related expenses. Hours under this paragraph will be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which is incorporated herein by this reference. Notwithstanding anything herein to the contrary, any Employee who is paid on an hourly basis or who is required to account for his hours of work shall be credited with Hours of Service based upon his actual hours of work as reflected by the Employer's books and records. Payments made to Employees for periods during which no services are performed are to be converted into Hours of Service as provided by Labor Department Regulations 29 C.F.R. Section 2530.200b-2(b) and (c). Any other Employee required by paragraph (A) or (B) above to be credited with at least one Hour of Service during his regular payroll period shall be credited with Hours of Service for that period determined by the following schedule: 8 11
Pay Period Hours of Service ---------- ---------------- Weekly 45 Bi-Weekly 90 Semi-Monthly 95 Monthly 190
Any award or agreement providing back pay, irrespective of any mitigation of damages, shall be credited as Hours of Service for the period for which it is allowed provided that it does not result in duplication of hours credited under paragraphs (1)(A) and (B) above. Hours of Service will be credited for employment with other members of an affiliated service group (under Code Section 414(m)), a controlled group of corporations (under Code Section 414(b)), or a group of trades or businesses under common control (under Code Section 414(c)) of which the Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Code Section 414(o) and the Regulations thereunder. Hours of Service will also be credited for any Leased Employee or other shared employee considered to be an Employee for purposes of this Plan by application of Section 414(n) or Section 414(o) of the Code and the Regulations thereunder and for service with a predecessor employer if the Employer maintains a plan of the predecessor Employer. Solely for purposes of determining whether a Break in Service, as defined in paragraph (3) below, has occurred in a Plan Year for participation and vesting purposes, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or, in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (A) by reason of the pregnancy of the individual, (B) by reason of a birth of a child of the individual, (C) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (D) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (A) in the Plan Year in which the absence begins if the crediting is necessary to prevent a Break in Service in that Year, or (B) in all other cases, in the following Plan Year. (2) "Year of Service" A Year of Service is defined as the twelve (12) consecutive month computation period during which the Employee completes at least one thousand (1,000) Hours of Service: (A) For purposes of determining a Year of Service for an Employee's eligibility to participate in the Plan pursuant to Article IV(a)(2), the initial eligibility computation period is the twelve (12) consecutive month period commencing with the Employee's Employment 9 12 Commencement Date (or the date an Employee performs his first Hour of Service following a Break in Service, whichever is later) during which the Employee completes at least one thousand (1,000) Hours of Service. All succeeding eligibility computation periods shall be the Plan Year; (B) For purposes of measuring Years of Service for vesting and benefit accrual purposes pursuant to Article VIII(c), after an Employee's satisfaction of the eligibility requirements set forth in Article IV, herein, the computation period shall be the Plan Years beginning with the Plan Year which includes the Employee's Employment Commencement Date. Initial Participants, as defined in Article IV(a)(1), will only be credited with one (1) Year of Service at December 31, 1994, for purposes of Article VIII(c)(2). (C) For purposes of determining a Year of Service for allocating additional shares of Company Stock pursuant to Article VI(a)(1), the computation period shall be the calendar year and shall exclude the calendar year which includes the Employee's Employment Commencement Date. For vesting purposes no credit shall be given for any Service prior to January 1, 1994. (3) "Break in Service" is defined as any twelve (12) consecutive month computation period during which a Participant fails to complete more than five hundred (500) Hours of Service with the Employer or an Affiliate. However, for purposes of determining Breaks in Service for eligibility, vesting and benefit accrual purposes, the computation periods shall be the same respective consecutive twelve (12) month periods used to determine Years of Service pursuant to paragraph (2) above. Notwithstanding anything herein to the contrary, a Break in Service shall not commence if the Participant is on an Authorized Leave of Absence, as defined in paragraph (e) above. (4) "Separation from Service" is defined as the date on which an Employee quits, retires, is discharged or dies. (ah) "Top Heavy Year" means any Plan Year in which the Top Heavy Tests under Article VII are met. (ai) "Trust" shall mean the trust established by the Trust Agreement. (aj) "Trust Agreement" shall mean the agreement providing for the Trust Fund, as it may be amended from time to time. (ak) "Trustee" shall mean the individual, individuals or corporation designated as trustee under the Trust Agreement. 10 13 (al) "Trust Fund" shall mean the trust fund established under the Trust Agreement from which the amounts of supplementary compensation provided for by the Plan are to be paid or are to be funded. (am) "Valuation Date" shall mean the date specified in paragraph (a) of Article XI on which the net worth of the assets comprising the Trust Fund is determined. ARTICLE II Name and Purpose of the Plan and the Trust (a) Name of Plan. The name of the Plan is the Home Shopping Network, Inc. Employee Equity Participation Plan. The Plan is an employee stock ownership plan which is intended to satisfy the requirements of Code Section 4975(e)(7) and Regulation Section 54.4975-11. (b) Exclusive Benefit. This Plan is created for the sole purpose of providing benefits to the Participants and enabling them to share in the growth of their Company. Except as otherwise permitted by law, in no event shall any part of the principal or income of the Trust be paid to or reinvested in any Employer or be used for or diverted to any purpose whatsoever other than for the exclusive benefit of the Participants and their Beneficiaries. (c) Mistake of Fact. Notwithstanding the foregoing provisions of paragraph (b), any contribution made by an Employer to this Plan by a mistake of fact may be returned to the Employer within one year after the payment of the contribution; and any contribution made by an Employer that is conditioned upon the deductibility of the contribution under Section 404 of the Code (each contribution shall be presumed to be so conditioned unless the Employer specifies otherwise) may be returned to the Employer if the deduction is disallowed and the contribution is returned (to the extent disallowed) within one year after the disallowance of the deduction. (d) Participant's Rights. The establishment of this Plan shall not be considered as giving any Employee, or any other person, any legal or equitable right against any Employer, any Affiliate, the Plan Administrator, the Trustee or the principal or the income of the Trust, except to the extent otherwise provided by law. The establishment of this Plan shall not be considered as giving any Employee, or any other person, the right to be retained in the employ of any Employer or any Affiliate. (e) Qualified Plan. This Plan and the Trust are intended to qualify under the Code as a tax-free employees' plan and trust, and the provisions of this Plan and the Trust should be interpreted accordingly. 11 14 ARTICLE III Plan Administrator (a) Administration of the Plan. The Plan Administrator shall control and manage the operation and administration of the Plan, except with respect to investments. The Administrator shall have no duty with respect to the investments to be made of the funds in the Trust except as may be expressly assigned to it by the terms of the Trust Agreement. (b) Powers and Duties. The Administrator shall have complete control over the administration of the Plan herein embodied, with all powers necessary to enable it to carry out its duties in that respect. Not in limitation, but in amplification of the foregoing, the Administrator shall have the power and discretion to interpret or construe this Plan and to determine all questions that may arise as to the status and rights of the Participants and others hereunder. (c) Direction of Trustee. It shall be the duty of the Administrator to direct the Trustee with regard to the allocation and the distribution of the benefits to the Participants and others hereunder. (d) Summary Plan Description. The Administrator shall prepare or cause to be prepared a summary plan description (if required by law) and such periodic and annual reports as are required by law. (e) Disclosure. At least once each year, the Administrator shall furnish to each Participant a statement containing the value of his interest in the Trust Fund and such other information as may be required by law. (f) Conflict In Terms. The Administrator shall notify each Employee, in writing, as to the existence of the Plan and Trust and the basic provisions thereof. In the event of any conflict between the terms of this Plan and Trust as set forth in this Plan and Trust Agreement and as set forth in any explanatory booklet or other description, this Plan and Trust Agreement shall control. (g) Nondiscrimination. The Administrator shall not take any action or direct the Trustee to take any action whatsoever that would result in unfairly benefiting one Participant or group of Participants at the expense of another or in improperly discriminating between Participants similarly situated or in the application of different rules to substantially similar sets of facts. (h) Records. The Administrator shall keep a complete record of all its proceedings as such Administrator and all data necessary for the administration of the Plan. All of the foregoing records and data shall be located at the principal office of the Administrator. 12 15 (i) Final Authority. Except to the extent otherwise required by law, the decision of the Administrator in matters within its jurisdiction shall be final, binding and conclusive upon each Employer and each Employee, member and Beneficiary and every other interested or concerned person or party. (j) Claims. (1) Claims for benefits under the Plan may be made by a Participant or a Beneficiary of a Participant on forms supplied by the Plan Administrator. Written notice of the disposition of a claim shall be furnished to the claimant by the Administrator within ninety (90) days after the application is filed with the Administrator, unless special circumstances require an extension of time for processing, in which event action shall be taken as soon as possible, but not later than one hundred eighty (180) days after the application is filed with the Administrator; and, in the event that no action has been taken within such ninety (90) or one hundred eighty (180) day period, the claim shall be deemed to be denied for the purposes of paragraph (2). In the event that the claim is denied, the denial shall be written in a manner calculated to be understood by the claimant and shall include the specific reasons for the denial, specific references to pertinent Plan provisions on which the denial is based, a description of the material information, if any, necessary for the claimant to perfect the claim, an explanation of why such material information is necessary and an explanation of the claim review procedure. (2) If a claim is denied (either in the form of a written denial or by the failure of the Plan Administrator, within the required time period, to notify the claimant of the action taken), a claimant or his duly authorized representative shall have sixty (60) days after the receipt of such denial to petition the Plan Administrator in writing for a full and fair review of the denial, during which time the claimant or his duly authorized representative shall have the right to review pertinent documents and to submit issues and comments in writing. The Plan Administrator shall promptly review the claim and shall make a decision not later than sixty (60) days after receipt of the request for review, unless special circumstances require an extension of time for processing, in which event a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after the receipt of the request for review. If such an extension is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. The decision of the review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, with specific references to the Plan provisions on which the decision is based. 13 16 (k) Appointment of Advisors. The Administrator may appoint such accountants, counsel (who may be counsel for an Employer), specialists and other persons that it deems necessary and desirable in connection with the administration of this Plan. The Administrator, by action of its Board of Directors, may designate one or more of its employees to perform the duties required of the Administrator hereunder. ARTICLE IV Eligibility and Participation (a) Current Employees. (1) Initial Participants. Any Eligible Person employed before January 1, 1994 who completes at least one thousand (1,000) Hours of Service during the calendar year 1994 and attained age 21 shall be eligible to participate on the Effective Date of the Plan. (2) Future Participants. Any Eligible Person who has not satisfied the requirements specified in paragraph (1) above, shall become eligible to participate in the Plan upon completing a Year of Service and attaining the age of 21. Any such Eligible Person shall enter the Plan as a Participant, if he is still an employee of an Employer, on the first Entry Date concurring therewith or next following his satisfaction of the eligibility requirements. (b) Former Employees. (1) An Employee who ceases to be a Participant and who subsequently reenters the employ of an Employer shall be eligible again to become a Participant on the date of his reemployment. (2) An Employee who satisfies the eligibility requirements set forth above and who terminates employment with an Employer prior to becoming a Participant will become a Participant on the later of the Entry Date on which he would have entered the Plan had he not terminated employment or the date of his reemployment. ARTICLE V Contributions to the Trust (a) Company's Contribution. The Company shall contribute stock or cash as needed to fulfill the requirements of Article VI paragraphs (a)(1) and (d) and may contribute Company Stock or cash in such amounts, if any, that the Company's Board of Directors, in 14 17 its sole discretion, may authorize and direct to be paid and allocated as provided in Article VI paragraphs (a)(2) and (b). (b) Payment. The Company's total annual contribution may be made, in one or more installments, not later than the due date (including extensions thereof) for filing the federal income tax return of the Company for its fiscal year ending with or during the Plan Year for which the contribution is made. Company Stock shall be valued at its then fair market value. (c) Maximum Amount of Employer Contributions. The aggregate amount of contributions made by the Employer shall not exceed the maximum amount allowable as a deduction for federal income tax purposes for the year of contribution nor shall the Employer contribute an amount for any Participant which exceeds the maximum amount allowable under Code Section 415(c). (d) Employee Contributions. Participants shall not be permitted to make any contributions to this Plan. (e) No Duty to Inquire. The Trustee shall have no right or duty to inquire into the amount of any contribution made by the Company or the method used in determining the amount of any such contribution, or to collect the same, but the Trustee shall be accountable only for funds actually received by it. ARTICLE VI Participants' Account and Allocation of Contributions (a) Initial Allocation. (1) Initial Participants. The Plan Administrator shall allocate to the Company Stock Account of each Participant on the Effective Date of the Plan 100 shares of Company Stock plus 10 shares for each Year of Service of the Plan Participant in excess of 1. For years before 1988, a calendar year during which the Participant was continuously employed shall be treated as a Year of Service regardless of the number of hours worked. (2) Future Participants. It is intended that each person who becomes a Participant after the Effective Date receive an initial allocation equal to the lesser of: (A) 100 shares of Company Stock or (B) shares of Company Stock which have a value equal to $1,000, with such shares rounded down to the nearest whole number of shares. If the Company makes discretionary contributions in addition to the Initial Allocation to Initial Participants of paragraph (a)(1), such contributions shall first be allocated pro rata to such Future Participants based on their Entry Dates, with the earliest Entry Date receiving the first allocation, until such Future Participants shall have been allocated the whole number of shares of Company Stock originally calculated as of the Allocation Date contemporaneous with or 15 18 next following their Entry Date. If such contributions are made during the Plan Year, which includes the Future Participant's Entry Date, such Participant need not be employed on the Allocation Date to share in the allocation provided by this paragraph. If such contributions are made during any Plan Year subsequent to the Plan Year which includes the Future Participant's Entry Date, such Participant must be employed on the Allocation Date to share in the allocation provided by this paragraph. Any discretionary contributions in excess of those required to make the allocations provided herein shall be allocated as provided in paragraph (b) below. (b) Additional Allocations. If the Company makes discretionary contributions in addition to the Initial Allocation of paragraph (a), every Eligible Participant employed on the Allocation Date shall share in the contribution in proportion to his Compensation relative to the Compensation of all Eligible Participants employed on that Allocation Date. (c) Limitation on Allocation of Contributions. (1) Notwithstanding anything contained in this Plan to the contrary, the aggregate Annual Additions to a Participant's Account under this Plan and under any other defined contribution plans maintained by an Employer or an Affiliate for any Limitation Year shall not exceed the lesser of $30,000.00 (or, if greater, one quarter of the dollar limitation in effect under Section 415(b)(1)(A) of the Code) or 25% of the Participant's Section 415 Compensation for such Plan Year. (2) In the event that the Annual Additions, under the normal administration of the Plan, would otherwise exceed the limits set forth above for any Participant, or in the event that any Participant participates in both a defined benefit plan and a defined contribution plan maintained by any Employer or any Affiliate and the aggregate Annual Additions to and projected benefits under all of such plans, under the normal administration of such plans, would otherwise exceed the limits provided by law, then the Plan Administrator shall take such actions, applied in a uniform and nondiscriminatory manner, as will keep the Annual Additions and projected benefits for such Participant from exceeding the applicable limits provided by law. Excess Annual Additions shall be disposed of as provided in paragraph (3) below. Adjustments shall be made to this Plan, if necessary to comply with such limits, before any adjustments may be made to any other Plan. (3) If as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's Section 415 Compensation, a reasonable error in determining the amount of Employer contributions that may be made with respect to any Participant under the limits of Section 415 of the Code, or other circumstances permitted under Section 415 of the Code, the Annual Additions attributable to Employer contributions for 16 19 a particular Participant would cause the limitations set forth in this paragraph (c) to be exceeded, the excess amount shall be used to reduce Employer contributions for the next Plan Year (and succeeding Plan Years, as necessary) for that Participant if that Participant is covered by the Plan as of the end of the Plan Year. If the Participant is not covered by the Plan as of the end of the Plan Year, such excess amount shall be held unallocated in a suspense account for the Plan Year and reallocated among the Participants as of the end of the next Plan Year to all of the Participants in the Plan in the same manner as an Employer contribution under the terms of paragraphs (a) and (b) of this Article VI before any further Employer contributions are allocated to the Accounts of the Participants, and such allocations shall be treated as Annual Additions to the Accounts of the Participants. In the event that the limits on Annual Additions for any Participant would be exceeded before all of the amounts in the suspense account are allocated among the Participants, then such excess amounts shall be retained in the suspense account to be reallocated as of the end of the next Plan Year and any succeeding Plan Years until all amounts in the suspense account are exhausted. (d) Make-Up Allocation. Any Participant who is prevented from receiving all or any portion of the Initial Allocation of Company Stock provided by paragraph (a) because of the limitations of paragraph (c) shall be entitled to an allocation of Company Stock in each succeeding year in which he is employed on the Allocation Date up to the limit provided by paragraph (c) until he has received the number of shares of Company Stock he would have received pursuant to paragraph (a) but for the limitations of paragraph (c). This paragraph shall not apply to discretionary allocations pursuant to paragraph (b) above. (e) Allocation of Forfeitures. Forfeitures arising during the Plan Year shall be allocated in the following order: (1) first to Participants who are entitled to restoration of amounts previously forfeited pursuant to Article VIII paragraph (c)(4)(C); (2) second to Participants who are entitled to a Make-Up Allocation pursuant to Article VI paragraph (d) above; (3) third to Future Participants who had Entry Dates in prior Plan Years and were not allocated the full amount of their Initial Allocation specified in Article VI paragraph (a)(2), above, and in the same order specified in that paragraph; (4) fourth, pursuant to paragraph (a)(2), above, to any Employees who became Participants during the Plan Year; and 17 20 (5) the balance of any Forfeitures shall be allocated in the same manner as the Company's contribution under paragraph (b), above. (f) Allocation of Earnings and Losses. As of each Allocation Date, the Plan Administrator shall credit or charge each Participant's Company Stock Account with its own earnings or losses for the year. (g) Allocation of Cash Dividends. Cash dividends paid on Company Stock allocated to a Participant's Company Stock Account shall be credited to that Participant's Company Stock Account. ARTICLE VII Top Heavy Plan (a) Minimum Allocation of Employer Contribution for Top Heavy Plan Year. Notwithstanding the foregoing, if the Plan is a Top Heavy Plan or an Extra Top Heavy Plan for any Plan Year (as determined by the tests set forth in paragraphs (e)(1) and (e)(2) of this Article VII), then a participating Non-Key Employee who is in the employ of the Employer on the last day of the Plan Year shall be entitled to a minimum contribution in accordance with the following paragraphs: (1) Only Defined Contribution Plans. If a Participant participates only in defined contribution plans maintained by the Employer or any Affiliate, and the Participant did not receive a contribution under this Plan, and/or any other defined contribution plan maintained by the Employer or any Affiliate equal to the lesser of: (i) three (3%) of the Participant's Section 415 Compensation for the year, or (ii) the percentage of the Section 415 Compensation for the Year which is equal to that of the Key Employee for whom the percentage is the highest, then the aggregate contribution for the year made by the Employer on behalf of each Participant and any Forfeitures allocated to his Account pursuant to this Plan shall be equal to the difference between: (A) the lesser of: (1) three percent (3%) of the Participant's Section 415 Compensation for the year from the Employer or any Affiliate, or (2) the percentage of such Section 415 Compensation which is equal to that of the Key Employee for whom the percentage is the highest, and (B) the contribution otherwise provided by this Plan and all other defined contribution plans maintained by the Employer or any Affiliate. (2) Both Defined Benefit and Defined Contribution Plans. If a Participant is also a participant in a defined benefit plan maintained by the Employer or any Affiliate, the minimum benefit 18 21 to which a Participant is entitled shall be provided by, and in accordance with, the terms of the defined benefit plan. However, if the defined benefit plan does not provide the Participant with a minimum accrued benefit equal to three percent (3%) of the Participant's average annual Section 415 Compensation from the Employer or any Affiliate for each Top Heavy Year or two percent (2%) of a Participant's average annual Section 415 Compensation from the Employer or any Affiliate for each Extra Top Heavy Year, multiplied by the number of Top Heavy Years or Extra Top Heavy Years (not in excess of ten (10) Years) during which he was a Participant in both Plans, and the Participant did not receive a contribution under this Plan and/or any other defined contribution plan maintained by the Employer or any Affiliate of at least seven and one-half percent (7 1/2%) of his Section 415 Compensation from the Employer or any Affiliate for a Top Heavy Year or five percent (5%) of such Section 415 Compensation for an Extra Top Heavy Year, the Participant shall be entitled to a minimum contribution for the year under this Plan. The Participant's minimum contribution under this Plan shall be a contribution equal to the difference between: (A) seven and one-half percent (7 1/2%) of his Section 415 Compensation from the Employer or any Affiliate for each Top Heavy Year or five percent (5%) of such Section 415 Compensation for each Extra Top Heavy Year in which he was a Participant in both Plans, and (B) the contribution otherwise provided by this Plan and all other defined contribution plans maintained by the Employer or any Affiliate. (3) Rules of Application. The minimum benefit or minimum contribution shall not be offset by any OASDI benefits received by the Participant, and any Top Heavy minimum benefits