-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PaSDqYnbOabla/8Wt3sGLUhdh83TH/U2kuLhxoZ0coElBAxnBoop261TxBCZjpL4 naU2Lnhe2rOhD3VuZrqLMA== 0000950144-96-002082.txt : 19960514 0000950144-96-002082.hdr.sgml : 19960514 ACCESSION NUMBER: 0000950144-96-002082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960510 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09118 FILM NUMBER: 96560581 BUSINESS ADDRESS: STREET 1: 2501 118TH AVE NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135728585 10-Q 1 HOME SHOPPING NETWORK, 10-Q, MARCH 31, 1996 1 LOGO FORM 10-Q For the Quarter Ended March 31, 1996 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 1-9118 --------------------- HOME SHOPPING NETWORK, INC. (Exact name of registrant as specified in its charter) DELAWARE 59-2649518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2501 118TH AVENUE NORTH, ST. PETERSBURG, FLORIDA 33716 (Address of principal executive offices) (813) 572-8585 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Total number of shares of outstanding stock (net of 6,986,000 shares of common stock held in treasury) as of May 1, 1996: Common stock....................................... 70,815,579 Class B common stock............................... 20,000,000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ----------------------- 1996 1995 - ------------------------------------------------------------------------------ (In thousands, except per share data) NET SALES.......................................... $282,689 $243,610 Cost of sales...................................... 191,888 161,935 -------- -------- Gross profit................................. 90,801 81,675 -------- -------- Operating expenses: Selling and marketing........................... 36,767 42,147 Engineering and programming..................... 24,078 25,357 General and administrative...................... 16,773 19,294 Depreciation and amortization................... 8,159 8,944 Restructuring charges........................... -- 2,041 -------- -------- 85,777 97,783 -------- -------- Operating profit (loss)...................... 5,024 (16,108) Other income (expense): Interest income................................. 510 555 Interest expense................................ (4,081) (1,219) Miscellaneous................................... 2,165 2,347 -------- -------- (1,406) 1,683 -------- -------- Earnings (loss) before income taxes................ 3,618 (14,425) Income tax expense (benefit)....................... 1,375 (5,626) -------- -------- NET EARNINGS (LOSS)................................ $ 2,243 $ (8,799) ======== ======== Net earnings (loss) per common share............... $ .02 $ (.10) ======== ======== Weighted average shares outstanding................ 92,757 91,190 ======== ========
The accompanying notes are an integral part of these statements. 1 4 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - --------------------------------------------------------------------------------
MARCH 31, --------------------- DECEMBER 31, ASSETS 1996 1995 1995 - ---------------------------------------------------------------------------------- (In thousands) CURRENT ASSETS Cash and cash equivalents................. $ 22,838 $ 20,562 $ 25,164 Accounts and notes receivable, net........ 20,540 32,007 23,634 Income taxes receivable................... -- 12,578 -- Inventories, net.......................... 92,383 111,328 101,564 Deferred income taxes..................... 24,081 16,873 24,484 Other current assets...................... 7,135 9,557 8,149 -------- -------- ------------ Total current assets.......... 166,977 202,905 182,995 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment.......... 90,661 106,789 90,581 Buildings and leasehold improvements...... 69,877 75,369 69,843 Furniture and other equipment............. 49,839 47,343 49,561 -------- -------- ------------ 210,377 229,501 209,985 Less accumulated depreciation and amortization..................... 122,265 121,337 118,710 -------- -------- ------------ 88,112 108,164 91,275 Land...................................... 16,914 17,818 17,093 Construction in progress.................. 293 2,496 406 -------- -------- ------------ 105,319 128,478 108,774 OTHER ASSETS Cable distribution fees, net ($36,136 and $35,086, at March 31, 1996 and 1995, respectively, and $34,803 at December 31, 1995, to related parties).......... 107,536 79,177 99,161 Deferred income taxes..................... 22,364 -- 23,142 Long-term investments ($10,000 in a related party)......................... 13,975 10,000 14,000 Other non-current assets.................. 9,260 9,817 8,223 -------- -------- ------------ 153,135 98,994 144,526 -------- -------- ------------ $425,431 $430,377 $436,295 ======== ======== ==========
The accompanying notes are an integral part of these statements. 2 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - --------------------------------------------------------------------------------