shall be provided by this Plan only after minimum benefits have been provided by all other Plans. (b) Top Heavy Tests. (1) Top Heavy. The Plan will be Top Heavy during the Plan Year if the aggregate accounts of the participating Key Employees determined as of the Determination Date, as provided in paragraph (b) below, equals or exceeds sixty percent (60%) of the aggregate accounts of all Participants included within the aggregation group. In any Top Heavy Year the applicable provisions of paragraph (a) of this Article VII shall apply and the provisions of this Article VII will supersede any conflicting provisions of the Plan. (2) Extra Top Heavy. If the sum of the accounts of the participating Key Employees equals or exceeds ninety percent (90%) of the sum of the aggregate accounts of all Participants 19 22 included within an aggregation group of plans, this Plan shall be considered Extra Top Heavy. If the Plan is Extra Top Heavy, then paragraph (a) of this Article VII shall apply. In addition, paragraph (c)(2) of Article VI shall also apply together with the adjustments required under Section 416(h)(1) of the Code. (c) Determination Date. The Determination Date for any Plan Year shall be the last day of the preceding Plan Year, or in the case of the first Plan Year to which this Article applies, the last day of the first Plan Year. (d) Aggregation Groups. Each plan maintained by the Employer or any Affiliate in which a Key Employee participates and any other plan maintained by those businesses which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will be considered a part of the aggregation group. Other plans maintained by the businesses which are not required to be included in the aggregation group may be included if the requirements of Code Sections 401(a)(4) and 410 are satisfied when those plans are considered together with the plans of the required aggregation group. In the event that two or more Plans within the aggregation group have different Determination Dates, the present value of all accrued benefits shall be determined separately at each Plan's Determination Date and the accrued benefits for each Plan shall then be aggregated based upon the Determination Dates for each Plan which fall within the same calendar year. (e) Definitions. (1) Accrued Benefits. For purposes of this Article the Accrued Benefits of a Participant, former Participant or Beneficiary shall include the value of: (A) the Participant's retirement benefits provided by his employer as of the most recent Valuation Date occurring within a twelve (12) month period ending on the Determination Date, and (i), in the case of any defined contribution plan maintained by the Employer or any Affiliate, adjusted to include contributions made by (in the case of any profit sharing plan) or due from (in the case of any pension plan) the Employer as of the Determination Date, or (ii), in the case of any defined benefit plan maintained by the Employer or any Affiliate, determined as if the Participant terminated service as of the Determination Date in the first Plan Year or as if the Participant terminated service on the Valuation Date for all subsequent Plan Years. The present value of a Participant's retirement benefits attributable to any defined benefit plan shall be determined using the actuarial assumptions set forth with the provisions of such plan; and 20 23 (B) all distributions made to a Participant within the Plan Year which includes the Determination Date or within the four (4) preceding Plan Years, but only to the extent that the distribution is not included in the value of the Participant's Account on the Valuation Date. Distributions of benefits received by a Participant from this Plan and rollover into another plan maintained the by Employer or any Affiliate shall not be counted as an accrued benefit under this Plan. This paragraph (e)(1)(B) shall include distributions under a terminated plan which if it had not been terminated would have been required to be included in the aggregation group as defined in paragraph (c) above. Notwithstanding anything to the contrary, if any Employee has not performed services for the Employer or any Affiliate during the 5-year period ending on any Determination Date, the accrued benefit of such Employee shall not be taken into consideration for purposes of determining whether the Plan is Top-Heavy with respect to the Plan Year to which the Determination Date applies. (2) Key Employee Accrued Benefits. The value of the Key Employee Accrued Benefits shall equal the sum of the aggregate values of the accrued benefits of all Key Employees and all Beneficiaries of Key Employees. (3) Non-Key Employee Accrued Benefit. Solely for purposes of determining whether the Plan is Top-Heavy, the accrued benefit of any Non-Key Employee shall be determined (A) under the method, if any, that uniformly applies for accrual purposes under all plans of the Employer or any Affiliate, or (B) if there is no such method, as if such benefit accrued no more rapidly than the lowest accrual rate permitted under the Fractional Accrual Rule of Section 411(b)(1)(C) of the Code. (4) Total Accrued Benefits. The value of the Total Accrued Benefits shall equal the sum of the aggregate value of the Key Employee Accrued Benefits described above plus the aggregate value of the accrued benefits of all other Participants, former Participants and Beneficiaries of plans included within the aggregation group of plans. The Total Accrued Benefits shall not, however, include the Account of any Participant, or Beneficiary of a Participant who was at any time a Key Employee but who is no longer a Key Employee. (5) Compensation. For any Plan Year in which the Plan is Top-Heavy, annual Compensation for purposes of this Article VII shall mean Section 415 Compensation. 21 24 ARTICLE VIII Benefits Under the Plan (a) Retirement Benefit. (1) A Participant shall be entitled to retire from the employ of his Employer upon such Participant's Normal Retirement Date. Until a Participant actually retires from the employ of his Employer, he shall continue to be treated in all respects as a Participant. (2) Upon the retirement of a Participant as provided in paragraph (1), such Participant shall be entitled to a retirement benefit in an amount equal to 100% of the balance in his Company Stock Account as of the date of distribution of his benefit. (b) Disability Benefit. (1) In the event a Participant's employment with his Employer is terminated by reason of his total and permanent disability, such Participant shall be entitled to a disability benefit in an amount equal to 100% of the balance in his Company Stock Account as of the date of distribution of his benefit. (2) Total and permanent disability shall mean the total incapacity of a Participant to perform the usual duties of his employment with his Employer and will be deemed to have occurred only when certified by a physician who is acceptable to the Plan Administrator and only if such proof is received by the Administrator within sixty (60) days after the date of the termination of such Participant's employment. (c) Termination of Employment Benefit. (1) In the event a Participant's employment with his Employer is terminated for reasons other than retirement, total and permanent disability or death, such Participant shall be entitled to a termination of employment benefit in an amount equal to his vested interest in the balance in his Company Stock Account as of the date of distribution of his benefit. (2) A Participant's vested interest in his Company Stock Account shall be a percentage of the balance of such Account as of the applicable Valuation Date, based upon such Participant's Years of Service as of the date of the termination of his employment, as follows: 22 25 TOTAL NUMBER OF VESTED YEARS OF SERVICE INTEREST ---------------- -------- Less than 1 Year of Service -0- 1 year, but less than 2 years 20% 2 years, but less than 3 years 40% 3 years, but less than 4 years 60% 4 years, but less than 5 years 80% 5 years or more 100% (3) (A) If the termination of employment results in five consecutive Breaks in Service, then upon the occurrence of such five consecutive Breaks in Service, the non-vested interest of the Participant in his Company Stock Account as of the Valuation Date concurring with or next following the date of his termination of employment shall be deemed to be forfeited and such forfeited amount shall be allocated as provided in paragraph (e) of Article VI. If the Participant is later reemployed by the Company or an Affiliate, the unforfeited balance, if any, in his Company Stock Account that has not been distributed to such Participant shall be set aside in a separate account, and such Participant's Years of Service after any five consecutive Breaks in Service resulting from such termination of employment shall not be taken into account for the purpose of determining the vested interest of such Participant in the balance of his Company Stock Account that accrued before such five consecutive Breaks in Service. (B) Notwithstanding any other provision of this paragraph (c), if a Participant is reemployed by the Company or an Affiliate and, as a result, no five consecutive Breaks in Service occur, the Participant shall not be entitled to any termination of employment benefit as a result of such termination of employment. (4) (A) Notwithstanding any other provision of this paragraph (c), if at any time a Participant is less than 100% vested in his Company Stock Account and, as a result of his termination of employment, he receives his entire vested termination of employment benefit pursuant to the provisions of Article IX, and the distribution of such benefit is made not later than the close of the fifth Plan Year following the Plan Year in which such termination occurs (or such longer period as may be permitted by the Secretary of the Treasury, through regulations or otherwise), then upon the occurrence of such distribution, the non-vested interest of the Participant in his Company Stock Account shall be deemed to be forfeited. Forfeited amounts shall be allocated as provided in paragraph (e) of Article VI. 23 26 (B) If a Participant is not vested as to any portion of his Company Stock Account, he will be deemed to have received a distribution immediately following his termination of employment. Upon the occurrence of such deemed distribution, the non-vested interest of the Participant in his Company Stock Account shall be deemed to be forfeited. Forfeited amounts shall be allocated as provided in paragraph (e) of Article VI. (C) If a Participant whose interest is forfeited under this paragraph (c)(4) resumes employment covered under the Plan, then such Participant shall have the right to repay to the Trust, before the date that is the earlier of: (i) five years after the Participant's resumption of employment, or (ii) the close of a period of five consecutive Breaks in Service following the date of his distribution, the full amount of the termination of employment benefit previously distributed to him. If the Participant elects to repay such amount to the Trust within the time periods prescribed herein, or if a non-vested Participant whose interest was forfeited under this paragraph (c)(4) resumes employment covered under the Plan prior to the occurrence of five consecutive Breaks in Service, the non-vested interest of the Participant previously forfeited pursuant to the provisions of this paragraph (c)(4) shall be restored to the Company Stock Account of the Participant, such restoration to be made from Forfeitures of non-vested interests and, if necessary, by contributions of the Company, so that the aggregate of the amounts repaid by the Participant and restored by the Company shall not be less than the account balance of the Participant at the time of Forfeiture unadjusted by any subsequent gains or losses. (d) Death Benefit. (1) In the event of the death of a Participant, his Beneficiary shall be entitled to a death benefit in an amount equal to 100% of the balance in his Company Stock Account as of the date of distribution of his benefit. (2) At any time and from time to time, each Participant shall have the unrestricted right to designate a Beneficiary to receive his death benefit and to revoke any such designation. Each designation or revocation shall be evidenced by written instrument filed with the Plan Administrator, signed by the Participant and bearing the signature of a witness to his signature. In the event that a Participant has not designated a Beneficiary or Beneficiaries, or if for any reason such designation shall be legally ineffective, or if such Beneficiary or Beneficiaries shall predecease the Participant, then the personal representative of the estate of such Participant shall be deemed to be the Beneficiary designated to receive such death benefit, or if no personal representative is appointed for the 24 27 estate of such Participant, then his next of kin under the statute of descent and distribution of the state of such Participant's domicile at the date of his death shall be deemed to be the Beneficiary or Beneficiaries to receive such death benefit. (3) Notwithstanding the foregoing, if the Participant is married as of the date of his death, the Participant's surviving spouse shall be deemed to be his designated Beneficiary and shall receive the full amount of the death benefit attributable to the Participant unless the spouse consents or has consented to the Participant's designation of another Beneficiary. Any such consent to the designation of another Beneficiary must acknowledge the effect of the consent, must be witnessed by a Plan representative or by a notary public and shall be effective only with respect to that spouse. A spouse's consent shall be a restricted consent (which may not be changed as to the Beneficiary unless the spouse consents to such change in the manner described herein). Notwithstanding the preceding provisions of this paragraph (d)(3), a Participant shall not be required to obtain spousal consent to his designation of another Beneficiary if: (i) the Participant is legally separated or the Participant has been abandoned, and the Participant provides the Administrator with a court order to such effect, or (ii) the spouse cannot be located. (e) Withdrawals During Employment. Participants shall not be entitled to receive an in-service withdrawal (including loans) under this Plan. Distributions may only be made as provided for under this Article VIII. ARTICLE IX Payment of Benefits (a) Time and Form of Payment of Benefits. (1) Except as otherwise provided under this Article IX: (A) The amount of the retirement, disability, termination of employment or death benefit to which a Participant is entitled under paragraphs (a), (b), (c) or (d) of Article VIII shall be paid to him (or his Beneficiary or Beneficiaries in the case of a death benefit), in a lump sum as soon as practicable following the Participant's retirement, disability, termination of employment or death, as the case may be. (2) (A) Notwithstanding the foregoing, no distribution shall be made of the retirement, disability or termination of employment benefit to which a Participant is entitled under paragraph (a), (b) or (c) of Article VIII prior to his Normal Retirement Date unless the value of his benefit 25 28 attributable to Employer contributions, if any, determined as of the time of distribution, does not exceed $3,500.00, or unless the Participant consents to the distribution. (B) In the event that a Participant does not consent to a distribution of a benefit in excess of $3,500.00 to which he is entitled under paragraph (a), (b) or (c) of Article VIII, the amount of his benefit shall be paid to the Participant not later than sixty (60) days after the last day of the Plan Year in which the Participant reaches his Normal Retirement Date. (3) (A) Notwithstanding anything contained herein to the contrary, any distribution paid to a Participant (or, in the case of a death benefit, to his Beneficiary or Beneficiaries) pursuant to paragraph (a)(1) above shall commence not later than the earlier of: (i) the 60th day after the last day of the Plan Year in which the Participant attains the earlier of age 65 or the Normal Retirement Date; or (ii) April 1 of the year immediately following the calendar year in which he reaches age 70-1/2. (4) In the case of a death benefit, payment to the designated Beneficiary shall be made within one year following the Participant's death (unless the designated Beneficiary is the Participant's surviving spouse, in which case such benefit shall begin no later than the date the Participant would have reached age 70-1/2). (5) Notwithstanding the foregoing, payments under the Plan shall satisfy the incidental death benefit requirements and all other applicable provisions of Section 401(a)(9) of the Code, the regulations issued thereunder (including Prop. Reg. Section 1.401(a) (9)-2), and such other rules thereunder as may be prescribed by the Commissioner). (b) Distribution of Benefits. Distribution of a Participant's benefit under the Plan will be made in whole shares of Company Stock or cash if Company Stock is not available for that purpose. Fractional shares of Company Stock shall be distributed in cash. (c) Put Option. (1) If the Company Stock becomes not readily tradeable on an established securities market, then any Participant, who is otherwise entitled to a distribution from the Plan, shall have the right (the "Put Option") to require that the Company repurchase any Company Stock under a fair valuation formula. (2) The Put Option must be exercisable only by a Participant, by the Participant's donees, or by a person 26 29 (including an estate or its distributees) to whom the Company Stock passes by reason of a Participant's death (Under this paragraph (c) (2), Participant or former Participant means a Participant or former Participant and the Beneficiaries of the Participant or former Participant under the Plan). The Put Option must permit a Participant to put the Company Stock to the Company. Under no circumstances may the Put Option bind the Plan. However, it shall grant the Plan an option to assume the rights and obligations of the Company at the time that the Put Option is exercised. The Put Option shall commence as of the day following the date the Company Stock is distributed to the Participant and end 60 days thereafter and, if not exercised within such 60-day period, an additional 60-day option shall commence on the first day of the first month of the Plan Year next following the date the stock was distributed to the Participant (or such other 60-day period as provided in regulations promulgated by the Secretary of the Treasury). However, in the case of Company Stock that is publicly traded without restrictions when distributed but ceases to be so traded within either of the 60-day periods described herein after distribution, the Company must notify each holder of such Company Stock in writing on or before the tenth day after the date the Company Stock ceases to be so traded that for the remainder of the applicable 60-day period the Company Stock is subject to the Put Option. The number of days between the tenth day and the date on which notice is actually given, if later than the tenth day, must be added to the duration of the Put Option. The notice must inform distributees of the term of the Put Options that they are to have. The terms must satisfy the requirements of this paragraph (c)(2). The Put Option is exercised by the holder notifying the Company in writing that the Put Option is being exercised; the notice shall state the name and address of the holder and the number of shares to be sold. The period during which a Put Option is exercisable does not include any time when a distributee is unable to exercise it because the party bound by the Put Option is prohibited from honoring it by applicable federal or state law. The price at which a Put Option must be exercisable is the value of the Company Stock determined in accordance with paragraph (c) of Article XI of the Plan. Payment upon exercise of the Put Option shall be made in substantially equal installments over a period certain determined by the payor beginning not later than thirty (30) days after exercise of the option and not extending beyond five (5) years from the date of exercise of the option. Any deferred payments must provide for reasonable interest and adequate security. The payor shall have the right to prepay the deferred payments, without penalty and with interest to the date of payment, in its sole discretion. Payment for Company Stock received other than as part of a "Total Distribution" shall be made within thirty (30) days after exercise of the Put Option. 27 30 For purposes of this Section, "Total Distribution" means a distribution to a Participant or his Beneficiary within one taxable year of the Participant's entire Vested Interest in the Plan. (3) An arrangement involving the Plan that creates a Put Option must not provide for the issuance of Put Options other than as provided under this paragraph (c). The Plan (and the Trust Fund) must not otherwise obligate itself to acquire Company Stock from a particular holder thereof at an indefinite time determined upon the happening of an event such as the death of the holder. (d) Location of Participant or Beneficiary Unknown. In the event that all, or any portion of the distribution payable to a Participant or his Beneficiary, hereunder shall remain unpaid after five (5) Plan Years solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the provisions of Article VIII. In the event a Participant or Beneficiary of such Participant is located subsequent to his benefit being reallocated, such benefit shall be restored. (e) Transfer to Other Qualified Plans. The Trustee, upon written direction by the Plan Administrator, shall transfer some or all of the assets held under the Trust to another plan or trust meeting the requirements of the Code relating to qualified plans and trust, whether such transfer is made pursuant to a merger or consolidation of this Plan with such other plan or trust or for any other allowable purpose. (f) Direct Rollovers. (1) Notwithstanding any provisions of the Plan to the contrary that would otherwise limit a distributee's (as defined below) election under this paragraph, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution (as defined below) paid directly to an eligible retirement plan (as defined below) specified by the distributee in a direct rollover (as defined below). (2) For purposes of this paragraph, the following terms shall have the following meanings: (A) An "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments made not less frequently than annually for the 28 31 life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9), and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (B) An "eligible retirement plan" is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (C) A "distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (D) A "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. ARTICLE X Voting and Exercising Other Rights of Securities (a) Voting Company Stock. Each Participant (or, in the event of his death, his Beneficiary) shall have the right to direct the Trustee as to the manner in which whole and partial shares of Company Stock allocated to his Company Stock Account as of the record date are to be voted on each matter brought before an annual or special shareholders' meeting. Before each such meeting of shareholders, the Trustee shall furnish to each Participant (or Beneficiary) a copy of the proxy solicitation material, together with a form requesting directions on how such shares of Company Stock allocated to such Participant's Company Stock Account shall be voted on each such matter. Upon timely receipt of such directions, the Trustee shall on each such matter vote as directed the number of shares (including fractional shares) of Company Stock allocated to such Participant's Company Stock Account, and the Trustee shall have no discretion in such matter. The directions received by the Trustee from Participants shall be held by the Trustee in confidence and shall 29 32 not be divulged or released to any person, including officers or employees of any Employer. The Trustee shall vote allocated shares for which it has not received direction and unallocated shares of Company Stock in the same proportion as directed shares are voted, and shall have no discretion in such matter. (b) Tender Offer. If a tender or exchange offer is commenced for Company Stock: (1) The Trustee shall distribute in a timely manner to each Participant (or Beneficiary) such information as is distributed to holders of Company Stock in connection with the tender or exchange offer. (2) All Company Stock held by the Trustee in Company Stock Accounts shall be tendered or not tendered by the Trustee in accordance with directions it receives from the Participants (or Beneficiaries). Each Participant (or Beneficiary) shall be entitled to direct the Trustee with respect to the tender of such Company Stock allocated to his Account. The instructions received by the Trustee from Participants (or Beneficiaries) shall be held by the Trustee in confidence and shall not be divulged or released to any person, including officers or employees of any Employer. (3) The Trustee shall not tender Company Stock allocated to Company Stock Accounts with respect to which directions by Participants (or Beneficiaries) are not received or Company Stock held by the Trustee that is not allocated to Company Stock Accounts. (c) No Recommendations. The Trustee shall make no recommendations regarding the manner of exercising any rights under this Article, including whether or not such rights should be exercised. ARTICLE XI Valuations (a) Valuation of Trust Fund. The Plan Administrator shall direct the Trustee, as of each Allocation Date, and at such other date or dates deemed necessary by the Plan Administrator, herein called "Valuation Date", to determine the net worth of the assets comprising the Trust Fund as it exists on the "Valuation Date" prior to taking into consideration any contribution to be allocated for that Plan Year. In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value as of the "Valuation Date" and shall deduct all expenses for which the Trustee has not yet obtained reimbursement from the Company or the Trust Fund. (b) Methods of Valuation. Valuations must be made in good faith and based on all relevant factors for determining the fair 30 33 market value of securities. In the case of a transaction between a Plan and a disqualified person, value must be determined as of the date of the transaction. For all other Plan purposes, value must be determined as of the most recent "Valuation Date" under the Plan. An independent appraisal will not in itself be a good faith determination of value in the case of a transaction between the Plan and a disqualified person. However, in other cases, a determination of fair market value based on at least an annual appraisal independently arrived at by a person who customarily makes such appraisals and who is independent of any party to the transaction will be deemed to be a good faith determination of value. If the Company Stock becomes not readily tradeable on an established securities market, then any valuation required under this Plan will be conducted by an independent appraiser meeting the requirements similar to those prescribed under Code Section 170(a)(1). ARTICLE XII Investment Funds (a) Investment of Trust Fund. The Trustee shall invest the Trust Fund primarily in Company Stock. The Trustee may also invest the Trust Fund in cash, cash equivalents, certificates of deposit, money market funds, guaranteed investment contracts, short term securities, bonds and similar suitable investments. (b) Diversification. Any Participant who has attained age 55 and completed 10 years of Plan participation (the "Qualified Participant") shall have the right to make an election to direct the Plan as to investment of his Account. Such a Participant may elect within 90 days after the close of each Plan Year in the qualified election period (as defined in Section 401(a)(28) of the Code) to diversify 25% of his Account, less any amount to which a prior election applies. In the case of the last year to which an election applies, 50% shall be substituted for 25%. Notwithstanding the above, if the fair market value (determined at the Plan Valuation Date immediately preceding the first day on which a Qualified Participant is eligible to make an election) of Company Stock acquired by or contributed to the Plan and allocated to a Qualified Participant's Company Stock Account is $500.00 or less, then such Company Stock shall not be subject to this paragraph (b). For purposes of determining whether the fair market value exceeds $500.00, Company Stock held in accounts of all employee stock ownership plans (as defined in Section 4975(e)(7) of the Code) and tax credit employee stock ownership plans (as defined in Section 409(a) of the Code) maintained by the Employer or any Affiliate shall be considered as held by the Plan. The Plan may meet the requirements of Section 401(a)(28) of the Code by either: (1) offering at least three (3) investment options, or (2) distributing the portion of the Account covered by the 31 34 election to the Participant within the 90 day period after the election is made. ARTICLE XIII Trust Fund and Expenses of Administration (a) Trustee. The Trust Fund shall be held by the Trustee, or by a successor trustee or trustees, for use in accordance with the Plan under the Trust Agreement. The Trust Agreement may from time to time be amended in the manner therein provided. Similarly, the Trustee may be changed from time to time in the manner provided in the Trust Agreement. (b) Expenses of Administration. (1) (A) Unless otherwise paid or provided by the Company, the assets of the Trust Fund shall be used to pay all expenses of the administration of the Plan and the Trust Fund, including the Trustee's compensation, the compensation of any investment manager, the expense incurred by the Plan Administrator in discharging its duties, all income or other taxes of any kind whatsoever that may be levied or assessed under existing or future laws upon or in respect of the Trust Fund, and any interest that may be payable on money borrowed by the Trustee for the purpose of the Trust. (B) The Company may pay the expenses of the Plan and the Trust Fund. Any such payment by the Company shall not be deemed a contribution to this Plan. (2) Notwithstanding anything contained herein to the contrary, no excise tax or other liability imposed upon the Trustee, the Plan Administrator or any other person for failure to comply with the provisions of any federal law shall be subject to payment or reimbursement from the assets of the Trust. (3) For its services, any corporate trustee shall be entitled to receive reasonable compensation in accordance with its rate schedule in effect from time to time for the handling of a retirement trust. Any individual trustee shall be entitled to such compensation as shall be arranged between the Company and the Trustee by separate instrument; provided, however, that no person who is already receiving full time pay from any Employer or any Affiliate shall receive compensation from the Trust Fund (except for the reimbursement of expenses properly and actually incurred). 32 35 ARTICLE XIV Amendment and Termination (a) Restrictions on Amendment Termination of Plan. It is the present intention of the Company to maintain the Plan set forth herein indefinitely. Nevertheless, the Company specifically reserves to itself the right at any time, and from time to time, to amend or terminate this Plan in whole or in part; provided, however, that no such amendment: (1) shall have the effect of vesting in any Employer, directly or indirectly, any interest, ownership or control in any of the present or subsequent funds held subject to the terms of the Trust; (2) shall cause or permit any property held subject to the terms of the Trust to be diverted to purposes other than the exclusive benefit of the Participants and their Beneficiaries or for the administrative expenses of the Plan Administrator and the Trust; (3) shall (A) reduce any vested interest of a Participant on the later of the date the amendment is adopted or the date the amendment is effective, except as permitted by law, or (B) reduce or restrict either directly or indirectly any benefit provided any Participant prior to the date an amendment is adopted; (4) shall reduce the Account of any Participant; (5) shall amend any vesting schedule with respect to any Participant who has at least three Years of Service at the end of the election period described below, except as permitted by law, unless each such Participant shall have the right to elect to have the vesting schedule in effect prior to such amendment apply with respect to him, such election, if any, to be made during the period beginning not later than the date the amendment is adopted and ending no earlier than sixty (60) days after the latest of the date the amendment is adopted, the amendment becomes effective or the Participant is issued written notice of the amendment by his Employer or the Plan Administrator; or (6) shall increase the duties or liabilities of the Trustee without its written consent. (b) Amendment of Plan. Subject to the limitations stated in paragraph (a), the Company shall have the power to amend this Plan in any manner that it deems desirable, and, not in limitation but in amplification of the foregoing, it shall have the right to change or modify the method of allocation of contributions hereunder, to change any provision relating to the administration of this Plan and 33 36 to change any provision relating to the distribution or payment, or both, of any of the assets of the Trust. (c) Termination of Plan. Any Employer, in its sole and absolute discretion, may permanently discontinue making contributions under this Plan or may terminate this Plan and the Trust, completely or partially, at any time without any liability whatsoever for such permanent discontinuance or complete or partial termination. In any of such events, the affected Participants, notwithstanding any other provisions of this Plan, shall have fully vested interests in the amounts credited to each of their respective accounts at the time of such complete or partial termination of this Plan and the Trust or permanent discontinuance of contributions. All such vested interests shall be nonforfeitable. (d) Discontinuance Procedure. In the event an Employer decides to permanently discontinue making contributions, such decision shall be evidenced by an appropriate resolution of its Board and a certified copy of such resolution shall be delivered to the Plan Administrator and the Trustee. All of the assets in the Trust Fund belonging to the affected Participants on the date of discontinuance specified in such resolutions shall, aside from becoming fully vested as provided in paragraph (c), be held, administered and distributed by the Trustee in the manner provided under this Plan. In the event of a permanent discontinuance of contributions without such formal documentation, full vesting of the interests of the affected Participants in the amounts credited to each of their respective accounts will occur on the last day of the year in which a substantial contribution is made to the Trust. (e) Termination Procedure. In the event an Employer decides to terminate this Plan and the Trust, such decision shall be evidenced by an appropriate resolution of its Board and a certified copy of such resolution shall be delivered to the Plan Administrator and the Trustee. After payment of all expenses and proportional adjustments of individual accounts to reflect such expenses and other changes in the value of the Trust Fund as of the date of termination, each affected Participant (or the Beneficiary of any such Participant) shall be entitled to receive, provided that no successor plan has been established, any amount then credited to his Account in accordance with the provisions of Article IX. ARTICLE XV Miscellaneous (a) Merger or Consolidation. This Plan and the Trust may not be merged or consolidated with, and the assets or liabilities of this Plan and the Trust may not be transferred to, any other plan or trust unless each Participant would receive a benefit immediately after the merger, consolidation or transfer, if the plan and trust then terminated, that is equal to or greater than the benefit the Participant would have received immediately before the merger, 34 37 consolidation or transfer if this Plan and the Trust had then terminated. (b) Alienation. (1) Except as provided in paragraph (2), no Participant or Beneficiary of a Participant shall have any right to assign, transfer, appropriate, encumber, commute, anticipate or otherwise alienate his interest in this Plan or the Trust or any payments to be made thereunder; no benefits, payments, rights or interests of a Participant or Beneficiary of a Participant of any kind or nature shall be in any way subject to legal process to levy upon, garnish or attach the same for payment of any claim against the Participant or Beneficiary of a Participant; and no Participant or Beneficiary of a Participant shall have any right of any kind whatsoever with respect to the Trust, or any estate or interest therein, or with respect to any other property or right, other than the right to receive such distributions as are lawfully made out of the Trust, as and when the same respectively are due and payable under the terms of this Plan and the Trust. (2) Notwithstanding the provisions of paragraph (b)(1), the Plan Administrator shall direct the Trustee to make payments pursuant to a Qualified Domestic Relations Order as defined in Section 414(p) of the Code. The Plan Administrator shall establish procedures consistent with Section 414(p) of the Code to determine if any order received by the Plan Administrator, or any other fiduciary of the Plan, is a Qualified Domestic Relations Order. (c) Governing Law. This Plan shall be administered, construed and enforced according to the laws of the State of Florida, except to the extent such laws have been expressly preempted by federal law. (d) Action by Employer. Whenever an Employer under the terms of this Plan is permitted or required to do or perform any act, it shall be done and performed by the Board of Directors of an Employer and shall be evidenced by proper resolution of such Board of Directors certified by the Secretary or Assistant Secretary of an Employer. (e) Alternative Actions. In the event it becomes impossible for the Company, the Plan Administrator or the Trustee to perform any act required by this Plan, then the Company, the Plan Administrator or the Trustee, as the case may be, may perform such alternative act that most nearly carries out the intent and purpose of this Plan. (f) Gender. Throughout this Plan, and whenever appropriate, the masculine gender shall be deemed to include the feminine and neuter; the singular, the plural; and vice versa. 35 38 IN WITNESS WHEREOF, this Plan has been executed this 28th day of December 2, 1994. HOME SHOPPING NETWORK, INC. By: /s/ -------------------------- Its Vice-President "COMPANY" 36 39 HOME SHOPPING NETWORK, INC. EMPLOYEE EQUITY PARTICIPATION PLAN AGREEMENT AND DECLARATION OF TRUST This Agreement and Declaration of Trust, made this 28th day of December, 1994, by and between HOME SHOPPING NETWORK, INC., a Delaware corporation, hereinafter referred to as the "Company", and PNC BANK KENTUCKY, INC., hereinafter referred to as the "Trustee". WHEREAS, the Company has heretofore adopted its Employee Stock Ownership Plan (a copy of which is annexed hereto and is herein called the "Plan") for the benefit of the Participants and their beneficiaries; NOW, THEREFORE, the Company and the Trustee do hereby agree and declare as follows: ARTICLE I Establishment of Trust Fund The Company hereby establishes with the Trustee, pursuant to the Plan, a trust which shall be comprised of an initial amount of $10.00, hereby delivered to the Trustee, together with other sums of money and other property acceptable to the Trustee, and the earnings and profits thereon. All such money and property, all investments made therewith and proceeds thereof, and all earnings and profits thereon, less the payments made by the Trustee, as authorized herein, are referred to herein as the "Fund". The Fund shall be held by the Trustee in trust and dealt with in accordance with the provisions of this Agreement and Declaration of Trust. At no time shall any part of the corpus or income of the Fund be used for or diverted to purposes other than for the exclusive benefit of the Participants and their beneficiaries. ARTICLE II Duties of Trustee 2.1 Distributions. It shall be the duty of the Trustee to make payments out of the Trust Fund from time to time on the written directions of the Administrator provided in the Plan to such persons, in the manner and in amounts as may be specified in the written directions of the Administrator, including, when the Administrator shall so direct, payments to the Participants or their beneficiaries under the Plan. Such directions need not specify the purpose of the payment so ordered, and the Trustee shall not be responsible in any way respecting the purpose of the payments, the applications of the payments or for the adequacy of the Fund to meet and discharge any liabilities under the Plan. In the event that more than one Administrator is appointed, the responsibilities of each shall be as determined by the Board of Directors and accepted in writing by the Administrators. In the event no delegation is made by the Board of Directors, the Administrators may allocate the responsibilities among themselves, in which event they shall notify the Trustee and the Board of 40 Directors in writing of their action. The Trustee thereafter shall be entitled to accept and rely upon any document executed by the appropriate Administrator unless the Board of Directors or the Administrators shall file with the Trustee a written revocation of the designation. 2.2 Company Stock. The Plan is intended to invest primarily in marketable securities of the Company and qualify as an employee stock ownership plan within the meaning of section 4975(e)(7) of the Internal Revenue Code of 1986, as amended. 2.3 Investment of Trust Fund. Subject to Section 2.2, above, the Trustee shall invest and reinvest the principal and income of the Fund and keep the Fund invested, without distinction between principal and income, in any and all common stocks, preferred stocks, bonds, treasury bills, mutual funds, shares of open-end management type investment companies, notes, debentures, mortgages, equipment trust certificates, ordinary life insurance, annuity and other investment contracts, common trust or investment funds (including funds which may be established by any bank or trust company which may be or become a Trustee hereunder), and in other property, real or personal, investments and securities of any kind, class or character as the Trustee may deem suitable for the Fund, and may purchase, sell, write or otherwise deal with stock options, both puts and calls, and futures contracts, provided that in selecting investments the Trustee shall use the skill and diligence of a prudent man acting in a like capacity in the conduct of an enterprise of a like character and with like aims. The Trustee, in the Trustee's discretion, may keep a portion of the Fund in cash or cash balance (including deposits with any bank which may be or become a Trustee hereunder) as the Trustee may from time to time deem to be in the best interests of the Fund. 2.4 Investment Managers. The Trustee may, with the written consent of the Administrator, select one or more Investment Managers, as defined by the Plan, to manage all or any portion of the Trust Fund, and the Trustee shall not thereafter be responsible for any act or omission of the Investment Manager or be under any obligation to invest or otherwise manage any asset of the Plan subject to the control of the Investment Manager. 2.5 Valuation of Trust Fund. Within 60 days after the end of the fiscal year of the Plan, the Trustee shall ascertain and certify to the Administrator the fair market value, as of the last day of such fiscal year, of all securities and other properties held in the Fund. The fair market values may be determined either by the Trustee or by any other person or persons believed by the Trustee to be competent to make the determination as the Trustee may select. Any determination of value so made shall, for all purposes of the Plan, conclusively establish such values. 2 41 ARTICLE III Powers of Trustee 3.1 Specific Powers. The Trustee is authorized and empowered: (a) To buy, sell exchange, convey, transfer, or otherwise acquire or dispose of any property held by the Trustee, by private contract or at public auction, and no person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of the sale or other disposition; (b) To buy, sell, write and otherwise deal with stock options and the purchases and sales may be made on credit including the use of a margin account; (c) To vote any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any warrants, conversion privileges, subscription rights, or other options and to make any payments incidental thereto; to consent to or otherwise participate in corporate reorganizations or other changes affecting corporate securities and to delegate discretionary powers and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property held in the Fund; (d) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (e) To register any investment held in the Fund in the Trustee's own names or in the name of the nominee or nominees and to hold any investment in bearer form, but the books and records of the Trustee shall at all times show that the investments are part of the Fund; (f) To manage, administer, operate, lease for any number of years, develop, improve, repair, alter, demolish, mortgage, pledge, grant options with respect to, or otherwise deal with any real property or interest therein at any time held in trust; (g) To employ suitable agents and counsel and to pay their reasonable expenses and compensation; (h) To borrow or raise monies for the purposes of the Trust and for any sum so borrowed to issue a promissory note as Trustee and to secure the repayment thereof by pledging all or any part of the Fund, but nothing herein contained shall obligate a Trustee to be liable individually for the borrowing; and no person 3 42 loaning money to the Trustee shall be bound to see to the application of the money loaned or to inquire into the validity, expediency, or propriety of the borrowing; 3.2 General Powers. Notwithstanding the provisions of Section 3.1, the Trustee is authorized and empowered to perform all acts not specifically mentioned herein as the Trustee may deem necessary to administer the Trust Fund and to carry out the purposes of the Trust. 3.3 Defined Terms. Capitalized terms used in this Agreement but not specifically defined herein shall have the meaning described to them in the Plan. ARTICLE IV Trustee 4.1 Resignation or Removal of Trustee. Any Trustee may resign at any time upon 60 days' notice in writing to the Company and the Administrator. A Trustee may be removed by the Company at any time upon 60 days' notice in writing to the Trustee and the Administrator. Upon the resignation or removal of a Trustee, the Company shall appoint a successor Trustee who shall have the same powers and duties as those conferred upon the former Trustee hereunder. The former Trustee shall assign, transfer, and pay to the remaining Trustee or the successor Trustee the Funds and properties then held by the former Trustee and constituting a part of the Fund. The former Trustee is authorized, however, to reserve a reasonable sum of money for payment of fees and expenses in connection with the settlement of the trust accounts or otherwise, and any balance of the reserve remaining after the payment of fees and expenses shall be paid to the remaining or successor Trustee. 4.2 Accounting by Trustee. The Trustee shall keep accurate and detailed accounts of all investments, receipts, disbursements, and other transactions hereunder, and all accounts, books, and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Administrator. Within 60 days following the close of the Plan's fiscal year, and within 90 days after the removal or resignation of a Trustee as provided in paragraph 4.1 hereof, the Trustee shall file with the Company a written account setting forth all investments, receipts, disbursements and other transactions effected by the Trustee during the fiscal year or during the period from the close of the last fiscal year to the date of the removal or resignation, which account so filed shall be open to inspection during business hours by the Administrator and by the Participants and their beneficiaries for a period of 30 days immediately following the date on which the account is filed with the Company. Upon the expiration of the 30-day period, the Trustee shall be forever released and discharged from all liability and accountability to anyone with respect to the propriety of the acts and transactions 4 43 shown in the account, except with respect to any act or transaction as to which the Company, Participants, or beneficiaries shall have filed written objections with the Trustee within the 30-day period. 4.3 Reliance by Trustee. Any action by the Board of Directors of the Company pursuant to any of the provisions of this Agreement and Declaration of Trust shall be evidenced by a resolution of the Board of Directors certified to the Trustee over the signature of its secretary or any assistant secretary under the corporate seal, and the Trustee shall be fully protected in acting in accordance with the resolutions. All directions, requests, and instructions of the Administrator to the Trustee shall be in writing, and the Trustee shall act and shall be fully protected in acting in accordance with the directions, requests and instructions. The Company shall furnish the Trustee from time to time with certified copies of resolutions of its Board of Directors evidencing the appointment and termination of office of Administrator. 4.4 Liability of Trustee. The Trustee from time to time may consult with counsel, who may be counsel for the Company, and other advisers and shall be fully protected in reasonably and prudently acting on the advice. 4.5 More than One Trustee. During any time when there shall be more than one Trustee serving, action shall be taken by a majority vote of the Trustee at a meeting or in writing without a meeting. The Trustee may authorize and direct one Trustee to communicate the actions of the Trustee to the Administrator or any other interested party. In that event the Administrator shall be notified of the authorization and shall be entitled to rely on the communication. ARTICLE V Termination and Amendment 5.1 Termination of Plan. The Company shall have the right at any time to permanently discontinue its contributions hereunder and to terminate or partially terminate its participation in this Plan and Trust by delivering to the Trustee and the Administrator written notice of the discontinuance, termination or partial termination, in which event the Fund shall be disposed of by the Trustee in accordance with the written directions of the Administrator. 