MARCH 31, LIABILITIES AND STOCKHOLDERS' --------------------- DECEMBER 31, EQUITY 1996 1995 1995 - ---------------------------------------------------------------------------------- (In thousands) CURRENT LIABILITIES Current maturities of long-term obligations............................ $ 1,555 $ 1,540 $ 1,555 Accounts payable.......................... 83,736 86,850 84,297 Accrued liabilities: Programming fees ($4,520 and $28,096 at March 31, 1996 and 1995, respectively, and $2,260 at December 31, 1995, to related parties)....... 23,805 37,467 20,377 Sales returns.......................... 12,734 9,343 10,832 Litigation settlements................. 5,965 4,850 6,140 Other.................................. 46,813 37,189 52,223 -------- -------- ------------ Total current liabilities..... 174,608 177,239 175,424 LONG-TERM OBLIGATIONS (net of current maturities)............................ 123,027 72,365 135,810 DEFERRED INCOME TAXES..................... -- 5,295 -- 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 77,750,579 and 77,591,329 shares at March 31, 1996 and 1995, respectively, and 77,718,379 shares at December 31, 1995................ 778 776 777 Class B -- convertible common stock -- $.01 par value; authorized, issued and outstanding, 20,000,000 shares................................. 200 200 200 Additional paid-in capital................ 169,234 167,724 169,057 Retained earnings......................... 9,920 60,761 7,677 Treasury stock -- 6,986,000 common shares, at cost................................ (48,718) (48,718) (48,718) Unearned compensation..................... (3,618) (5,265) (3,932) -------- -------- ------------ 127,796 175,478 125,061 -------- -------- ------------ $425,431 $430,377 $436,295 ======== ======== ==========
The accompanying notes are an integral part of these statements. 3 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) - --------------------------------------------------------------------------------
CLASS B CONVERTIBLE ADDITIONAL COMMON COMMON PAID-IN RETAINED TREASURY UNEARNED STOCK STOCK CAPITAL EARNINGS STOCK COMPENSATION TOTAL - ------------------------------------------------------------------------------------------------------------- (In thousands) BALANCE AT JANUARY 1, 1995..................... $776 $ 200 $ 167,463 $ 69,560 $(27,136) $ (4,420) $206,443 Issuance of common stock upon exercise of stock options.................. -- -- 211 -- -- -- 211 Income tax benefit related to executive stock award program and stock options exercised................ -- -- 50 -- -- -- 50 Expense related to executive stock award program.................. -- -- -- -- -- 164 164 Unearned compensation related to employee equity participation plan..................... -- -- -- -- -- (1,264) (1,264) Expense related to employee equity participation plan..................... -- -- -- -- -- 255 255 Purchase of treasury stock, at cost.................. -- -- -- -- (21,582) -- (21,582) Net loss for the three months ended March 31, 1995..................... -- -- -- (8,799) -- -- (8,799) ------ ----------- ---------- -------- -------- ------------ -------- BALANCE AT MARCH 31, 1995..................... $776 $ 200 $ 167,724 $ 60,761 $(48,718) $ (5,265) $175,478 ====== ======== ======== ======= ======== ========== ======== BALANCE AT JANUARY 1, 1996..................... $777 $ 200 $ 169,057 $ 7,677 $(48,718) $ (3,932) $125,061 Issuance of common stock upon exercise of stock options.................. 1 -- 177 -- -- -- 178 Expense related to executive stock award program and stock options.................. -- -- -- -- -- 59 59 Expense related to employee equity participation plan..................... -- -- -- -- -- 255 255 Net earnings for the three months ended March 31, 1996..................... -- -- -- 2,243 -- -- 2,243 ------ ----------- ---------- -------- -------- ------------ -------- BALANCE AT MARCH 31, 1996..................... $778 $ 200 $ 169,234 $ 9,920 $(48,718) $ (3,618) $127,796 ====== ======== ======== ======= ======== ========== ========
The accompanying notes are an integral part of these statements. 4 7 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ------------------------ 1996 1995 - ---------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net earnings (loss)............................................... $ 2,243 $ (8,799) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................................ 4,209 6,423 Amortization of cable distribution fees...................... 3,967 2,521 Deferred income taxes........................................ 1,181 3,738 Inventory carrying value adjustment.......................... 528 (536) Provision for losses on accounts receivable.................. 436 84 Common stock and change in Stock Appreciation Rights issued for services provided....................................... 314 (869) Gain on sale of assets....................................... (91) (18) Equity in losses of unconsolidated affiliates................ -- 44 Change in current assets and liabilities: Decrease in accounts and notes receivable................. 2,610 3,540 Increase in income taxes receivable....................... -- (9,762) Decrease in inventories................................... 8,653 8,009 Decrease in other current assets.......................... 