5.2 Amendment of Trust. The Company reserves the right at any time and from time to time, by action of its Board of Directors, to modify or amend, in whole or in part, any or all of the provisions of this Agreement and Declaration of Trust provided that no modification or amendment which affects the rights, duties or responsibilities of the Trustee may be made without the Trustee's consent in writing, and provided further, that no 5 44 modification or amendment shall authorize or permit, at any time, any part of the corpus or income of the Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries under the Plan. 5.3 Adoption by Affiliates. Affiliates of the Company may, with the consent of the Company, adopt this Plan for the benefit of their employees. Any such Affiliate may also discontinue its participation in the Plan at any time by giving appropriate notice to the Trustee, the Company and the Plan Administrator. ARTICLE VI Miscellaneous Provision 6.1 Expenses and Taxes. All brokerage costs and transfer taxes incurred in connection with the investment and reinvestment of the Fund, all expenses (other than fees for legal services rendered to the Trustee) incurred in connection with the acquisition or holding or real property, any interest therein or mortgage thereon, and all income taxes or other taxes of any kind whatsoever which may be levied or assessed under existing or future laws upon or in respect of the Fund, and any interest which may be payable on money borrowed by the Trustee for the purposes of the Trust, shall be paid from the Fund, and until paid, shall constitute a charge upon the Fund. All other administrative expenses actually incurred by the Trustee in the performance of Trustee's duties hereunder, including fees for legal services rendered to the Trustee and such compensation to any Trustee who is not also an employee of the Company as may be agreed upon in writing from time to time between the Company and the Trustee, shall be paid by the Company, but until paid shall constitute a charge upon the Fund. 6.2 Applicable Law. The Plan and this Agreement and Declaration of Trust shall be administered, construed and enforced according to the Employee Retirement Income Security Act of 1974, as amended, and the laws of the State of Florida, to the extent they are not inconsistent therewith. IN WITNESS WHEREOF, this Agreement has been executed on the day and year set forth in the first paragraph of page 1, above. Attest: HOME SHOPPING NETWORK, INC. By: /s/ By: /s/ ------------------------- ------------------------ Asst. Secretary Vice-President (Corporate Seal) 6 45 TRUSTEE'S ACCEPTANCE PNC BANK KENTUCKY, INC. hereby accepts the designation by the Board of Directors of HOME SHOPPING NETWORK, INC., as Trustee under this Agreement and Declaration of Trust. In exercising the responsibilities hereunder, the Trustee understands that he is the fiduciary of the Plan and will be held responsible for their actions and failures to act in that capacity. Brenda Higgins, VP Trust Officer -------------------------------- "Trustee" STATE OF FLORIDA COUNTY OF PINELLAS The foregoing instrument was acknowledged before me this 28th day of December, 1994, by Kevin J. McKeon and H. Steven Holtzman as Vice President and Secretary, respectively, of HOME SHOPPING NETWORK, INC., on behalf of the Company, who is personally known to me or has produced ______________________ as identification. Shirley S. Edwards -------------------------------- NOTARY PUBLIC Name: --------------------------- My Commission Expires: (SEAL) STATE OF KENTUCKY COUNTY OF JEFFERSON The foregoing instrument was acknowledged before me this 29th day of December, 1994, by Brenda Higgins, as Trustee, who is personally known to me or who has produced ____________________ as identification. Judy A. Franklin -------------------------------- NOTARY PUBLIC Name: Judy A. Franklin --------------------------- My Commission Expires: 3/30/96 7 EX-13 3 ANNUAL REPORT 1 EXHIBIT 13 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. As discussed in Note A to the Consolidated Financial Statements, included herein, on July 13, 1993, the Company elected to change its year end from August 31 to December 31. This change was made effective January 1, 1993. The following discussion presents the material changes in the consolidated results of operations of the Company which have occurred between the years ended December 31, 1994 and 1993, along with material changes between the year ended December 31, 1993 and the fiscal year ended August 31, 1992, and the four months ended December 31, 1992 versus the four months ended December 31, 1991. Reference should also be made to the Consolidated Financial Statements and Summary Financial Data included herein. All tables and discussion included herein calculate the percentage changes using actual dollar amounts, versus rounded dollar amounts. YEAR ENDED DECEMBER 31, 1994 vs. YEAR ENDED DECEMBER 31, 1993 NET SALES For the year ended December 31, 1994, net sales for the Company increased $79.9 million, or 7.6%, to $1.127 billion from $1.047 billion for the year ended December 31, 1993. Net sales of HSC increased $65.2 million, or 6.8%, for the year ended December 31, 1994, reflecting a 19.5% increase in the number of packages shipped and a 10.2% decrease in the average price per unit sold compared to the year ended December 31, 1993. Promotional price discounts, used to enhance HSC merchandise sales, increased to 2.7% of HSC sales for the year ended December 31, 1994, from 1.8% in 1993. In addition, sales by the Company's new infomercial joint venture, HSN Direct Joint Venture ("HSND"), which commenced operations during the third quarter of 1994, totaled $13.5 million and sales by the Company's retail outlets increased $6.7 million for the year ended December 31, 1994 compared to the prior year. The increases for the year ended December 31, 1994 were primarily offset by a decline in sales of $6.9 million attributable to the sale of the Company's former wholly-owned subsidiary, HSN Mistix Corporation ("Mistix") in the second quarter of 1994. The sale of Mistix should not have a significant impact on the Company's net sales or results of operations in future periods. The sales increases for the year ended December 31, 1994 versus 1993, occurred primarily in the first nine months of the year and were the continuation of a trend that began in the latter part of the third quarter of 1993. Management believes that 1994 sales levels were 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. Since September 1994, the Company has appointed new senior management personnel with expertise in merchandising. The Company has also instituted procedures intended to improve purchasing and other merchandising practices. Management's emphasis in this area includes evaluating new product sources and programs to boost customer loyalty, offering higher quality and a greater variety of products, developing strong private label lines, selling higher margin items and offering name brand merchandise. During the fourth quarter of 1994, in addition to reorganizing its merchandising and sales practices, the Company continued to significantly restyle its programming. This includes new on-air presentations, offering regularly scheduled themed shows, increasing the number of items aired per hour and the display of item numbers which enables a customer to order an item when it is off the air. Additional programming changes which are currently under evaluation by management include revising the current network structure to simplify program scheduling. These changes are expected to be introduced in the second and third quarters of 1995 and may not be fully implemented until the end of 1995. These changes in merchandising and programming strategy are aimed at long-term improvements in sales by attempting to attract new customers and increase the frequency of sales. However, the initial impact of these changes was a slowdown in sales, such that consolidated net sales for the quarter ended December 31, 1994 increased only 1.8% over the same period in 1993. Sales and earnings through mid-1995 are expected to be negatively affected by these changes. While management 22 2 believes the Company's new merchandising and programming strategy will improve results, it estimates the earliest that sales will be positively affected will be the latter half of 1995. There can be no assurance that these changes will achieve management's intended results. For the years ended December 31, 1994 and 1993, HSC's merchandise return percentage remained constant at 24.4%. The return rate continues to be affected by high returns in jewelry and electronics merchandise categories which typically experience higher return rates than other merchandise categories. Management is evaluating the Company's product mix and is taking other steps in the area of merchandising, as discussed above, in an attempt to reduce the merchandise return rate. At December 31, 1994, HSC had approximately 4.9 million active members representing a 1.4% gain over December 31, 1993. An active member is defined as an HSC member that has completed a transaction within the last 18 months or placed an order within the last seven months. In addition, 59.4% of active members have made more than one purchase in the last 18 months. 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 sales and 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. The following table highlights the changes in the estimated unduplicated television household reach of HSC programming by category for the year ended December 31, 1994:
Cable Broadcast Satellite Total --------- ------------ ---------- --------- (In thousands of households) Balance - December 31, 1993. . . . . . . . . . . . . . . . . . . 33,788 25,876 3,100 62,764 Net additions. . . . . . . . . . . . . . . . . . . . . . . . . . 2,029 463 650 3,142 Shift in classification . . . . . . . . . . . . . . . . . . . . 3,143 (3,143) - - Change in Nielsen household counts . . . . . . . . . . . . . . . - (128) - (128) --------- --------- -------- --------- Balance - December 31, 1994 . . . .. . . . . . . . . . . . . . . 38,960 23,068 3,750 65,778 ========= ========= ======== =========
As of December 31, 1994, there were approximately 95.4 million homes in the United States with a television set, 60.0 million basic cable television subscribers and 3.8 million homes with satellite dish receivers. The cable television household growth was achieved primarily through increased cable system carriage of HSC's broadcast signal due to the implementation of "must carry" beginning in September 1993, and the Company's aggressive campaign to obtain contracts for cable carriage of HSC programming. Because HSC programming is now on a cable channel line-up, former broadcast households can now more easily access HSC programming. The decrease in broadcast television households was primarily attributable to the shift in classification from broadcast to cable. This decrease was offset, in part, by the addition of broadcast television households due to changes in the composition of the broadcast television station group with which HSC has affiliation agreements. During 1995, 5.0 million cable subscribers are covered by cable system contracts that are subject to termination or renewal. This represents 12.7% of the total number of unduplicated cable households receiving HSC programming, exclusive of "must carry" subscribers. The Company is pursuing both renewals and additional cable television system contracts, but channel availability, competition, cost of carriage, cable re-regulation and ownership or affiliation of the Company's competitors with cable system operators 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 the contracts will be renewed. HSC's market penetration typically lags behind increases in carriage. As a result of the increase in carriage since late 1993, the Company has experienced a slight improvement in its market penetration. As the new households mature, the Company expects market penetration to improve, but there can be no assurance that this will occur. The Company is developing new marketing programs aimed at increasing consumer awareness of HSC programming to further improve market penetration. In 1994, the Company commenced two ventures: HSND produces and airs infomercials and a joint venture with Black Entertainment Television, Inc. is testing a new television shopping program. Also, in 1994 the Company expanded its role in computer on-line interactive shopping through the acquisition of Internet Software, Inc. ("ISN") which markets merchandise over the Internet. The Company intends to expand this service. In addition, in 1994, the Company launched two on-line stores over interactive on-line computer services. Recently, the Company announced that it has engaged the services of consultants 23 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES to assist in developing its new shopping service, Television Shopping Mall, which is expected to be launched by early 1996. These business activities did not have a material negative impact on the Company's financial statements since their inception or acquisition during the second half of 1994. A full year of these business activities may have a negative impact on the Company's results of operations in 1995. 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, both domestic and international, 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. COST OF SALES For the year ended December 31, 1994, cost of sales increased $26.5 million, or 3.7%, to $730.5 million from $704.0 million for the year ended December 31, 1993. As a percentage of net sales, cost of sales decreased to 64.8% from 67.3% compared to the year ended December 31, 1993. Cost of sales of HSC increased $22.5 million for the year ended December 31, 1994. As a percentage of HSC sales, cost of sales decreased to 66.9% from 69.1%, compared to the year ended December 31, 1993. In addition, cost of sales for HSND and the Company's retail outlets for the year ended December 31, 1994, increased $5.0 million and $3.7 million, respectively, compared to the year ended December 31, 1993. The remaining decrease in cost of sales for the year ended December 31, 1994, compared to 1993, is primarily attributable to the sale of Mistix, as discussed in "Net Sales." The decreases in consolidated and HSC's cost of sales percentages in 1994 compared to 1993 relate primarily to an additional $20.1 million adjustment made to HSC's inventory carrying amount, which increased cost of sales in the first quarter of 1993, in connection with a change in management's merchandising philosophy. OPERATING EXPENSES The following table highlights the operating expense section from the Company's Consolidated Statements of Operations, including the dollar and percentage changes for the year ended December 31, 1994, compared to the year ended December 31, 1993:
Years Ended December 31, ---------------------- $ % 1994 1993 Change Change --------- --------- --------- --------- (In millions, except %) Selling and marketing. . . . . . . . . . . . . . . . . . . $161.9 $138.1 $ 23.8 17.2% Engineering and programming. . . . . . . . . . . . . . . . 98.8 93.7 5.1 5.5 General and administrative . . . . . . . . . . . . . . . . 79.3 93.5 (14.2) (15.1) Depreciation and amortization . . . . . . . . . . . . . . 29.1 24.2 4.9 20.2 --------- --------- --------- $369.1 $349.5 $ 19.6 5.6 ========= ========= =========
As a percentage of net sales, operating expenses decreased to 32.8% from 33.4% compared to the year ended December 31, 1993. 24 4 SELLING AND MARKETING For the year ended December 31, 1994, selling and marketing expenses, as a percentage of net sales, increased to 14.4% from 13.2% compared to the year ended December 31, 1993. The major components of selling and marketing expenses are detailed below, including the dollar and percentage changes for the year ended December 31, 1994 compared to the year ended December 31, 1993:
Years Ended December 31, --------------------- $ % 1994 1993 Change Change -------- -------- --------- --------- (In millions, except %) Telephone, operator and customer service. . . . . . . . . . . $53.8 $48.5 $ 5.3 10.8% Fees to cable system operators: Commissions . . . . . . . . . . . . . . . . . . . . . . . . 38.4 33.9 4.5 13.1 Marketing payments for cable advertising. . . . . . . . . . 25.3 30.7 (5.4) (17.5) Performance bonus commissions . . . . . . . . . . . . . . . 9.1 - 9.1 100.0
Telephone, operator and customer service expenses are typically related to sales, call volume and the number of packages shipped, and for the year ended December 31, 1994, compared to the year ended December 31, 1993, these expenses increased as a result of increases in call and package volume. These expenses are expected to fluctuate in relation to sales, call volume and package volume in 1995. For the year ended December 31, 1994, commissions to cable system operators increased at a higher rate than sales as a result of increased cable system carriage of the Company's programming due to the implementation of the "must carry" provisions of the cable re-regulation law. Marketing payments for cable advertising, related primarily to previous contractual commitments, decreased for the year ended December 31, 1994, compared to the year ended December 31, 1993. As older agreements expire or are renegotiated and new cable carriage agreements are executed, marketing payments for 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. Accordingly, marketing payments for cable advertising are expected to continue to decrease and depreciation and amortization is expected to increase in 1995. Performance bonus commissions based upon the sales levels of HSC programming in the cable operator's franchise area are expected to increase as additional contracts are renewed or added. In addition, cable operators which have executed affiliation agreements to carry HSN2 are compensated for all sales of HSN2 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, fees paid to cable system operators are expected to remain at higher levels in future periods. Selling and marketing expenses related to HSND totaled $6.7 million for the year ended December 31, 1994. The remaining net increase in selling and marketing expenses is attributable to other advertising and promotional expenses of 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 year ended December 31, 1994, engineering and programming expenses, as a percentage of net sales, decreased to 8.8% from 9.0% compared to the year ended December 31, 1993. Increases in expense related to broadcast affiliates in additional markets totaled $3.7 million compared with the year ended December 31, 1993. In addition, based on sales within the broadcast markets of Silver King Communications, Inc. ("SKC"), for the year ended December 31, 1994, the Company incurred additional broadcast commission expense of $1.3 million, compared to the year ended December 31, 1993. 25 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES Broadcast costs are expected to remain at these higher levels in 1995. 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 1995. GENERAL AND ADMINISTRATIVE For the year ended December 31, 1994, general and administrative expenses, as a percentage of net sales, decreased to 7.0% from 8.9% compared to the year ended December 31, 1993. For the year ended December 31, 1994, consulting and stockholder relations expenses decreased $5.3 million, due to expenses incurred 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 and the unsolicited merger proposal by QVC, Inc. that was not consummated. Expenses in connection with the Company's executive stock award program, stock appreciation rights granted in 1993, settlement of sales tax issues, legal expense, repairs and maintenance and equipment rental decreased $13.8 million for the year ended December 31, 1994, compared to the year ended December 31, 1993. The above decreases were offset by increases for the year ended December 31, 1994, totaling $5.0 million, in payroll expense and other administrative expenses. Based on present circumstances, management expects general and administrative expenses to remain at current levels in 1995. DEPRECIATION AND AMORTIZATION For the year ended December 31, 1994, depreciation and amortization increased primarily due to the amortization of cable distribution fees, which totaled $3.9 million for the year ended December 31, 1994. Amortization of these fees is expected to total $8.2 million in 1995 based on existing agreements. This amortization could increase if additional cable distribution fees are paid in 1995 in connection with renewing or adding long-term cable system contracts, as discussed in "Net Sales." The balance of the increase in depreciation and amortization is attributable to capital asset additions during the year ended December 31, 1994. Accordingly, depreciation and amortization will be higher in 1995. OTHER INCOME (EXPENSE) For the year ended December 31, 1994, the Company had net other income of $3.6 million compared to net other expense of $(12.6) million for the year ended December 31, 1993. Interest income decreased $4.1 million for the year ended December 31, 1994, compared to the year ended December 31, 1993, due to the repayment by SKC, in August 1994, of its indebtedness to the Company, as discussed in "Financial Position, Liquidity and Capital Resources." Accordingly, interest income is expected to further decrease in 1995. Interest expense decreased $5.4 million for the year ended December 31, 1994, primarily as a result of the repayment by the Company, in August 1994, of its Senior Term Loans, as discussed in "Financial Position, Liquidity and Capital Resources." In late 1994 and the first quarter of 1995, the Company borrowed funds under its amended bank facility and intends to borrow additional amounts in 1995 as discussed in "Financial Position, Liquidity and Capital Resources." Interest expense in 1995 will increase as a result of these borrowings and higher interest rates compared to 1994. For the year ended December 31, 1994, net miscellaneous expense decreased $2.0 million compared to the year ended December 31, 1993. Net miscellaneous expense for the year ended December 31, 1993 includes nonrecurring costs totaling $3.8 million. For the year ended December 31, 1994, net miscellaneous expense includes a $(2.9) million loss on the sale of Mistix. The sale of Mistix should not have a significant impact on the Company's operating results in future periods. In addition, 1994 includes the receipt of proceeds from a lawsuit settlement totaling $.8 million. An additional $.6 million will be received in the first quarter of 1995. Net other expense for the year ended December 31, 1993 also includes litigation settlements totaling $13.0 million. INCOME TAXES The Company's effective tax rate was an expense of 42.0% for the year ended December 31, 1994 and a benefit of (20.6)% for the year ended December 31, 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 26 6 income taxes and the provision for interest on adjustments proposed by the Internal Revenue Service ("IRS"), as discussed in Note E to the Consolidated Financial Statements included herein. In 1995, the Company anticipates a decrease in its effective tax rate to approximately 39.0%. EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS In the year ended December 31, 1994, the Company repaid the remaining $85.0 million outstanding balance on its Senior Term Loans. In the year ended December 31, 1993, the Company refinanced and retired the remaining $143.3 million of its 11 3/4% Senior Notes (the "Senior Notes") and retired the remaining $16.9 million of its 5 1/2% Convertible Subordinated Debentures (the "Debentures"). These transactions resulted in extraordinary items -- loss on early extinguishment of long-term obligations, net of taxes as discussed in Note D to the Consolidated Financial Statements included herein. NET EARNINGS (LOSS) The Company had net earnings of $16.8 million, or $.18 per share, for the year ended December 31, 1994, compared to a net loss of $(22.8) million, or $(.26) per share, for the year ended December 31, 1993. The increase in net earnings for the year ended December 31, 1994, was primarily attributable to an increase in net sales of $79.9 million and an increase in gross profit of $53.5 million compared to the year ended December 31, 1993. As discussed in "Cost of Sales," the results for the year ended December 31, 1993, included an additional adjustment of $20.1 million to the inventory carrying amount, which increased "Cost of Sales." The results for the year ended December 31, 1993 were also affected by the litigation settlements of $13.0 million, as discussed in "Other Income (Expense)" and Note I to the Consolidated Financial Statements included herein. As previously discussed, the Company has recorded a loss of ($2.9) million on the sale of the common stock of Mistix. In addition, the consolidated results for the year ended December 31, 1994 includes a pre-tax loss for Mistix of $(1.6) million. Consolidated results also include extraordinary losses, net of taxes, of $(.9) million, or $(.01) per share, for the year ended December 31, 1994, and $(7.2) million, or $(.08) per share, for the year ended December 31, 1993. YEAR ENDED DECEMBER 31, 1993 vs. FISCAL YEAR ENDED AUGUST 31, 1992 GENERAL As discussed in Note J to the Consolidated Financial Statements, included herein, on July 31, 1992 and December 28, 1992, the Company distributed the capital stock of its former wholly-owned subsidiaries, Precision Systems, Inc. ("PSi") and SKC, respectively, as stock dividends to the Company's stockholders. As noted below, these distributions affect the comparison of revenues and expenses for the year ended December 31, 1993 versus the fiscal year ended August 31, 1992 and for the four months ended December 31, 1992 versus the four months ended December 31, 1991. NET SALES For the year ended December 31, 1993, net sales decreased $51.2 million, or 4.6%, to $1.047 billion from $1.098 billion for the fiscal year ended August 31, 1992. Net sales of HSC decreased $43.8 million, or 4.3%, for the year ended December 31, 1993, reflecting a 22.7% decrease in the number of packages shipped while the average price per unit sold increased 29.4% compared to the fiscal year ended August 31, 1992. On a consolidated basis, $20.4 million of the net sales decrease was due to the distribution by the Company of the capital stock of PSi and SKC. These declines were somewhat offset by an increase in sales attributable to the Company's mail order subsidiary, HSN Mail Order, Inc. ("Mail Order") of $3.5 million and a $6.9 million increase in sales through the Company's retail outlets for the year ended December 31, 1993. After consideration of the distributions of SKC and PSi, net sales for the year ended December 31, 1993, declined 2.9% compared to the fiscal year ended August 31, 1992. The decline in sales for the year ended December 31, 1993, primarily occurred during the first quarter of the year. Management believes that this decline was attributable to the same factors that resulted in lower sales in the latter part of 1992, including the weak economy and a possible decline in viewership due to programming competition. The Company also made certain format and policy changes beginning in September 1992 which also may have contributed to this 27 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES decline. These changes included, among other things, the visual display of shipping and handling charges on the television screen, greater program segmentation, higher priced merchandise in categories which typically carry a higher return percentage, changes in merchandise offerings, and other show format changes. During April 1993, the Company held a week long "Big Top" sales event, primarily to liquidate certain merchandise. See "Cost of Sales." While additional sales volume was generated during this event, sales levels were lower in the second quarter of 1993 than in 1992 and this trend continued through the beginning of the third quarter of 1993. In the latter part of the third quarter through the end of 1993, however, sales levels increased. A significant reason for the sales increase during this period was the addition of new cable subscribers beginning in September 1993 as a result of the "must carry" provisions of the cable re-regulation law. Although sales increased in the latter part of 1993, they are compared to a period which reflected a sales decrease. Nonetheless, management believes that sales levels in late 1993 were positively affected by improvements initiated during 1993 in the merchandising management and sales philosophy of HSC. For the year ended December 31, 1993, the merchandise return percentage increased to 22.4% from 20.3%, compared to the fiscal year ended August 31, 1992. The primary reason for the higher return percentage was increased sales in higher priced jewelry and electronic merchandise categories which typically experience higher rates of return than other merchandise categories. COST OF SALES For the year ended December 31, 1993, cost of sales increased $12.7 million, or 1.8%, to $704.0 million from $691.3 million for the fiscal year ended August 31, 1992. As a percentage of net sales, cost of sales increased to 67.3% from 63.0% for the year ended December 31, 1993, compared to the fiscal year ended August 31, 1992. Cost of sales of HSC increased $21.0 million for the year ended December 31, 1993. The increases in consolidated and HSC's cost of sales and cost of sales percentage relate primarily to the liquidation of certain inventory at less than cost, due to a change in management's merchandising philosophy as further discussed below. In addition, consolidated cost of sales was affected by a decrease of $15.4 million as a result of the distribution by the Company of the capital stock of SKC and PSi, as previously discussed. The remaining change in cost of sales for the year ended December 31, 1993, compared to the fiscal year ended August 31, 1992, is primarily attributable to Mail Order and the Company's retail outlets, which had an increase in cost of sales of $2.4 million and $5.0 million, respectively. In connection with the change in management's merchandising philosophy, the Company made an additional adjustment of $20.1 million to HSC's inventory carrying amount in February 1993. During April 1993, the Company held a week long "Big Top" sales event, primarily featuring products sold on a liquidation basis, which provided additional sales volume. Due to the promotional nature of this event, the cost of sales percentage for products featured during this event was higher than typically experienced. The liquidation of this merchandise continued during the second and third quarters resulting in higher than usual cost of sales percentages during these periods. OPERATING EXPENSES The following table highlights the operating expense section from the Company's Consolidated Statements of Operations, including the dollar and percentage changes for the year ended December 31, 1993, compared to the fiscal year ended August 31, 1992:
Years Ended ------------------------ December 31, August 31, $ % 1993 1992 Change Change --------- --------- --------- --------- (In millions, except %) Selling and marketing. . . . . . . . . . . . . . . . . . . . $138.1 $135.8 $ 2.3 1.7% Engineering and programming. . . . . . . . . . . . . . . . . 93.7 54.5 39.2 71.9 General and administrative . . . . . . . . . . . . . . . . . 93.5 87.1 6.4 7.4 Depreciation and amortization. . . . . . . . . . . . . . . . 24.2 46.9 (22.7) (48.4) --------- --------- --------- $349.5 $324.3 $ 25.2 7.8 ========= ========= =========
As a percentage of net sales, these expenses increased to 33.4% from 29.5% compared to the fiscal year ended August 31, 1992. 28 8 SELLING AND MARKETING For the year ended December 31, 1993, selling and marketing expenses, as a percentage of net sales, increased to 13.2% from 12.4% compared to the fiscal year ended August 31, 1992. The major components of selling and marketing expenses are detailed below, including the dollar and percentage changes for the year ended December 31, 1993 compared to the fiscal year ended August 31, 1992:
Years Ended ------------------- December 31, August 31, $ % 1993 1992 Change Change ------- ------- --------- --------- (In millions, except %) Telephone, operator and customer service. . . . . . . . . . . . $48.5 $47.0 $1.5 3.2% Commissions to cable system operators . . . . . . . . . . . . . 33.9 34.4 (.5) (1.4) Marketing payments for cable advertising. . . . . . . . . . . . 30.7 26.8 3.9 14.5
Telephone, operator and customer service expenses are typically related to sales and order volume. However, for the year ended December 31, 1993 compared to the fiscal year ended August 31, 1992, these expenses were higher primarily due to telephone credits totaling $2.1 million received from the Company's long distance carrier and lower salary costs in the fiscal year ended August 31, 1992. For the year ended December 31, 1993, commissions to cable system operators decreased as a result of lower sales volume, compared to the fiscal year ended August 31, 1992. Marketing payments for cable advertising increased for the year ended December 31, 1993, due to previous contractual commitments for cable advertising purchases in conjunction with the Company's attempt to increase market penetration. In addition, selling and marketing expenses for the year ended December 31, 1993 decreased as a result of the curtailment of the inhouse production portion of the Company's infomercial operations which had selling and marketing expenses of $2.1 million for the fiscal year ended August 31, 1992. The remaining net decrease in selling and marketing expenses is attributable to the Company's other subsidiary operations. ENGINEERING AND PROGRAMMING For the year ended December 31, 1993, engineering and programming expenses, as a percentage of net sales, increased to 9.0% from 5.0% compared to the fiscal year ended August 31, 1992. The increase was primarily attributable to the expense of $41.1 million incurred under affiliation agreements with SKC during the year ended December 31, 1993. GENERAL AND ADMINISTRATIVE For the year ended December 31, 1993, general and administrative expenses, as a percentage of net sales, increased to 8.9% from 7.9% compared to the fiscal year ended August 31, 1992. For the year ended December 31, 1993, legal, accounting, consulting and stockholder relations expenses increased $12.5 million primarily in connection with a merger proposal by Liberty following the acquisition in February 1993, of a controlling interest in the Company by a wholly-owned subsidiary of Liberty, and the merger proposal by QVC, Inc. Additional expenses of $12.7 million, in connection with the Company's executive stock award program, stock appreciation rights granted in 1993, increased salary expense, repairs and maintenance and administrative expenses, were incurred in the year ended December 31, 1993 compared to the fiscal year ended August 31, 1992. The above increases were partially offset by decreases in certain general and administrative expenses primarily attributable to the distribution of the capital stock of SKC and PSi, as previously discussed, which reduced general and administrative expenses by $15.1 million for the year ended December 31, 1993, compared to the fiscal year ended August 31, 1992. In addition, equipment rental expense decreased $3.6 million for the year ended December 31, 1993, compared to the fiscal year ended August 31, 1992, relating to new operating leases for computer equipment with more favorable terms. 29 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES DEPRECIATION AND AMORTIZATION For the year ended December 31, 1993, depreciation and amortization decreased primarily due to the distribution of the capital stock of SKC and PSi, as previously discussed, which resulted in a reduction of depreciation and amortization of $23.4 million for the year ended December 31, 1993, compared to the fiscal year ended August 31, 1992. OTHER INCOME (EXPENSE) For the year ended December 31, 1993, net other expense decreased $5.1 million to $12.6 million from $17.7 million for the fiscal year ended August 31, 1992. Interest income increased $12.8 million for the year ended December 31, 1993, relating to a note receivable as a result of the distribution of the capital stock of SKC, as discussed in Note J to the Consolidated Financial Statements included herein. This increase was offset by a $3.5 million decrease in interest earned on available cash due to lower cash balances and interest rates. Interest expense decreased $11.4 million for the year ended December 31, 1993, primarily relating to the redemption and refinancing of the Senior Notes. The above mentioned decreases in net other expense are partially offset by litigation settlements totalling $13.0 million during 1993 and an increase in miscellaneous expense for the quarter ended March 31, 1993, primarily due to nonrecurring costs which include $2.6 million of inventory contributed to charity as a result of the change in management's merchandising philosophy regarding the types of merchandise sold on HSC. INCOME TAXES The Company's effective tax rate was a benefit of (20.6)% for the year ended December 31, 1993, and an expense of 42.0% for the fiscal year ended August 31, 1992. 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 IRS, as discussed in Note E to the Consolidated Financial Statements included herein. EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS In the year ended December 31, 1993, the Company refinanced and retired the remaining $143.3 million of its Senior Notes and retired the remaining $16.9 million of its Debentures. In the fiscal year ended August 31, 1992, the Company purchased and retired $4.0 million and $.1 million of Senior Notes and Debentures, respectively. These transactions resulted in extraordinary items -- loss on early extinguishment of long-term obligations, net of taxes, as discussed in Note D to the Consolidated Financial Statements included herein. NET EARNINGS (LOSS) The Company had a net loss of $(22.8) million, or $(.26) per share, for the year ended December 31, 1993, compared to net earnings of $37.3 million, or $.42 per share, for the fiscal year ended August 31, 1992. The loss for the year ended December 31, 1993, was primarily attributable to the following factors: decrease in net sales of $51.2 million compared to the fiscal year ended August 31, 1992; the liquidation of a portion of the Company's inventory at less than cost, the adjustment to the inventory carrying amount, as discussed in "Cost of Sales" and the litigation settlements, as discussed in "Other Income (Expense)" and Note I to the Consolidated Financial Statements included herein. For the year ended December 31, 1993, the results include an extraordinary loss of $(7.2) million, or $(.08) per share, compared to an extraordinary loss of $(.1) million, with no per share effect, for the fiscal year ended August 31, 1992. 30 10 FOUR MONTHS ENDED DECEMBER 31, 1992 (AUDITED) VS. FOUR MONTHS ENDED DECEMBER 31, 1991 (UNAUDITED) NET SALES For the four months ended December 31, 1992, net sales decreased $29.4 million, or 7.6%, to $357.2 million from $386.6 million for the four months ended December 31, 1991. Net sales of HSC decreased $26.2 million, or 7.4%, for the four months ended December 31, 1992. This decline reflected a decrease in the number of packages shipped while the average price per unit sold increased slightly compared to the four months ended December 31, 1991. Management believes this decline in sales was attributable to the weak economy, uncertainty in buyers' confidence levels caused by the November 1992 elections and a possible decline in viewership due to programming competition. The Company also made certain format and policy changes in the beginning of the four month period in 1992, which also may have contributed to this decline. These changes included, among other factors, the visual display of shipping and handling charges on the television screen, greater program segmentation, higher priced merchandise in categories which typically carry a higher return percentage, changes in merchandise offerings, and other format changes. In an effort to stimulate merchandise sales during the four months, the Company instituted HSC customer incentive programs, which included increased sales discounts and reduced shipping and handling charges. These programs which may have stimulated sales for the period, nevertheless resulted in a net sales and gross profit decrease of approximately $8.3 million. These programs were subsequently curtailed. In addition, net sales decreased $5.9 million due to the distribution by the Company of the capital stock of PSi. The above net sales decreases were offset in part by increases in sales relating to the Company's other subsidiary operations. Merchandise returns for the four months ended December 31, 1992, remained relatively constant as a percentage of sales decreasing to 20.0% from 20.3% compared to the four months ended December 31, 1991. COST OF SALES For the four months ended December 31, 1992, cost of sales decreased $12.0 million, or 4.9%, to $232.5 million from $244.5 million for the four months ended December 31, 1991. As a percentage of net sales, cost of sales increased to 65.1% from 63.2% compared to the same period last year. Cost of sales of HSC decreased $6.4 million. In addition, consolidated cost of sales was affected by a decrease of $4.9 million for the four months ended December 31, 1992, as a result of the distribution by the Company of the capital stock of PSi. The balance of the change in cost of sales compared to the same period last year relates to the Company's other subsidiary operations. The increase in cost of sales percentage and the corresponding decrease in gross profit as a percentage of net sales is primarily attributable to an increase in cost of sales percentage of HSC which was related to the institution of incentive programs, offering increased sales discounts and reduced shipping and handling charges, which had a negative impact on gross profit and net sales of HSC, as discussed in "Net Sales." OPERATING EXPENSES The following table highlights the operating expense section from the Company's Consolidated Statements of Operations, including the dollar and percentage changes for the four months ended December 31, 1992, compared to the four months ended December 31, 1991:
Four Months Ended December 31, ----------------------- 1992 1991 $ % Unaudited Change Change --------- ------------- --------- --------- (In millions, except %) Selling and marketing. . . . . . . . . . . . . . . . . . . . . . $ 45.3 $ 45.0 $ .3 0.6% Engineering and programming. . . . . . . . . . . . . . . . . . . 18.1 17.8 .3 2.0 General and administrative . . . . . . . . . . . . . . . . . . . 29.3 31.3 (2.0) (6.3) Depreciation and amortization. . . . . . . . . . . . . . . . . . 14.4 15.0 (.6) (4.2) --------- --------- ------- $107.1 $109.1 $(2.0) 1.8 ========= ========= =======
As a percentage of net sales, these expenses increased to 30.0% from 28.2% compared to the four months ended December 31, 1991. 31 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES SELLING AND MARKETING For the four months ended December 31, 1992, selling and marketing expenses, as a percentage of net sales, increased to 12.7% from 11.6% compared to the four months ended December 31, 1991. The major components of selling and marketing expenses are detailed below, including the dollar and percentage changes for the four months ended December 31, 1992, compared to the four months ended December 31, 1991:
Four Months Ended December 31, ----------------------- 1992 1991 $ % Unaudited Change Change -------- ------------- --------- --------- (In millions, except %) Telephone, operator and customer service. . . . . . . . . . . . $16.2 $14.2 $2.0 14.1% Commissions to cable system operators . . . . . . . . . . . . . 11.2 12.1 (.9) (7.4) Marketing payments for cable advertising. . . . . . . . . . . . 9.0 8.9 .1 1.1
Telephone, operator and customer service expenses are typically related to sales and order volume. However, for the four months ended December 31, 1992, compared to the same period last year, these expenses were higher due to a rate reduction and a volume discount credit totaling $2.1 million received from the Company's long distance carrier in the four months ended December 31, 1991 and increased rates during the four months ended December 31, 1992. Commissions to cable system operators decreased as a result of lower sales volume. Marketing payments for cable advertising increased slightly for the four months ended December 31, 1992. In addition, selling and marketing expenses for the four months ended December 31, 1992, decreased related to the in-house production portion of its infomercial operations which had selling and marketing expenses of $.8 million for the four months ended December 31, 1991, and which were discontinued in May 1992. The remaining change relates primarily to other subsidiary operations. ENGINEERING AND PROGRAMMING For the four months ended December 31, 1992, engineering and programming expenses, as a percentage of net sales, increased to 5.1% from 4.6% compared to the four months ended December 31, 1991. GENERAL AND ADMINISTRATIVE For the four months ended December 31, 1992, general and administrative expenses, as a percentage of net sales, increased to 8.2% from 8.1% compared to the four months ended December 31, 1991. Equipment rent expense decreased $.9 million compared to the same period in 1991 relating to new operating leases for computer equipment with more favorable terms. Additional savings of $.9 million were realized as a result of the curtailment of subsidiary operations in the infomercial and 800/900 telemarketing businesses in May 1992. DEPRECIATION AND AMORTIZATION For the four months ended December 31, 1992, depreciation and amortization decreased primarily due to a decrease in depreciation expense of $.6 million due to the distribution by the Company of the capital stock of PSi. OTHER INCOME (EXPENSE) For the four months ended December 31, 1992, net other expense increased $.2 million to $6.1 million from $5.9 million for the four months ended December 31, 1991. The increase was primarily attributable to an increase in charitable contributions of $.1 million relating to disaster relief efforts. In addition, miscellaneous expenses, primarily related to other subsidiary operations, increased $.6 million. These expense increases were offset by a decrease in interest expense of $.9 million related to the redemption of $37.5 million of Senior Notes on October 15, 1992. 32 12 INCOME TAXES The Company's effective tax rate was 55.1% for the four months ended December 31, 1992, and 42.0% for the four months ended December 31, 1991. The Company's effective tax rate for the four months ended December 31, 1992, differed from the statutory rate due primarily to the distribution of the capital stock of SKC, as discussed in Note J to the Consolidated Financial Statements included herein, 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 IRS, as discussed in Note E to the Consolidated Financial Statements included herein. NET EARNINGS The Company had net earnings of $5.1 million, or $.06 per share, for the four months ended December 31, 1992, compared to net earnings of $15.7 million, or $.18 per share, for the four months ended December 31, 1991. The decrease in net earnings was primarily attributable to a decrease in net sales of $29.4 million compared to the four months ended December 31, 1991, as discussed in "Net Sales." SEASONALITY The Company believes that seasonality does impact its business but not to the same extent it impacts the retail industry in general. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The following table highlights various balances and ratios from the Consolidated Financial Statements included herein:
December 31, ------------------------- 1994 1993 --------- ----------- Cash and cash equivalents (millions). . . . . . . . . . . . . . . . $ 33.6 $ 35.6 Working capital (millions) . . . . . . . . . . . . . . . . . . . . $ 23.1 $ 8.1 Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11:1 1.04:1 Accounts and notes receivable, net (millions) . . . . . . . . . . . $ 40.8 $ 27.8 Inventories, net (millions) . . . . . . . . . . . . . . . . . . . . $ 118.8 $ 110.9 Annual inventory turnover . . . . . . . . . . . . . . . . . . . . . 6.36 6.12
Cash and cash equivalents totaled $33.6 million at December 31, 1994 compared to $35.6 million at December 31, 1993. The principal source of cash in 1994 was the repayment by SKC of its obligation to the Company. These funds, along with operating funds, were used principally to repay the balance of the Company's outstanding Senior Term Loans, to pay cable distribution fees of $31.3 million, and for capital expenditures. Net earnings adjusted for non-cash items totalled $51.0 million and the Company borrowed $25.0 million under its revolving credit facility in 1994. Accounts and notes receivable, net, increased to $40.8 million at December 31, 1994, from $27.8 million at December 31, 1993. The primary reason for the increase is "FlexPay" sales which resulted in accounts receivable totaling $23.6 million at December 31, 1994 compared $15.5 million at December 31, 1993. The Company's financing of "FlexPay" accounts receivable has not had a significant impact on its liquidity position. In addition, on August 16, 1994, the Company loaned $5.0 million to PSi under an unsecured Line of Credit Agreement. This amount, together with accrued interest at the rate of 1% over prime, is due on July 31, 1995. 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, interest income and interest expense declined for the year ended December 31, 1994. Under terms of affiliation agreements with SKC, the broadcast stations are obligated to carry the Company's programming until December 1997. 33 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES Inventories, net, increased to $118.8 million at December 31, 1994, from $110.9 million at December 31, 1993. The inventory balance is net of a carrying adjustment of $18.8 million at December 31, 1994, which represents a decrease from $25.2 million at December 31, 1993. The carrying adjustment decrease relates primarily to the liquidation of merchandise. The increase in the gross inventory balance at December 31, 1994, from December 31, 1993, was $1.4 million. Inventory levels are expected to increase in 1995 over comparable 1994 periods. Capital expenditures for the year ended December 31, 1994, were $18.6 million. These expenditures were primarily for additional telecommunications equipment, technological upgrades and development of telemarketing opportunities. The Company estimates capital expenditures will range between $20.0 and $25.0 million for 1995. The Company's working capital needs and capital expenditure requirements for the year ended December 31, 1994, were met from funds provided by operations. Surplus funds were invested in short-term investments. On August 30, 1994, the Company's $40.0 million revolving credit facility was amended and increased to $100.0 million, as discussed in Note D to the Consolidated Financial Statements included herein. In December 1994, the Company borrowed $25.0 million under its bank facility and in the first quarter of 1995, borrowed an additional $50.0 million. These funds were used to finance purchases of treasury stock, as discussed below, to pay litigation settlements and for general corporate purposes. During 1994, using available cash, the Company paid $19.6 million, including interest, to the IRS relating to the audit settlement, as discussed in Note E to the Consolidated Financial Statements included herein, and in February 1995 the Company paid $9.6 million, plus interest, in connection with litigation settlements, using borrowings under its bank facility. In 1995, management expects to pay cable distribution fees, totaling $40.6 million, relating to current contracts with cable system operators to carry HSC programming. The Company has agreed to participate in the investor group which was awarded a major league baseball franchise for the Tampa Bay area. The Company's commitment is contingent upon its securing certain merchandising and broadcasting rights with respect to the franchise. If the Company obtains those rights, it has agreed to contribute $10.0 million as a general and limited partner. The Company has received a commitment for an additional $50.0 million credit facility which it expects to be in place by the end of the first quarter of 1995. The total credit facility will contain restrictive covenants, one of which precludes the Company from purchasing its common stock if the debt to operating cash flow ratio is above certain levels. Management believes that available cash, internally generated funds and credit facilities will provide sufficient capital resources to meet the Company's foreseeable needs. As of February 28, 1995, the Company had $65.0 million of bank credit lines which back letters of credit and which are used exclusively to facilitate inventory imports. 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 $16.1 million at February 28, 1995, leaving $48.9 million available. For the year ended December 31, 1994, the Company did not pay any cash dividends and does not anticipate paying cash dividends in the immediate future. On September 1, 1994, a wholly-owned subsidiary of the Company purchased all the outstanding shares of ISN for a total of $5.0 million consisting of cash and $2.9 million of notes payable. At February 28, 1995, .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 $2.4 million to the Company. In 1994, the Company's Board of Directors authorized the repurchase of up to an additional $75.0 million of the Company's common stock. In 1994, the Company repurchased 1.3 million shares at a total cost of $13.1 million and in 1995, through February 28, the Company repurchased an additional 2.6 million shares at a total additional cost of $21.6 million. The Company may, subject to cash availability, debt covenants and market conditions, continue to repurchase its common stock within the limits set by the Board of Directors. 34 14 MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES The consolidated balance sheets of Home Shopping Network, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1994 and 1993, the four months ended December 31, 1992 and the fiscal year ended August 31, 1992 have been prepared by management. These consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include some amounts that are based upon management's best estimates and judgments. Our independent auditors are engaged to audit and to render an opinion on the fairness in all material respects of our consolidated financial statements presented in conformity with generally accepted accounting principles. In performing their audit, they obtain an understanding of certain aspects of our internal accounting control systems and carry out various substantive auditing procedures they consider necessary in connection with expressing their opinion on our consolidated financial statements. In fulfilling its responsibility, management has established internal controls, accounting policies and procedures, administrative procedures and reporting practices which we believe to be effective. Although no system can ensure that all errors or irregularities have been eliminated, management believes that the internal accounting controls in place provide reasonable assurance that assets are safeguarded against loss, unauthorized use or disposition, that transactions are executed in accordance with management's authorization and that financial records are reliable for preparing financial statements and maintaining accountability for assets. We believe our people are our most important asset and that their proper selection, training and development is the best means of ensuring that management's objectives of maintaining effective internal accounting controls and uniform reporting standards are met. 35 15 CONSOLIDATED BALANCE SHEETS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