1,014 2,372 Increase (decrease) in accounts payable................... (561) 11,586 Decrease in accrued liabilities........................... (255) (25,524) Increase in cable distribution fees.......................... (12,342) (13,719) Stock purchases for employee benefit plan.................... -- (1,264) --------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....... 11,906 (22,174) --------- -------- Cash flows from investing activities: (Increase) decrease in other non-current assets................... (1,423) 2,280 Capital expenditures.............................................. (509) (3,343) Proceeds from sale of assets...................................... 322 539 Increase in intangible assets..................................... -- (631) --------- -------- NET CASH USED IN INVESTING ACTIVITIES..................... (1,610) (1,155) --------- -------- Cash flows from financing activities: Principal payments on long-term obligations....................... (110,000) (277) Net proceeds from issuance of Convertible Subordinated Debentures..................................................... 97,200 -- Proceeds from issuance of common stock............................ 178 211 Borrowings from secured credit facility........................... -- 45,000 Payments for purchases of treasury stock.......................... -- (34,691) --------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....... (12,622) 10,243 --------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS........................... (2,326) (13,086) Cash and cash equivalents at beginning of period.................... 25,164 33,648 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $ 22,838 $ 20,562 ========= ========
The accompanying notes are an integral part of these statements. 5 8 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A -- BASIS OF PRESENTATION The interim Condensed Consolidated Financial Statements of Home Shopping Network, Inc. and Subsidiaries (the "Company") are unaudited and should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto for the years ended December 31, 1995 and 1994. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items and a nonrecurring item as discussed in Note E. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company's annual Consolidated Financial Statements and Notes thereto. NOTE B -- LONG-TERM INVESTMENTS In July 1995, the Company paid $4.0 million for a 20% interest in Body by Jake Enterprises, L.L.C. ("BBJ"). This investment is accounted for under the cost method. Simultaneously, the Company entered into a long-term joint marketing agreement with BBJ to provide for the sale and promotion of merchandise. The Company has a $10.0 million investment consisting of 100,000 shares of Series A non-voting preferred stock, $.01 par value, with a liquidation preference of $100 per share, in The National Registry Inc. ("NRI"), which is accounted for under the cost method. This investment is convertible into 6,336,154 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 $15.0 million. The Company does not have the ability to exercise any significant influence over the operating or financial activities of BBJ or NRI. NOTE C -- CREDIT FACILITY AND CONVERTIBLE SUBORDINATED DEBENTURES On March 1, 1996, the Company completed an offering of $100.0 million of unsecured Convertible Subordinated Debentures (the "Debentures"), due March 1, 2006, which bear interest at 5 7/8% and are convertible into shares of the Company's common stock any time after May 1, 1996, at a conversion price of $12.00 per share. The Debentures are redeemable by the Company for cash at any time on or after March 1, 1998 at specified redemption prices, plus accrued interest, except that prior to March 1, 1999, the Debentures may not be redeemed unless the closing price of the common stock equals or exceeds 140% of the conversion price per share for a specified period of time. The Debentures are subordinated to all existing and future senior debt of the Company. The Company used the net proceeds of $97.2 million from the Debentures to repay borrowings under its Revolving Credit Facility (the "Credit Facility"). This and other repayments reduced the total outstanding amount under the Credit Facility to $25.0 million at March 31, 1996. Subsequently, the Company repaid an additional $5.0 million under the Credit Facility, leaving $20.0 million outstanding at April 30, 1996. On February 13, 1996, the Company amended its Credit Facility and agreed, among other things, that upon consummation of the sale of the Debentures discussed above, the amount available for borrowing under the Credit Facility would be reduced by 30% of the principal amount of Debentures. Accordingly, the maximum borrowing availability under the Credit Facility is now $120.0 million, leaving $100.0 million available for borrowing at April 30, 1996. The Company obtained a waiver of the working capital ratio requirement under the Credit Facility for the first quarter of 1996. Due to the Company obtaining in excess of $50.0 million in net proceeds from the sale of the Debentures, the covenant under the Credit Facility related to the anticipated change in control, as discussed in Note J, has been waived. The Company was in compliance with all other covenants contained in the Credit Facility. 