December 31, ------------------------- 1994 1993 ------------ ------------ ASSETS (In thousands) CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,648 $ 35,566 Accounts and notes receivable (net of an allowance for doubtful accounts of $1,738 and $1,627, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . 40,841 27,849 Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,816 -- Note and interest receivable from related party . . . . . . . . . . . . . . . . . . . . -- 5,707 Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,801 110,930 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,108 29,279 Other current assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,632 8,070 ------------ ------------ Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,846 217,401 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,144 107,439 Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . 74,514 71,283 Furniture and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,183 48,091 ------------ ------------ 226,841 226,813 Less accumulated depreciation and amortization . . . . . . . . . . . . . . 116,697 105,777 ------------ ------------ 110,144 121,036 Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,774 17,708 Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,182 2,626 ------------ ------------ 131,100 141,370 OTHER ASSETS Cable distribution fees, net ($34,174, net, to related parties) . . . . . . . . . . . . 67,978 -- Long-term investment in related party . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,575 5,775 Note receivable from related party (net of current maturity) . . . . . . . . . . . . . -- 126,597 ------------ ------------ 86,553 142,372 ------------ ------------ $446,499 $501,143 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations . . . . . . . . . . . . . . . . . . . . . . $ 1,690 $ 25,345 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,264 88,858 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 15,586 Accrued liabilities: Programming fees ($26,591 and $2,738, respectively, to related parties) . . . . . . . 50,170 10,860 Litigation settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,450 16,000 Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,109 -- Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,304 13,632 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,786 39,067 ------------ ------------ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 205,773 209,348 LONG-TERM OBLIGATIONS (net of current maturities) . . . . . . . . . . . . . . . . . . . 27,491 86,927 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,792 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 77,553,329 and 76,172,890 at December 31, 1994 and 1993, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 776 762 Class B - convertible common stock -- $.01 par value; authorized, issued and outstanding, 20,000,000 and 20,559,456 shares at December 31, 1994 and 1993, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 206 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,463 160,371 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,560 52,783 Treasury stock - 4,440,700 and 3,105,700 common shares, at cost, at December 31, 1994 and 1993, respectively . . . . . . . . . . . . . . . . . . . . . (27,136) (14,027) Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,420) (3,541) ------------ ------------ 206,443 196,554 ------------ ------------ $446,499 $501,143 ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 36 16 CONSOLIDATED STATEMENTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
Years Ended Four Months December 31, Ended Year Ended ------------------------ December 31, August 31, 1994 1993 1992 1992 ---------- ---------- ----------- ----------- (In thousands, except per share data) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $1,126,514 $1,046,580 $357,166 $1,097,787 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 730,504 704,040 232,530 691,328 ---------- ---------- -------- ---------- Gross profit. . . . . . . . . . . . . . . . . . . . 396,010 342,540 124,636 406,459 ---------- ---------- -------- ---------- Operating expenses: Selling and marketing. . . . . . . . . . . . . . . . . . . 161,886 138,092 45,248 135,794 Engineering and programming. . . . . . . . . . . . . . . . 98,835 93,686 18,144 54,501 General and administrative . . . . . . . . . . . . . . . . 79,344 93,539 29,309 87,068 Depreciation and amortization. . . . . . . . . . . . . . . 29,066 24,172 14,366 46,894 ---------- --------- ------- --------- 369,131 349,489 107,067 324,257 ---------- --------- ------- --------- Operating profit (loss) . . . . . . . . . . . . . . 26,879 (6,949) 17,569 82,202 Other income (expense): Interest income. . . . . . . . . . . . . . . . . . . . . . 9,556 13,655 1,142 4,384 Interest expense . . . . . . . . . . . . . . . . . . . . . (5,512) (10,863) (6,651) (22,299) Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . (403) (2,410) (614) 205 Litigation settlements . . . . . . . . . . . . . . . . . . -- (13,000) -- -- ---------- --------- ------- --------- 3,641 (12,618) (6,123) (17,710) ---------- --------- ------- --------- Earnings (loss) before income taxes and extraordinary item . 30,520 (19,567) 11,446 64,492 Income tax expense (benefit) . . . . . . . . . . . . . . . . 12,819 (4,028) 6,306 27,087 ---------- --------- ------- --------- Earnings (loss) before extraordinary item . . . . . . . . . . 17,701 (15,539) 5,140 37,405 Extraordinary item -- loss on early extinguishment of long-term obligations (net of tax benefit of $567, $4,395, $-0- and $82, respectively) (924) (7,242) -- (112) ---------- --------- ------- --------- NET EARNINGS (LOSS) . . . . . . . . . . . . . . . . . . . . . $ 16,777 $ (22,781) $ 5,140 $ 37,293 ========== ========== ======= ========= Earnings (loss) per common share: Earnings (loss) before extraordinary item. . . . . . . . . $ .19 $ (.18) $ .06 $ .42 Extraordinary item, net. . . . . . . . . . . . . . . . . . (.01) (.08) -- -- ---------- ---------- ------- --------- Net earnings (loss). . . . . . . . . . . . . . . . . . . . $ .18 $ (.26) $ .06 $ .42 ========== ========== ======= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 37 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
Class B Convertible Additional Unearned Common Common Paid-In Retained Treasury Compen- Stock Stock Capital Earnings Stock sation Total --------- ---------- ---------- -------- -------- -------- ----- (In thousands) Balance at August 31, 1991 . . . . . . . . . . . . $661 $242 $107,706 $ 79,710 $(14,027) $(12,453) $161,839 Issuance of common stock upon exercise of stock options . . . . . . . . . . . . . . . . . . 6 -- 3,555 -- -- -- 3,561 Issuance of common stock upon conversion of debentures . . . . . . . . . . . . . . . . . . -- -- 146 -- -- -- 146 Issuance of common stock in connection with employee stock bonus plan . . . . . . . . . . . . -- -- 9 -- -- -- 9 Unearned compensation related to executive stock award program . . . . . . . . . . . . . . . -- -- 232 -- -- (232) -- Income tax benefit related to executive stock award program and stock options exercised . . . . . . . -- -- 606 -- -- -- 606 Expense related to executive stock award program . -- -- -- -- -- 3,454 3,454 Dividend issued in the form of common stock of a wholly-owned subsidiary . . . . . . . . . . . . . -- -- -- (36,579) -- -- (36,579) Net earnings for the year ended August 31, 1992 . . -- -- -- 37,293 -- -- 37,293 ---- ---- -------- -------- -------- ------- -------- Balance at August 31, 1992 . . . . . . . . . . . . 667 242 112,254 80,424 (14,027) (9,231) 170,329 Issuance of common stock upon exercise of stock options . . . . . . . . . . . . . . . . . . 4 -- 1,854 -- -- -- 1,858 Income tax benefit related to executive stock award program, stock options exercised and stock dividends . . . . . . . . . . -- -- 1,738 -- -- -- 1,738 Expense related to executive stock award program . -- -- -- -- -- 1,084 1,084 Dividend issued in the form of common stock of a wholly-owned subsidiary . . . . . . . . . . . . . -- -- -- (10,000) -- -- (10,000) Net earnings for the four months ended December 31, 1992 . . . . . . . . . . . . . . . . -- -- -- 5,140 -- -- 5,140 ----- ---- -------- -------- -------- ------- -------- Balance at December 31, 1992 . . . . . . . . . . . 671 242 115,846 75,564 (14,027) (8,147) 170,149 Issuance of common stock upon exercise of stock options . . . . . . . . . . . . . . . . . . 55 -- 31,796 -- -- -- 31,851 Issuance of common stock upon conversion of debentures . . . . . . . . . . . . . . . . . . -- -- 15 -- -- -- 15 Unearned compensation related to executive stock award program . . . . . . . . . . . . . . . -- -- 1,009 -- -- (1,009) -- Income tax benefit related to executive stock award program and stock options exercised . . . . . . . -- -- 11,705 -- -- -- 11,705 Expense related to executive stock award program . -- -- -- -- -- 5,615 5,615 Conversion of Class B common stock to common stock 36 (36) -- -- -- -- -- Net loss for the year ended December 31, 1993 . . . -- -- -- (22,781) -- -- (22,781) ----- ---- -------- -------- -------- ------- -------- Balance at December 31, 1993 . . . . . . . . . . . 762 206 160,371 52,783 (14,027) (3,541) 196,554 Issuance of common stock upon exercise of stock options . . . . . . . . . . . . . . . . . . 8 -- 4,517 -- -- -- 4,525 Unearned compensation related to employee equity participation plan . . . . . . . . . . . . -- -- -- -- -- (3,736) (3,736) Income tax benefit related to executive stock award program and stock options exercised . . . . . . . -- -- 2,575 -- -- -- 2,575 Expense related to executive stock award program . -- -- -- -- -- 2,047 2,047 Expense related to employee equity participation plan . . . . . . . . . . . . . . . -- -- -- -- -- 810 810 Purchases of treasury stock, at cost . . . . . . . -- -- -- -- (13,109) -- (13,109) Conversion of Class B common stock to common stock 6 (6) -- -- -- -- -- Net earnings for the year ended December 31, 1994 . -- -- -- 16,777 -- -- 16,777 ----- ---- -------- -------- -------- ------- -------- Balance at December 31, 1994 . . . . . . . . . . . $776 $200 $167,463 $ 69,560 $(27,136) $(4,420) $206,443 ===== ==== ======== ======== ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 38 18 CONSOLIDATED STATEMENTS OF CASH FLOWS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
Years Ended Four Months December 31, Ended Year Ended -------------------------- December 31, August 31, 1994 1993 1992 1992 ------------ ----------- ------------ ---------- (In thousands) Cash flows from operating activities: Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . $ 16,777 $ (22,781) $ 5,140 $ 37,293 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . 25,173 24,172 14,366 46,894 Amortization of cable distribution fees . . . . . . . . . . . . 3,893 -- -- -- Inventory carrying value adjustment . . . . . . . . . . . . . . (6,455) 12,179 (257) 5,171 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 5,649 (14,102) (479) 11,902 Loss on disposition of wholly-owned subsidiary. . . . . . . . . 2,854 -- -- -- Loss on retirement of long-term obligations . . . . . . . . . . 1,491 11,637 -- 194 Common stock and Stock Appreciation Rights ("SARs") issued for services provided . . . . . . . . . . . . . . . . . 1,310 8,449 1,084 3,463 Provision for losses on accounts and notes receivable . . . . . 377 (171) (436) 34 Equity in (earnings) losses of unconsolidated affiliates. . . . (144) 589 31 99 (Gain) loss on sale of assets . . . . . . . . . . . . . . . . . 106 (277) 56 124 Liquidation of joint venture operation . . . . . . . . . . . . -- 722 -- -- Non-cash interest income . . . . . . . . . . . . . . . . . . . -- -- -- (968) Change in current assets and liabilities: Increase in accounts receivable . . . . . . . . . . . . . . . (10,698) (15,753) (2,569) (11,529) (Increase) decrease in interest receivable from related party. 1,039 (1,039) -- -- Increase in inventories . . . . . . . . . . . . . . . . . . . (1,416) (4,056) (5,179) (5,467) (Increase) decrease in other current assets. . . . . . . . . . (3,313) (1,175) (351) 1,840 Increase (decrease) in accounts payable . . . . . . . . . . . (13,594) 26,683 13,450 (17,362) Increase (decrease) in accrued liabilities and income taxes payable . . . . . . . . . . . . . . . . . . . . . . 24,687 29,923 (2,037) (26,583) Increase in cable distribution fees . . . . . . . . . . . . . . . (71,871) -- -- -- Stock purchases for employee benefit plan . . . . . . . . . . . . (3,736) -- -- -- ------------ ------------ ----------- ----------- Net cash provided by (used in) operating activities (27,871) 55,000 22,819 45,105 ------------ ------------ ----------- ----------- Cash flows from investing activities: Proceeds from long-term notes receivable . . . . . . . . . . . . . 133,325 4,892 454 2,231 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (18,602) (15,491) (9,939) (35,973) (Increase) decrease in notes receivable and other. . . . . . . . . (6,185) 683 (4,439) (3,432) Increase in intangible assets. . . . . . . . . . . . . . . . . . . (4,338) (2,057) (433) (1,830) Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . 3,221 548 93 410 Increase in long-term investment . . . . . . . . . . . . . . . . . -- (2,775) (1,515) (5,710) ------------ ------------ ----------- ----------- Net cash provided by (used in) investing activities. . . . . . 107,421 (14,200) (15,779) (44,304) ------------ ------------ ----------- ----------- Cash flows from financing activities: Principal payments on and redemptions of long-term obligations . . (110,993) (206,506) (47,776) (7,432) Proceeds from unsecured credit facilities . . . . . . . . . . . . 25,000 150,000 10,000 -- Proceeds from issuance of common stock . . . . . . . . . . . . . . 4,525 31,851 1,858 3,561 Cash portion of dividend . . . . . . . . . . . . . . . . . . . . . -- -- (5,249) (4,971) ------------ ------------ ----------- ----------- Net cash used in financing activities. . . . . . . . . . . . . (81,468) (24,655) (41,167) (8,842) ------------ ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents . . . . . . . . (1,918) 16,145 (34,127) (8,041) Cash and cash equivalents at beginning of period . . . . . . . . . . 35,566 19,421 53,548 61,589 ------------ ------------ ----------- ----------- Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 33,648 $ 35,566 $ 19,421 $ 53,548 ============ ============ =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 39 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Home Shopping Network, Inc. (the "Company" or "HSN") 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. On July 13, 1993, the Company elected to change its annual reporting period from a year ending August 31, to a year ending December 31, effective January 1, 1993. The change in year end was made following the acquisition of voting control of the Company by a wholly-owned subsidiary of Liberty Media Corporation ("Liberty"), a Delaware corporation, which reports its financial position and results of operations using a December 31 year end. See Note K. The following is a summary of the significant accounting policies of the Company consistently applied in the preparation of the accompanying consolidated financial statements. 1. CONSOLIDATION The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany transactions and accounts have been eliminated. Certain amounts in the consolidated financial statements for periods prior to December 31, 1994 have been reclassified to conform to the 1994 presentation. 2. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and short-term investments. Short-term investments consist primarily of U.S. Treasury Securities, auction preferred shares, U.S. Government agency securities and certificates of deposit with original maturities of less than 91 days. 3. ACCOUNTS AND NOTES RECEIVABLE, NET HSN has a sales program with a deferred payment arrangement, "FlexPay," which allows customers to charge their purchases to third party credit cards in installments, generally over three consecutive months. FlexPay receivables totaled $23,621,000 and $15,547,000 at December 31, 1994 and 1993, respectively. An allowance for doubtful accounts is provided based on the Company's past experience. At December 31, 1994 and 1993, accounts and notes receivable includes $3,000,000 due from a former Chairman of the Company's Board of Directors and at December 31, 1994 a $5,000,000 note receivable from a former wholly-owned subsidiary, Precision Systems, Inc. ("PSi"). 4. INVENTORIES, NET Merchandise inventories are valued at the lower of cost or market, cost being determined using the first-in, first-out method. Cost includes freight, certain warehousing costs and other allocable overhead. Market is determined on the basis of net realizable value, giving consideration to obsolescence and other factors. Inventories are presented net of a carrying adjustment of $18,791,000 and $25,246,000 at December 31, 1994 and 1993, respectively. 5. PROPERTY, PLANT AND EQUIPMENT, AND DEPRECIATION Property, plant and equipment, including significant improvements, are stated at cost. Repairs and maintenance and any gains or losses on dispositions are included in operations. Depreciation is provided on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives as follows:
Original Period ASSET CATEGORY Of Depreciation -------------- -------------------- Computer and broadcast equipment. . . . . . . . . . . . . . 5 to 10 Years Buildings . . . . . . . . . . . . . . . . . . . . . . . . . 30 to 40 Years Leasehold improvements. . . . . . . . . . . . . . . . . . . 4 to 13 Years Furniture and other equipment . . . . . . . . . . . . . . . 3 to 10 Years
40 20 Depreciation expense was $22,540,000 and $21,911,000 for the years ended December 31, 1994 and 1993, respectively. Depreciation expense for the four months ended December 31, 1992, and the fiscal year ended August 31, 1992, was $9,706,000 and $32,653,000, respectively. For income tax purposes, certain assets are depreciated using allowable accelerated methods which result in different depreciation amounts than would be calculated for financial statement purposes. 6. CABLE DISTRIBUTION FEES, NET During 1994, the Company committed to long-term cable contracts for carriage of the Company's programming. These contracts provide for payments of distribution fees to cable system operators totaling $71,871,000. Amounts payable under these agreements totaled $40,559,000 at December 31, 1994. Cable distribution fees are amortized to expense on a straight-line basis, over the terms of the respective contracts which range from 5 to 15 years. Amortization expense and accumulated amortization for the year ended, and as of, December 31, 1994 was $3,893,000. 7. OTHER NON-CURRENT ASSETS Other non-current assets include intangible assets consisting primarily of mailing lists and goodwill. Intangible assets are recorded at cost and amortized on a straight-line basis over their economic lives. Amortization expense was $2,633,000 and $2,261,000 for the years ended December 31, 1994 and 1993, respectively. Amortization expense for the four months ended December 31, 1992, and the fiscal year ended August 31, 1992, was $4,660,000 and $14,241,000, which includes amortization of intangible assets related to Silver King Communications, Inc. ("SKC") distributed on December 28, 1992, as discussed in Note J. Mailing lists developed for the Company's direct response advertising business are amortized over two years. The total amount of direct response advertising charged to expense for the years ended December 31, 1994 and 1993, the four months ended December 31, 1992 and the fiscal year ended August 31, 1992 was $1,982,000, $1,988,000, $639,000 and $2,059,000, respectively. All non-direct response advertising is expensed in the period incurred. In connection with the purchase of Internet Software, Inc. ("ISN"), as discussed in Note F, goodwill increased $5,239,000, representing the majority of goodwill which is being amortized over a three year period. 8. NET SALES Revenues include merchandise sales and shipping and handling revenues, and are reduced by incentive discounts and sales returns to arrive at net sales. Revenues are recorded for credit card sales upon transaction authorization, and for check sales upon receipt of customer payment, which does not vary significantly from the time goods are shipped. The Company's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days. An allowance for returned merchandise is provided based upon past experience. 9. INCOME TAXES In the consolidated financial statements as of and prior to December 31, 1992, deferred income taxes were provided using the deferred method for those items of revenue and expense which were recognized for financial reporting purposes in different periods than for income tax purposes. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("Statement 109"). The cumulative effect of this change in method of accounting for income taxes was immaterial and was included as a reduction of income tax expense in the Consolidated Statement of Operations for the year ended December 31, 1993. The valuation allowance on the date of adoption of Statement 109 was $744,000. Prior years' consolidated financial statements were not restated to apply the provisions of Statement 109. 10. EARNINGS (LOSS) PER COMMON SHARE Primary earnings (loss) per common share is based on net earnings (loss) divided by the weighted average common shares outstanding giving effect to stock options and convertible debt, when dilutive. Fully diluted earnings per share is not materially different from primary earnings per share in any period presented. 41 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES Weighted average common shares outstanding were 95,061,000 and 91,192,000 for the years ended December 31, 1994 and 1993, respectively. Weighted average shares for the four months ended December 31, 1992, and the fiscal year ended August 31, 1992, were 91,115,000 and 90,255,000, respectively. The number of common shares outstanding at December 31, 1994 and 1993, of 73,112,629 and 73,067,190, respectively, are net of 4,440,700 and 3,105,700, respectively, of common shares held in treasury. NOTE B - NOTE AND INTEREST RECEIVABLE FROM RELATED PARTY On August 1, 1994, SKC repaid the outstanding principal and accrued interest of $129,700,000 on its obligation to the Company. On the same date, the Company repaid the outstanding $85,000,000 balance on its Senior Term Loans, prior to scheduled maturity. See Note D. The original terms of the loan to SKC provided for principal repayments through December 2007 along with interest at 9.5% per annum on any unpaid principal amounts. Interest income earned on the note was $7,224,000 and $12,765,000 for the years ended December 31, 1994 and 1993, respectively. NOTE C - LONG-TERM INVESTMENT The Company has a $10,000,000 investment consisting of 100,000 shares of Series A non-voting preferred stock, $.01 par value, with a liquidation preference of $100 per share, of The National Registry Inc. ("NRI"), which is accounted for under the cost method. This investment is convertible into 6,000,000 shares of NRI common stock at the Company's option, however, conversion to common stock is automatic in the event that cumulative gross revenues for NRI reach $15,000,000. Two of the Company's executive officers serve as directors of NRI. J. Anthony Forstmann, a director of the Company, is Co-Chairman of NRI. See Notes M and P. NOTE D - LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
December 31, ------------------- 1994 1993 ------- -------- (In thousands) Unsecured $100,000,000 Revolving Credit Facility ("Amended Credit Facility") dated August 30, 1994, and expiring August 30, 1997. Amounts can be used for any general corporate purposes. The interest rate ranged from 6.75% to 7.06% and is tied to the London Interbank Offered Rate ("LIBOR"), plus an applicable margin based on the Company's total debt to operating cash flow ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 $ -- Unsecured note payable to related parties in connection with a business acquisition, with $1,451,493 plus accrued interest due on both September 1, 1995 and September 1, 1996. The interest rate is 7.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,903 -- Unsecured Senior Term Loans ("Senior Term Loans"), with $25,000,000 paid on June 15, 1994 and the balance repaid prior to scheduled maturity on August 1, 1994, as discussed in Note B. The interest rate was tied to the LIBOR plus an applicable margin adjustment . . . . . -- 110,000 Capitalized lease obligation and other long-term obligations . . . . . . . . . . . . . . . . . . 1,278 2,272 ------- -------- Total long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,181 112,272 Less current portion. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,690 25,345 ------- -------- $27,491 $ 86,927 ======= ========
42 22 Aggregate contractual maturities of long-term obligations are as follows:
Years Ending December 31, ------------ (In thousands) 1995 . . . . . . . . . . . . . . . . . $ 1,690 1996 . . . . . . . . . . . . . . . . . 1,682 1997 . . . . . . . . . . . . . . . . . 25,249 1998 . . . . . . . . . . . . . . . . . 270 1999 . . . . . . . . . . . . . . . . . 290 ------- $29,181 =======
In August 1994, the Company entered into a three-year $100,000,000 Amended Credit Facility which amended and restated the Company's $40,000,000 Revolving Credit Facility. The only borrowings during the year were in December 1994. The Amended Credit Facility has yearly extension options at the request of the Company which are subject to the approval of the participating banks. Under the Amended Credit Facility, the interest rate on borrowings is tied to the LIBOR, Federal Funds Rate, or the Prime Rate, at the Company's option, plus an applicable margin. Commitment fees relating to the Amended Credit Facility totaled $170,000 during 1994, with $121,000 being amortized over the remaining life of the agreement. In addition, there is an annual facility fee of $250,000 payable in quarterly installments. Restrictions contained in the Amended Credit Facility include, but are not limited to, limitations on the encumbrance and disposition of assets and the maintenance of various financial covenants and ratios. The Company also has an additional $65,000,000 of unsecured bank credit lines, which back letters of credit, used exclusively to facilitate inventory importation. Presentation of these letters of credit by vendors results in an immediate charge to the Company's account with no interest charges incurred. At December 31, 1994, outstanding letters of credit amounted to $17,514,000 leaving $47,486,000 of these bank credit lines available. The Company recognized extraordinary losses on the early extinguishment of its long-term obligations as follows:
Years Ended December 31, Year Ended -------------------- August 31, 1994 1993 1992 --------- --------- ------ (In thousands) Total extinguished . . . . . . . . . . . . . . . . . . . $ 85,000 $ 160,152 $4,050 --------- --------- ------ Pre-tax loss net of discounts . . . . . . . . . . . . . . $ (1,491) $ (11,637) $ (194) Income tax benefit . . . . . . . . . . . . . . . . . . . 567 4,395 82 --------- --------- ------ Extraordinary loss . . . . . . . . . . . . . . . . . . . $ (924) $ (7,242) $ (112) ========= ========= ======
There was no early extinguishment of long-term obligations during the four months ended December 31, 1992. 43 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTE E - INCOME TAXES A reconciliation of total income tax expense (benefit) to the amounts computed by applying the statutory federal income tax rate to earnings (loss) before income tax expense (benefit) and extraordinary item is shown as follows:
Years Ended Four Months December 31, Ended Year Ended ------------------ December 31, August 31, 1994 1993 1992 1992 ------- -------- ------ ------- (In thousands) Income tax expense (benefit) at the federal statutory rate of 35% for 1994 and 1993 and 34% for all other periods (effect of rate change in 1993 to 35% was $(196). . . . . . . . . . . . . . . . . . $10,682 $ (6,848) $3,892 $21,927 Amortization and write-off of goodwill and other acquired intangibles and interest on adjustments proposed by the Internal Revenue Service ("IRS"). . . . . . . . . . . . . . . . . . 2,145 1,582 503 2,923 State income taxes, net of effect of federal tax benefit 803 71 275 1,728 Executive compensation in excess of $1 million - 688 - - Distribution of SKC capital stock . . . . . . . . . . . . . . . . . . - - 1,500 - Sale of wholly-owned subsidiary . . . . . . . . . . . . . . . . . . . (920) - - - Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 479 136 509 ------- -------- ------ ------- $12,819 $ (4,028) $6,306 $27,087 ======= ======== ====== =======
The Company's effective tax expense (benefit) rate was 42.0% for the year ended December 31, 1994; (20.6)% for the year ended December 31, 1993; 55.1% for the four months ended December 31, 1992; and 42.0% for the fiscal year ended August 31, 1992. The components of income tax expense (benefit) attributable to operations are as follows:
Years Ended Four Months December 31, Ended Year Ended ------------------ December 31, August 31, 1994 1993 1992 1992 ------- -------- ------ ------- (In thousands) INCOME TAXES CURRENTLY PAYABLE: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,791 $ 8,753 $6,392 $14,065 State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584 870 594 1,727 ------- -------- ------ ------- 5,375 9,623 6,986 15,792 ------- -------- ------ ------- DEFERRED INCOME TAXES: Depreciation for tax in excess of (less than) financial statements. . 683 55 (1,221) (1,538) Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 (471) (314) 264 Amortization of acquired intangible assets. . . . . . . . . . . . . . (1,622) 47 322 1,048 Provision for accrued liabilities . . . . . . . . . . . . . . . . . . 956 (1,363) 218 (472) Inventory costing . . . . . . . . . . . . . . . . . . . . . . . . . . 1,330 (4,057) (22) 427 Litigation settlements. . . . . . . . . . . . . . . . . . . . . . . . 542 (4,550) - 11,399 Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . 275 (907) 310 (561) State income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 325 (618) (45) 588 IRS settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,794 - - - Amortization of long-term obligation issue costs - (718) 236 20 Sales tax accrual . . . . . . . . . . . . . . . . . . . . . . . . . . 771 24 (77) (1) Provision for uncollectible amounts . . . . . . . . . . . . . . . . . 2,585 (351) (17) (18) Amortization of cable distribution fees . . . . . . . . . . . . . . . (530) - - - Charitable contribution carryover . . . . . . . . . . . . . . . . . . 244 (910) - - Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . 116 135 - - Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (518) 33 (70) 139 ------- -------- ------- ------- 7,444 (13,651) (680) 11,295 ------- -------- ------- ------- $12,819 $ (4,028) $ 6,306 $27,087 ======= ======== ======= =======
Additionally, the Company recorded an extraordinary item, loss on early extinguishment of long-term obligations, net of the income tax effect. See Note D. 44 24 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, ------------------------ 1994 1993 ------- ------- (In thousands) DEFERRED TAX ASSETS: Inventory costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,918 $ 7,248 Provision for accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 3,775 4,731 Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,176 4,669 Litigation settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,008 4,550 Provision for uncollectible amounts . . . . . . . . . . . . . . . . . . . . . . . . 608 3,193 Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,825 2,100 Sales tax reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 1,549 Charitable contribution carryover . . . . . . . . . . . . . . . . . . . . . . . . . 666 910 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 329 ------- ------- Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,108 $29,279 ======= ======= DEFERRED TAX LIABILITIES (ASSETS): State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (633) $ (958) Cable distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (530) - Investment in unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . (238) (238) Installment sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (182) (182) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (915) (685) ------- ------- (2,498) (2,063) Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995 879 ------- ------- (1,503) (1,184) Depreciation for tax in excess of financial statements . . . . . . . . . . . . . . 7,616 6,933 Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . - 1,622 Capitalized costs of mailing lists . . . . . . . . . . . . . . . . . . . . . . . . 539 535 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 408 ------- ------- Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,792 $ 8,314 ======= =======
The Company had taxable income and pre-tax book income (loss) for the periods presented as follows:
Years Ended Four Months December 31, Ended Year Ended ------------------- December 31, August 31, 1994 1993 1992 1992 ------- -------- ------- -------- (In thousands) Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,200 $ 8,207 $17,591 $ 34,740 Pre-tax book income (loss) . . . . . . . . . . . . . . . . . . . . . . . . 29,029 (31,204) 11,446 64,298
The primary differences between taxable income and pre-tax book income (loss) are detailed above. In addition to these reconciling items, the Company recognized income tax deductions relating to the issuance of common stock pursuant to the executive stock award program and the exercise of stock options ("Common Stock Deductions"), the income tax benefit of which was recorded as an increase to additional paid-in capital. During the year ended December 31, 1994, the Company incurred Common Stock Deductions of $7,308,000. Common Stock Deductions for the year ended December 31, 1993, the four months ended December 31, 1992, and the fiscal year ended August 31, 1992, were $31,697,000, $4,718,000 and $1,696,000, respectively. 45 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES Except for the effects of the reversal of net deductible temporary differences and the effects of future Common Stock Deductions, the Company is not currently aware of any factors which would cause any significant differences between taxable income and pre-tax book income in future years. There can be no assurances that there will not be significant differences in the future between taxable income and pre-tax book income if circumstances change (for example, changes in tax laws or the Company's financial condition or performance). Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income or a net operating loss that would be carried back to prior taxable years. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings. The IRS conducted examinations of the Company's federal income tax returns for fiscal years 1986 through 1989 and proposed various adjustments. On June 8, 1994, the Company and the IRS agreed to settle all of the outstanding issues with the exception of the deductibility of royalty payments made to a then related party. In August 1994, the Company paid the assessments, totaling $15,000,000 including interest, related to all the issues except the royalty payments covering all taxable periods through August 31, 1993. These assessments had previously been accrued. On September 9, 1994, the IRS issued a statutory Notice of Deficiency for fiscal years 1986 through 1989 related to the royalty payments issue. In December 1994, the Company paid the assessments, totaling $4,600,000 including interest, which had previously been accrued. The Company continues to maintain that it has meritorious positions regarding the deductibility of these payments and intends to file a refund claim with the IRS during 1995. The Company also made such royalty payments during fiscal years 1990 through early 1993. The deductibility of these payments will also be challenged by the IRS upon audit. The Company has made adequate provision for this issue for these years. The Company's federal income tax returns for fiscal years 1990 and 1991 are currently under examination by the IRS. No proposed adjustments relating to such years, other than those discussed above, have been brought to management's attention. NOTE F - BUSINESS COMBINATION On September 1, 1994, a wholly-owned subsidiary of the Company purchased all the outstanding shares of ISN for a total of $5,000,000 consisting of cash and $2,903,000 of notes payable. The purchase method of accounting was used to account for this business combination. Goodwill acquired in connection with this transaction is being amortized over three years. Consolidated results of operations for the year ended December 31, 1994 include the results of ISN from its acquisition date. The results of operations prior to the date of acquisition and pro forma effects were not significant to the Company's consolidated results of operations and therefore pro forma information is not presented. NOTE G - EMPLOYEE BENEFIT PLANS The Company offers a plan pursuant to Section 401(k) of the Internal Revenue Code covering substantially all full-time employees. Matching employer contributions are set at the discretion of the Board of Directors. The Company's contributions for the years ended December 31, 1994 and 1993, were $824,000 and $667,000, respectively. Contributions for the four months ended December 31, 1992 and the fiscal year ended August 31, 1992, were $300,000 and $618,000, respectively. On December 28, 1994, the Board of Directors adopted the Home Shopping Network, Inc. Employee Equity Participation Plan (the "Equity Plan"), effective December 31, 1994. The Company has applied to the IRS for a determination that the Equity Plan is a qualified plan for IRS purposes. The Equity Plan covers all employees at December 31, 1994, who were employed before January 1, 1994, had completed at least 1,000 hours of service during calendar 1994, were at least 21 years of age, and do not hold options to purchase shares of HSN common stock or SAR's. The Company allocated 100 shares of common stock to each eligible employee, plus an additional 10 shares of common stock for each full year of service in excess of one. The allocated stock vests ratably at 20% a year starting December 31, 1994, and is included in the weighted average shares for the earnings per share calculation in 1994. The Company transferred $5,000,000 to an escrow account to cover the cost of purchasing stock for the Equity Plan, of which $3,736,000 of stock, representing 367,000 shares, was purchased during December 1994. The remaining $1,264,000 is included in cash and cash equivalents at December 31, 1994. 46 26 The common stock purchases were recorded as unearned compensation as of December 31, 1994 and $810,000 was charged to expense based on the vesting schedule discussed above. The remaining unearned compensation represents shares purchased for the Equity Plan as of December 31, 1994, that have not vested. Any future contributions to the Equity Plan will be subject to the Board of Directors' approval. NOTE H - COMMITMENTS and CONTINGENCIES The Company leases satellite transponders, computers and warehouse space used in connection with its operations under various operating leases. Future minimum payments under noncancellable operating leases are as follows:
Years Ending December 31, ------------ (In thousands) 1995 . . . . . . . . . . . . $12,954 1996 . . . . . . . . . . . . 12,369 1997 . . . . . . . . . . . . 12,223 1998 . . . . . . . . . . . . 8,094 1999 . . . . . . . . . . . . 7,723 Thereafter . . . . . . . . . 38,935 ------- $92,298 =======
Total rent and lease expense charged to operations was $13,978,000 and $15,185,000 for the years ended December 31, 1994 and 1993, respectively. Total rent and lease expense for the four months ended December 31, 1992, and the fiscal year ended August 31, 1992, was $6,611,000 and $20,278,000, respectively. The Company had commitments for capital expenditures totaling $15,644,000 at December 31, 1994. On December 28, 1992, HSC entered into affiliation agreements with SKC which provide for SKC's broadcast television stations to air HSC programming on a full-time basis. The agreements have an original term of five years, and are renewable for two successive five year terms at SKC's sole option. The affiliation agreements are cancelable by SKC with eighteen months written notice prior to the end of any scheduled term. HSC pays an affiliation fee to SKC based on hourly rates and, upon reaching certain sales levels, also pays commissions on net sales. Expense related to affiliation agreements with SKC for the years ended December 31, 1994 and 1993, was $42,415,000 and $41,135,000, respectively, of which $1,865,000 and $996,000, respectively, represent commissions. In 1995, payments, exclusive of commissions, under these affiliation agreements are expected to be $40,620,000. In August 1994, the Company entered into a five-year employment agreement with the Company's Chief Operating Officer, which is automatically renewable for successive one-year terms unless either party provides at least 180 days written notice. The employment agreement provides for an annual base salary of not less than $500,000 and a $1,000,000 loan, evidenced by a note, bearing interest at 5.8% per annum. The note is due on the earlier of August 16, 1996 or upon termination of employment, subject to forgiveness of $500,000, $250,000 and $250,000 plus accrued interest on January 1, 1995, July 1, 1995 and August 16, 1996, respectively. The employment agreement also provides options to purchase 1,500,000 shares of the Company's common stock at $11.50 per share under the terms of the 1986 Stock Option Plan for Employees, as amended (the "1986 Plan"). In September 1994, the Company entered into a three-year employment agreement with its General Counsel which calls for an annual base salary of at least $225,000 per year until August 1997 and options to purchase 100,000 shares of the Company's common stock at $11.75 per share under the terms of the 1986 Plan. In February 1993, the Company entered into a four-year employment agreement with the Company's President and Chief Executive Officer, which is automatically renewable for successive one year terms unless either party provides 180 days written notice. The employment agreement provides for an annual base salary of not less than $500,000 and SARs, as further discussed in Note L. 47 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES Termination of the above employment agreements by the Company other than for cause will result in payment of the annual base salary amounts that would have been payable had employment continued until the expiration of the employment terms plus any annual bonus for the year of termination. In addition, termination of employment following a change in control of the Company may result in entitlement to all unpaid compensation and other benefits through the term of the contracts. On August 11, 1993, upon resignation as Chairman of the Board of the Company, the former Chairman commenced a five-year consultancy and non-competition arrangement with the Company during which period he receives $500,000 per year. The Company has entered into an agreement for telephone services with MCI Telecommunications Corporation ("MCI") for a term of three years ending in November 1996. In exchange for discounted phone rates, the Company agreed to minimum monthly and minimum quarterly payments of $800,000 and $3,150,000, respectively. If the Company terminates the agreement for reasons other than cause, payment of 50% of the aggregate of the minimum amounts for the remainder of the unexpired term will be due 30 days after the termination. The Company's payments to MCI for phone services during the years ended December 31, 1994 and 1993 substantially exceeded the above mentioned minimums. The Company has agreed to participate in the investor group which was awarded a major league baseball franchise for the Tampa Bay area. The Company's commitment is contingent upon its securing certain merchandising and broadcasting rights with respect to the franchise. If the Company obtains those rights, it has agreed to contribute $10,000,000 as a general and limited partner. NOTE I - LITIGATION On December 30, 1993, the parties to several class action lawsuits (the "Florida Federal Securities Actions"), which assert claims relating to, among other things, the adequacy of HSN disclosures in certain public filings in 1992 and 1993, reached an agreement in principle to settle the cases. On January 11, 1995, the settlement was approved by the court. Pursuant to the terms of the settlement the Company has agreed to pay $9,600,000 plus accrued interest of $557,000 in complete settlement of the claims. On November 16, 1994, an agreement was reached to settle several lawsuits in which the Company, Liberty and others are parties. The actions alleged, among other things, breaches of fiduciary duty relating to the change in control, tender offers and merger proposal relating to the Company and failure to take effective action to exempt Liberty from the requirements of Section 203 of the Delaware Corporation Law relating to any subsequent business combination with the Company. The Company will not incur any financial obligation in connection with this settlement which was approved by the court on January 25, 1995. On or about February 8, 1994, the Company, with the approval of the special litigation committee of its Board of Directors, signed an agreement in principle to settle the lawsuit entitled 7547 Corp., et al. v. Roy M. Speer, et al., Case Nos. 92-1966-CIV-T-15A and 92-2045-CIV-T-99C (consolidated). Pursuant to the terms of the settlement, Roy M. Speer, the Company's former Chairman of the Board and Chief Executive Officer, has agreed to pay the Company $2,000,000 and to pay the Company an additional $1,000,000 to partially fund the $9,600,000 settlement in the Florida Federal Securities Actions. The Company has agreed to pay Western Hemisphere, Inc. ("Western"), the successor to Pioneer Data Processing, Inc. ("Pioneer"), $4,500,000 in exchange for releases and cancellation or acquisition of a 1985 license agreement involving the Company and Pioneer. The Company also has agreed to pay such attorneys' fees as may be awarded by the Court to the plaintiffs' counsel. This settlement is conditioned on, among other things, Court approval after notice to the shareholders and a hearing on the fairness of the settlement. In connection with the above lawsuits, the Company accrued $13,000,000 at December 31, 1993, to cover anticipated costs and expenses primarily related to such settlements. Effective May 2, 1994, the Company, 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. A consolidated class action initiated in 1990 is pending against the Company in the Court of Common Pleas of Bucks County, Pennsylvania. The complaints allege violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law with respect to the Company's pricing practices for diamond and imitation diamond jewelry. Plaintiffs seek compensatory damages of $100 per class member, treble damages, attorneys' fees, costs, interest and other relief on behalf of all Pennsylvania 48 28 residents who purchased any jewelry containing diamonds or imitation diamonds from the Home Shopping Club between December 27, 1984 and May 20, 1991. Substantial discovery has been taken in the case. In February 1995, the plaintiffs filed a motion for summary judgment. The Company believes that it has meritorious defenses and is vigorously defending this action. During fiscal 1992, the Company paid $33,000,000 relating to certain suits filed against officers and directors and class action lawsuits. The Company is engaged in various other lawsuits either as plaintiff or defendant. In the opinion of management, the ultimate outcome of these various lawsuits should not have a material impact on the Company's financial position or results of operations. NOTE J - STOCKHOLDERS' EQUITY The holders of both classes of the Company's common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. In the event of the liquidation, dissolution or winding up of the Company, the holders of both classes of common stock are entitled to share ratably in all assets of the Company remaining after provision for payment of liabilities. Shares of Class B common stock are convertible at the option of the sole holder, a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), into shares of common stock of the Company on a share-for-share basis. In the event of conversion of the Class B common stock, the Class B shares so converted will be retired and not subject to reissue. In October 1993, RMS Limited Partnership, a Nevada limited partnership ("RMS"), converted 3,600,000 shares of Class B common stock into shares of common stock, on a share-for-share basis. After the conversion, there were 20,559,456 shares of Class B common stock outstanding. Because there were less than 22,800,000 shares of Class B common stock outstanding after this conversion, the holders of the Class B common stock began voting together with the holders of common stock on all matters submitted to stockholders, except that they are not entitled to vote in the election of 25% of the Board of Directors. The holder of the Class B common stock was entitled to cast ten votes per share on all other matters. In 1994, RMS converted 559,456 additional shares of Class B common stock to shares of common stock leaving a wholly-owned subsidiary of TCI the sole holder of Class B common stock. On December 28, 1992, the Company distributed the capital stock of SKC to the Company's stockholders of record on December 24, 1992, in the form of a pro rata stock dividend. The distribution also included Telemation, Inc., formerly a wholly-owned subsidiary of HSN that operates video production and post-production facilities, the capital stock of which was contributed to SKC prior to the distribution. The stockholders of HSN received one share of SKC common stock for each ten shares of HSN common stock held at the close of business on December 24, 1992. In connection with this distribution, intercompany indebtedness in the amount of $135,172,000 was converted into a secured long-term Senior Loan. This loan was repaid in August 1994, as discussed in Note B. At the date of distribution, the remaining intercompany indebtedness in the amount of $93,120,000 was forgiven resulting in SKC having a net book value at the date of distribution of $10,000,000. The distribution reduced the Company's stockholders' equity at December 31, 1992, by $10,000,000, consisting of net operating assets of $4,751,000 and cash and cash equivalents of $5,249,000. Property, plant and equipment with a net book value of $41,516,000 and identified intangible assets and FCC licenses with a net book value of $88,720,000 were the major assets held by SKC at the time of the stock distribution. SKC's assets and capabilities were an integral part of HSC's operations and were used almost exclusively for HSC programming. Accordingly, at the time of the distribution, HSC and SKC entered into affiliation agreements, as discussed in Notes H and M providing, among other things, parameters for SKC's carriage of HSC programming, HSC's payment to SKC for such carriage and renewal or extension of the affiliation agreements. The distribution of the capital stock of SKC was a taxable transaction. The Company recognized a gain for income tax purposes in an amount equal to the difference between the fair market value of the SKC capital stock distributed and the Company's basis in such SKC capital stock. This gain resulted in additional income tax expense of $1,500,000 which was recorded during the four months ended December 31, 1992. No additional income tax expense resulted from the final settlement of the IRS examination, as discussed in Note E. In accordance with a Tax Sharing Agreement, entered into in connection with the distribution of SKC, HSN is responsible for paying all taxes related to SKC's operations for periods through December 28, 1992. Any liabilities associated with IRS examinations through that date are the responsibility of HSN and not SKC. 49 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES On July 31, 1992, the Company distributed the capital stock of PSi to the Company's stockholders of record on July 30, 1992 in the form of a tax-free, pro rata stock dividend. The stockholders of HSN received one share of PSi common stock for each ten shares of HSN common stock held at the close of business on July 30, 1992. The distribution reduced the Company's stockholders' equity in the year ended August 31, 1992 by $36,579,000, consisting of net operating assets of $31,579,000 and cash of $5,000,000. NOTE K - CHANGE IN CONTROL On February 11, 1993, Liberty acquired 20,000,000 shares of the Company's Class B common stock, from RMS in exchange for $58,000,000 in cash and 8,000,000 shares (adjusted for a 2 for 1 stock dividend) of Liberty Class A common stock, par value $1.00 per share. In addition, on the acquisition date, RMS granted an irrevocable assignable option (the "Option") to Liberty to purchase from RMS 2,000,000 shares ("Subject Shares") of Class B common stock of SKC for $2,000,000 plus interest from February 11, 1993. On September 23, 1994, RMS and Liberty entered into an Option Amendment Agreement in which RMS agreed to extend the exercise period of the option agreement to February 11, 1999. RMS and Liberty further agreed to amend, among other terms, the exercise price to $1.25 per share through February 11, 1995, with such exercise price increasing in the amount of $.25 each year thereafter. Upon exercise of the Option and purchase of the Subject Shares, Liberty or any assignee under the Option would effectively control SKC by virtue of the voting power of the Subject Shares. The 20,000,000 shares of Class B common stock purchased by Liberty, in addition to the 616,300 shares of HSN common stock acquired by Liberty prior to February 11, 1993, represented approximately 23.3% of the beneficial ownership interest in the Company's equity at February 28, 1993. In addition, because the Class B common stock is generally entitled to ten votes per share, the aggregate of all such shares represented approximately 65.6% of the beneficial ownership interest in the voting rights of the Company. These percentage amounts do not reflect the common stock purchased in the tender offer or the conversion of the Class B common stock discussed below. On April 23, 1993, Liberty commenced a tender offer to purchase up to 15,000,000 shares of HSN common stock at $7.00 per share. During the period of the tender offer, which expired on May 20, 1993, 23,266,306 shares of HSN common stock were tendered. Consistent with its rights under the federal securities laws, Liberty elected to purchase an additional 1,296,602 of these shares. This acquisition of 16,296,602 shares of HSN common stock increased Liberty's beneficial ownership interest in HSN's equity to approximately 41.5% and in its voting rights to approximately 70.8% at May 21, 1993. In connection with Liberty's acquisition, RMS agreed to convert its remaining 4,159,456 shares of Class B common stock into shares of common stock. Of these shares, 3,600,000 were converted prior to December 31, 1993, and the remainder were converted to common stock during the year ended December 31, 1994. After taking into account these conversions, Liberty's beneficial ownership and voting rights were approximately 40.3% and 79.7%, respectively, at December 31, 1994. In January, 1994, Liberty and Tele-Communications, Inc. ("Old TCI") entered into a definitive agreement providing for a combination of the two companies. On August 4, 1994, Liberty and Old TCI consummated a business combination resulting in Old TCI and Liberty becoming wholly-owned subsidiaries of a newly formed holding company, which has been renamed TCI. NOTE L - STOCK OPTIONS AND AWARDS The Company has granted options to purchase common stock under option plans as follows: The 1987 Cable Operators Stock Option Plan, as amended, provided for the issuance of options to purchase common stock at or above the fair market value at the date of grant in exchange for entering into affiliation agreements to carry the Company's programming for up to seven years. All outstanding options were exercised or cancelled on or before June 1, 1994. The 1986 Plan provides for the grant of options to purchase common stock at the fair market value at date of grant. The options generally vest and become exercisable annually and equally over five years beginning one year from the date of grant, and expire ten years from the date of grant. The 1986 Stock Option Plan for Outside Directors, as amended, provides for the grant of options to purchase common stock at fair market value as of the date of grant. The options vest and become exercisable equally over two years beginning on the date of grant. All options expire five years from the date they vest and become exercisable. During 1992, the Board of Directors 50 30 and shareholders approved certain amendments to the plan. The amendments provide for additional option grants after five years of service and, in addition, the number of shares of common stock subject to option under the plan was increased to 1,630,000 shares. A summary of changes in outstanding options, under the stock option plans is as follows:
Cable Operators Employees Outside Directors --------------------- --------------------- --------------------- Price Price Price Total Options Range Options Range Options Range Options ---------- -------- ---------- -------- ---------- -------- --------- (In thousands, except price range) AUTHORIZED: September 1, 1986 . . . . . . 15,000 2,400 630 18,030 Year ended August 31, 1987. . 12,500 7,600 -- 20,100 Year ended August 31, 1992. . -- -- 1,000 1,000 -------- -------- ------- --------- Total authorized. . . . . . 27,500 10,000 1,630 39,130 -------- -------- ------- --------- OUTSTANDING: Outstanding - August 31, 1991 5,002 $6.00-7.00 3,294 $ 3.50- 8.88 510 $ 3.63- 7.13 8,806 Granted . . . . . . . . . . . -- -- 540 $ 5.63- 7.50 180 $ 5.38- 5.58 720 Exercised . . . . . . . . . . (234) $6.00-7.00 (286) $ 4.75- 6.88 (60) $ 5.88- 5.88 (580) Canceled . . . . . . . . . . (432) $6.00-7.00 (543) $ 3.71- 6.13 -- -- (975) -------- -------- ------- --------- Outstanding - August 31, 1992(1) 4,336 $5.70-6.65 3,005 $ 3.33- 8.43 630 $ 3.44- 6.78 7,971 Granted . . . . . . . . . . . -- -- 145 $ 5.13- 5.13 -- -- 145 Exercised . . . . . . . . . . (11) $5.70-6.65 (66) $ 3.33- 6.53 (330) $ 3.44- 5.58 (407) Canceled. . . . . . . . . . . -- -- (150) $ 5.22- 6.38 -- -- (150) -------- -------- ------- --------- Outstanding - December 31, 1992(1) 4,325 $5.56-6.49 2,934 $ 3.25- 8.23 300 $ 3.36- 6.61 7,559 Granted . . . . . . . . . . . 49 $5.56-6.49 1,063 $ 8.50-14.63 180 $14.75-14.75 1,292 Exercised . . . . . . . . . . (3,305) $5.56-6.49 (1,781) $ 3.25- 6.96 (216) $ 3.36- 6.61 (5,302) Canceled. . . . . . . . . . . (524) $5.56-6.49 (115) $ 4.41- 9.88 (54) $ 4.98- 4.98 (693) -------- -------- ------- --------- Outstanding - December 31, 1993 545 $5.56-6.49 2,101 $ 3.25-14.63 210 $ 5.45-14.75 2,856 Granted . . . . . . . . . . . -- -- 3,316 $10.25-12.25 -- -- 3,316 Exercised . . . . . . . . . . (336) $5.56-6.49 (335) $ 3.71- 9.88 (30) $ 5.45- 5.45 (701) Canceled. . . . . . . . . . . (209) $5.56-6.49 (419) $ 4.41-14.63 -- -- (628) -------- -------- ------- --------- Outstanding - December 31, 1994 -- -- 4,663 $ 3.25-14.63 180 $14.75-14.75 4,843 -------- -------- ------- --------- Options exercisable . . . . . -- 586 $ 3.25-14.63 120 $14.75-14.75 706 -------- -------- ------- --------- Options Available for grant . -- 2,417 814 3,231 -------- -------- ------- ---------
(1) All of the exercise prices were adjusted as of July 31, 1992 and December 28, 1992, for options outstanding at such dates, to reflect the distributions of PSi and SKC, respectively, to the stockholders of the Company as more fully discussed in Note J. During 1994, the Company received $3,827,000 in cash in connection with the exercise of 701,000 stock options. During 1994 the Company issued 120,000 shares of common stock in connection with the exercise of stock options by outside consultants not included in the above chart, for which the Company received $698,000 in cash. At December 31, 1994, no other options were outstanding or exercisable by consultants. In October 1990, the Company adopted the 1990 Executive Stock Award Program (the "Program") pursuant to which 2,990,000 shares of common stock were granted to certain key employees and consultants. The Program was funded exclusively by the contribution of shares of common stock owned by the former Chairman of the Board and a former President of the Company. The Company will not issue any additional shares of stock in connection with the Program. The rights of such individuals in shares granted under the Program vest over a five year period and are distributed in five equal annual install- 51 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES ments commencing one year from the grant date. Participants in the Program are entitled to receive dividends, if declared, on their unvested shares and certain officers are entitled to voting rights with respect to their unvested shares. Forfeitures are reissued at the discretion of the Compensation/Benefits Committee of the Board of Directors. Under this Program and another award of stock, the amount amortized and expensed relating to the compensation earned was $2,047,000 and $5,615,000 for the years ended December 31, 1994 and 1993, respectively, $1,084,000 for the four months ended December 31, 1992, and $3,454,000 for the fiscal year ended August 31, 1992. In 1993, the President and Chief Executive Officer of HSN received SARs with respect to 984,876 shares of the Company's common stock at an exercise price of $8.25 per share. The SARs vest over a four year period and are exercisable until February 23, 2003. The SARs will vest upon termination of employment other than for cause and will be exercisable for up to one year following the termination of employment. In the event of a change in control of the Company, all unvested SARs will vest immediately prior to the change in control and shall remain exercisable for a one year period. SARs not exercised will expire to the extent not exercised. The SARs may be exercised for cash or, so long as the Company is a public company, for shares of the Company's common stock equal to the excess of the fair market value of each share of common stock over $8.25 at the exercise date. The SARs also will vest in the event of death or disability. Compensation expense (benefit) recognized by the Company for the SAR's during the years ended December 31, 1994 and 1993 was ($1,547,000) and $2,800,000, respectively. NOTE M - RELATED PARTY TRANSACTIONS Currently, the Company is involved in several agreements with related parties and has made payments to those related parties as follows. HSC has entered into affiliation agreements with cable operators which are wholly or partially owned by TCI. In addition, certain officers of Liberty served, or continue to serve, on the Company's Board of Directors. The managing general partner of certain cable systems which carry the Company's programming, was appointed to HSN's Board of Directors in July 1993. TCI also has an ownership interest in these cable systems. Payments to the above related parties for cable commissions and advertising were $7,269,000 and $4,300,000 for the years ended December 31, 1994 and 1993, respectively. Commitments for cable distribution fees to related parties were $34,684,000, of which $8,673,000 was paid during 1994. The balance of $26,011,000 will be paid in 1995. On April 28, 1992, the Company purchased 100,000 shares of Series A Preferred Stock of NRI. Pursuant to the purchase of these shares, HSN provided office space to NRI beginning in 1993. The Company charged NRI $200,000 and $65,000, respectively, for rent during the years ended December 31, 1994 and 1993. The Co-Chairman of NRI was appointed to the Board of Directors of the Company on April 30, 1992. HSN and NRI also share one other common board member. See Notes C and P. Prior to 1994, the Company received a variety of products and services from entities related through common ownership and management with the former Chairman of the Company's Board of Directors and his immediate family members. These transactions were considered related party transactions until the resignation of the former Chairman of the Company's Board of Directors in August 1993. Subsequent to his resignation, these transactions are no longer considered related party transactions, but are included for disclosure purposes for periods prior to January 1, 1994. Transactions with these entities are summarized as follows: 1. Computer software license agreement: In 1985, the Company entered into a license agreement for computer software with Pioneer, which provided for continuing monthly payments of 1% of HSC's gross profit, as defined. The amounts expensed in connection with these agreements were $297,000 for the year ended December 31, 1993, $1,176,000 for the four months ended December 31, 1992 and $3,502,000 for the fiscal year ended August 31, 1992. 2. Commissions on inventory dispositions: Certain inventory in the form of returned merchandise, rejects and small lot saleable inventory were disposed of through Western for a 15% commission. Sales by the related party were less than 1% of total sales. The Company also provided certain equipment and space located at or in close proximity to each of the Company's four fulfillment centers, free of charge. The Company terminated this arrangement in 1993. Commissions were $561,000 for the year ended December 31, 1993, $456,000 for the four months ended December 31, 1992 and $1,469,000 for the fiscal year ended August 31, 1992. 52 32 As of December 31, 1994 and 1993, in connection with a proposed litigation settlement as discussed in Note I, the Company had a $4,500,000 liability recorded to Western. This amount relates to cancellation of the computer software license agreement, the arrangement pursuant to which Western provided certain liquidation and related services, as noted above, and all other existing agreements and arrangements excluding certain assignment, secrecy and non-compete agreements. In connection with this and other litigation settlements, the former Chairman of the Company's Board of Directors has agreed to pay HSN $3,000,000, which is recorded in accounts and notes receivable, as of December 31, 1994 and 1993. Prior to the SKC distribution, the Company was a non-voting common stockholder in a corporation which owns a television station that carries HSN programming. A former member of the Company's Board of Directors is a significant owner of this same corporation. During fiscal 1989, the Company funded construction of the television station through a 12.8% interest-bearing note, to be amortized over seven years beginning in April 1991, with monthly payments of $69,000. The amount due under this note was $3,294,000 at August 31, 1992. In connection with the distribution of the capital stock of SKC, the note and the Company's investment in the corporation were transferred to SKC prior to December 31, 1992. See Note J. Also, the Company paid $1,549,000, $504,300 and $1,553,000 under an affiliation agreement with the television station for the year ended December 31, 1993, the four months ended December 31, 1992 and the fiscal year ended August 31, 1992, respectively. During 1991, the Company engaged two firms in consulting capacities which had one officer each that was on the Company's Board of Directors until February 1993. Fees paid pursuant to these engagements totaled $126,000 for the year ended December 31, 1993, $34,000 for the four months ended December 31, 1992, and $100,000 for the fiscal year ended August 31, 1992. The Company purchased certain equipment from PSi and paid license and system maintenance fees related to this equipment of $1,316,000 and $3,545,000, respectively, for the year ended December 31, 1993 and $1,521,300 and $2,250,000, respectively, for the four months ended December 31, 1992. The former Chairman of HSN owned a controlling position in PSi's outstanding stock. Until August 1993, HSN and PSi also shared a common board member, and officer. Subsequent to August 11, 1993, PSi is no longer considered a related party due to the resignation of certain members of PSi's Board of Directors, and the resignation of the former Chairman of the Company. NOTE N - CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information is as follows:
Years Ended Four Months December 31, Ended Year Ended ------------------ December 31, August 31, 1994 1993 1992 1992 ------- -------- ------ ------- (In thousands) CASH PAID DURING THE PERIOD FOR: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,899 $13,872 $10,837 $22,995 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 22,430 515 4,648 14,854
Supplemental information of non-cash investing and financing activities is as follows: - - As discussed in Note F, in connection with the purchase of ISN, the Company issued notes payable totaling $2,903,000. - - During the years ended December 31, 1994 and 1993, RMS converted 559,456 and 3,600,000 shares, respectively, of Class B common stock into shares of common stock. See Note J. - - During the year ended December 31, 1993, and the fiscal year ended August 31, 1992, $15,000 and $150,000 of the Company's 5 1/2% Convertible Subordinated Debentures were converted into 2,293 and 21,276 shares of common stock, respectively. - - On December 28, 1992, the Company distributed the common stock of SKC to the Company's stockholders, in the form of a taxable pro rata stock dividend. See Note J. - - On July 31, 1992, the Company distributed the common stock of PSi to the Company's stockholders in the form of a tax-free, pro rata stock dividend. See Note J. 53 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTE O - QUARTERLY RESULTS (UNAUDITED)
Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31, June 30, September 30, December 31, ------------ --------- ------------- ------------ (In thousands, except per share data) YEAR ENDED DECEMBER 31, 1994 Net sales . . . . . . . . . . . . . . . . . . . . . . . $274,215 $274,005 $276,612 $301,682 Gross profit . . . . . . . . . . . . . . . . . . . . . 98,600 95,202 97,620 104,588 Earnings before extraordinary item . . . . . . . . . . 6,651 1,908 7,349 1,793 Net earnings . . . . . . . . . . . . . . . . . . . . . 6,651 1,908 6,425 1,793 Earnings per common share: Before extraordinary item . . . . . . . . . . . . . . .07 .02 .08 .02 Net earnings . . . . . . . . . . . . . . . . . . . . .07 .02 .07 .02 YEAR ENDED DECEMBER 31, 1993(1) Net sales . . . . . . . . . . . . . . . . . . . . . . . $239,421 $250,264 $260,462 $296,433 Gross profit . . . . . . . . . . . . . . . . . . . . . 61,540 (2) 87,541 90,122 103,337 Earnings (loss) before extraordinary item . . . . . . . (16,980) 2,001 1,115 (1,675)(3) Net earnings (loss) . . . . . . . . . . . . . . . . . . (23,823) 1,602 1,115 (1,675) Earnings (loss) per common share: Before extraordinary item . . . . . . . . . . . . . . . (.19) .02 .01 (.02) Net earnings (loss) . . . . . . . . . . . . . . . . . . (.27) .02 .01 (.02) Quarter Quarter Quarter Month Ended Ended Ended Ended November 30, February 28, May 31, June 30, 1992 1993 1993 1993(4) ------------- ------------- ------------- ------------ PERIODS SUBSEQUENT TO (In thousands, except per share data) AUGUST 31, 1992 Net sales . . . . . . . . . . . . . . . . . . . . . . . $265,796 $244,044 $260,157 $76,854 Gross profit . . . . . . . . . . . . . . . . . . . . . 94,829 60,529 (2) 93,052 25,307 Earnings (loss) before extraordinary item . . . . . . . 5,828 (20,040) 6,158 (1,785) Net earnings (loss) . . . . . . . . . . . . . . . . . . 5,828 (26,883) 5,759 (1,785) Earnings (loss) per common share: Before extraordinary item . . . . . . . . . . . . . . .07 (.23) .07 (.02) Net earnings (loss) . . . . . . . . . . . . . . . . . .07 (.31) .07 (.02)
(1) The quarters ended March 31, 1993 and June 30, 1993 are shown for comparative purposes only. (2) During February 1993, the Company adjusted its inventory carrying amount by $22,700,000. Of this adjustment, $20,100,000 affected gross profit and $2,600,000 was charged to miscellaneous expense. (3) In the fourth quarter of 1993, the Company charged $13,000,000 to other income (expense) for the settlement of various lawsuits. See Note I. (4) The month ended June 30, 1993 is shown in connection with the transition for the change in year end from August 31 to December 31, as discussed in Note A. The difference between earnings (loss) before extraordinary item and net earnings (loss) in each quarter represents losses from early extinguishment of long-term obligations. See Note D. The Company believes that seasonality does impact its business, but not to the same extent it impacts the retail industry in general. 54 34 NOTE P - FINANCIAL INSTRUMENTS The additional disclosure below of the estimated fair value of financial instruments was made in accordance with the requirements of Statements of Financial Accounting Standards No. 107. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.
December 31, 1994 December 31, 1993 ---------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ---------- ---------- --------- (In thousands) Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 33,648 $ 33,648 $ 35,566 $ 35,566 Note and interest receivable from related party . . . . . . . -- -- 132,304 132,304 Other non-current assets. . . . . . . . . . . . . . . . . . . 1,309 1,309 3,117 3,117 Long-term investment. . . . . . . . . . . . . . . . . . . . . 10,000 7,875 10,000 18,000 Long-term obligations . . . . . . . . . . . . . . . . . . . . (29,181) (29,181) (112,272) (112,272)
The carrying value of cash and cash equivalents, note and interest receivable from related party, and other non-current assets are a reasonable estimate of their fair value. The fair value of the Company's long-term obligations at December 31, 1994 and 1993, approximates the carrying value because the instruments have variable rates that, in effect, reprice the notes frequently. The amount set out in the table above as the fair value of long-term investment in NRI at December 31, 1994 and 1993 has been determined using the trading price of NRI's common stock on those dates. Management is of the opinion, however, that the fair value of this investment is not readily determinable. The Company's investment is in the preferred stock of NRI which is not publicly traded and, therefore, does not have an established market price. In addition, if the Company were to convert its investment to common stock, its investment would represent 23.3% of NRI's outstanding common stock at December 31, 1994. It is not anticipated that the Company would be able to sell its holdings without adversely affecting the market price of the NRI common stock and the amount realized in the event of a sale. In recent filings, NRI has indicated that it believes the adequacy of cash resources and the ability to continue operations is dependent upon achieving sales and obtaining additional capital to continue, among other things, the development, testing and marketing of its products. On March 15, 1995, NRI sold 4,000,000 shares of common stock to a third party investor for $4,000,000. Based in part on this capital infusion, which provides NRI funds to continue the development, testing and marketing of its products, management believes that continuing to carry the Company's investment in NRI at cost is appropriate. The Company's maximum exposure on the NRI investment is the $10,000,000 carrying value. 55 35 INDEPENDENT AUDITORS' REPORT HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES SUMMARY FINANCIAL DATA The Board of Directors Home Shopping Network, Inc. We have audited the accompanying consolidated balance sheets of Home Shopping Network, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two year period ended December 31, 1994 and the four months ended December 31, 1992. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Home Shopping Network, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 1994 and the four months ended December 31, 1992 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP - --------------------- KPMG Peat Marwick LLP St. Petersburg, Florida February 15, 1995, except as to the last paragraph of Note P which is as of March 15, 1995 The Board of Directors Home Shopping Network, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows for the year ended August 31, 1992 of Home Shopping Network, Inc. and subsidiaries (the "Company"). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the Company's results of operations and its cash flows for the year ended August 31, 1992 in conformity with generally accepted accounting principles. Deloitte & Touche LLP - --------------------- Deloitte & Touche LLP Tampa, Florida October 15, 1992 (February 15, 1995 as to Note I to the consolidated financial statements) 56 36 SUMMARY FINANCIAL DATA HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED STATEMENTS OF Years Ended Four Months OPERATIONS DATA December 31, Ended Years Ended August 31, ---------------------- December 31, ---------------------------------- 1994 1993 1992 1992 1991 1990 -------- -------- -------- -------- -------- -------- (In thousands, except per share data) Net sales . . . . . . . . . . . . . . . $1,126,514 $1,046,580 $357,166 $1,097,787 $1,078,547 $1,008,272 Gross profit . . . . . . . . . . . . . 396,010 342,540(1) 124,636 406,459 389,398 374,908 Operating profit (loss) . . . . . . . . 26,879 (6,949) 17,569 82,202 64,570 (3) 74,720 Earnings (loss) before extraordinary item . . . . . . . . . 17,701 (15,539)(2) 5,140 37,405 (9,599)(3) 32,464 Net earnings (loss) . . . . . . . . . . 16,777 (22,781) 5,140 37,293 (8,945)(3) 38,754 Earnings (loss) per common share: Earnings (loss) before extraordinary item . . . . . . . . . .19 (.18) .06 .42 (.11)(3) .35 Net earnings (loss) . . . . . . . . . . .18 (.26) .06 .42 (.10)(3) .42 Weighted average common shares outstanding . . . . . . . . . 95,061 91,192 91,115 90,255 87,452 95,736
SUMMARY CONSOLIDATED BALANCE SHEET DATA December 31, August 31, --------------------------------- ----------------------------------- 1994 1993 1992 1992 1991 1990 -------- -------- --------- ---------- --------- -------- Working capital . . . . . . . . . . . . $ 23,073 $ 8,053 $ 38,493 $ 47,004 $ 52,868 $ 98,006 Total assets . . . . . . . . . . . . . 446,499 501,143 477,913 519,670 565,036 556,236 Unsecured Revolving Credit Facility . . 25,000 -- -- -- -- -- Unsecured Senior Term Loans . . . . . . -- 85,000(4) -- -- -- -- 11 3/4% Senior Notes. . . . . . . . . . -- -- 140,000(4) 153,252(4) 184,752 190,678 5 1/2% Convertible Subordinated Debentures . . . . . . . . . . . . . -- -- 16,915 16,915 17,115 28,335 Other long-term obligations . . . . . . 2,491 1,927 2,276 2,689 3,175 6,096 Stockholders' equity . . . . . . . . . 206,443 196,554 170,149 170,329 161,839 177,481
(1) The gross profit declined to 32.7% for the year ended December 31, 1993, from 37.0% for the fiscal year ended August 31, 1992. This was primarily due to the liquidation of inventory at less than cost. (2) In the fourth quarter of 1993, the Company charged $13,000,000 to other income (expense) for the settlement of various lawsuits. See Note I. (3) During fiscal 1991, the Company recorded $44,500,000 in pre-tax non-recurring special charges. Additionally, the Company increased its income tax provision $10,382,000 relating to certain adjustments proposed by the IRS. (4) At December 31, 1993 and 1992, and August 31, 1992, $25,000,000, $3,200,000 and $27,500,000, respectively, was classified as current reflecting management's ability and intent to satisfy a portion of the debt from funds provided from operations. 57 37 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES The following table sets forth, for the quarterly periods indicated, the high and low sales prices of the Company's common stock on the New York Stock Exchange (Symbol: HSN).
High Low ---- --- YEAR ENDED DECEMBER 31, 1994 Quarter ended March 31 ........................................... $15.13 $11.63 Quarter ended June 30 ............................................ 14.75 9.50 Quarter ended September 30 ....................................... 13.00 10.38 Quarter ended December 31 ........................................ 11.75 9.50 YEAR ENDED DECEMBER 31, 1993 Quarter ended November 30 ........................................ $ 6.38 $ 4.25 Quarter ended February 28 ........................................ 9.00 4.88 Quarter ended May 31.............................................. 8.63 4.13 Quarter ended June 30............................................. 12.88 7.50 Quarter ended September 30........................................ 14.75 10.63 Quarter ended December 31 ........................................ 15.38 10.50 YEAR ENDED AUGUST 31, 1992 Quarter ended November 30 ........................................ $ 7.13 $ 5.00 Quarter ended February 29 ........................................ 8.88 4.88 Quarter ended May 31.............................................. 8.63 5.25 Quarter ended August 31........................................... 6.38 5.13
The closing price per share as of March 13, 1995 was $9.00 and there were 8,710 stockholders of record as of that date. 58 -----END PRIVACY-ENHANCED MESSAGE-----