6 9 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D -- INCOME TAXES The Company had taxable income for the three months ended March 31, 1996 which offset a portion of the net operating loss carryforward from 1995. Management believes that the Company will generate future taxable income sufficient to realize the tax benefit of the loss carryforward prior to its expiration. Accordingly, the Company has recognized a non-current asset related to this carryforward and no valuation allowance has been provided. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings in order to allow the Company to realize the benefits of the net operating loss carryforward or other deferred tax assets. NOTE E -- RESTRUCTURING CHARGES During the three months ended March 31, 1995, the Company recorded a charge of $2.0 million covering employee and other costs related to the closing of its fulfillment center in Reno, Nevada. In addition, in the fourth quarter of 1995 the Company recorded an additional $2.1 million of charges to reflect the additional costs expected to be incurred in relation to the closing. The facility was closed by June 30, 1995. During the three months ended March 31, 1996, payments totaling $.2 million were made related to this charge leaving $2.4 million accrued for future charges. During the three months ended March 31, 1995, no payments were made which related to this charge. NOTE F -- EARNINGS (LOSS) PER SHARE Primary earnings (loss) per common share is based on net earnings (loss) divided by the weighted average number of common shares outstanding giving effect to stock options and convertible debt, when dilutive. Fully diluted earnings per share is not materially different from primary earnings per share in any period presented. NOTE G -- CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash and short-term investments. Short-term investments consist primarily of auction preferred shares, money market funds and certificates of deposit with original maturities of less than 91 days. Supplemental disclosures of cash flow information: - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ----------------- 1996 1995 ------------------------------------------------------------------------------------- (In thousands) CASH PAID FOR: Interest........................................................ $6,167 $938 Income taxes.................................................... 50 348 CASH RECEIVED FOR: Income tax refund............................................... 649 --
On March 27, 1995, Precision Systems, Inc. ("PSi") repaid $2.7 million, plus accrued interest, of its $5.0 million loan from the Company. Under an agreement between the Company and PSi, the remaining principal balance of the loan was recorded as a prepayment of future monthly software maintenance payments through December 1995. NOTE H -- SUBSEQUENT EVENTS During April 1996, the Company sold a majority of its interest in HSN Direct Joint Venture ("HSND") for $5.9 million to a company under control of Tele-Communications, Inc. ("TCI"), which also owns a controlling interest in the Company. The Company received $4.9 million in cash at closing and is due an 7 10 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) additional $1.0 million payable in four equal annual installments commencing on February 1, 1997. The Company will retain a 15% interest in the venture and a newly formed corporation. The Company made a capital contribution to the new corporation in the amount of $155,000. Due to the Company's reduced interest in the venture and inability to exercise significant influence over its operating or financial activities, the Company's investment will be accounted for under the cost method. NOTE I -- PRO-FORMA QUARTERLY RESULTS, EXCLUDING HSND Due to the sale of a majority of its interest in HSND during 1996, the following unaudited table reports the pro-forma results for the Company for 1995 giving effect to the sale of HSND as if it occurred on January 1, 1995: - --------------------------------------------------------------------------------
THREE MONTHS ENDED ----------------------------------------------- 3/31/95 6/30/95 9/30/95 12/31/95 ----------------------------------------------------------------------------------------- (In thousands) Net sales............................... $231,784 $241,348 $237,467 $287,099 Cost of sales........................... 157,180 163,772 160,706 210,192 -------- -------- -------- -------- Gross profit.......................... 74,604 77,576 76,761 76,907 Operating expenses...................... 89,274 91,504 96,219 103,691 -------- -------- -------- -------- Operating (loss)...................... (14,670) (13,928) (19,458) (26,784) Other income (expense).................. 1,119 (636) (5,138) (11,413) -------- -------- -------- -------- (Loss) before income taxes.............. $(13,551) $(14,604) $(24,596) $(38,197) ======== ======== ======== ========
Pro forma results for the quarter ended March 31, 1996 are not applicable because the net assets were held for sale and the operating results of HSND were used to adjust this balance accordingly. NOTE J -- ANTICIPATED CHANGE IN CONTROL In November 1995, Liberty Media Corporation ("Liberty"), a wholly-owned subsidiary of TCI, and the new Chairman of the Company's Board of Directors (the "Chairman"), entered into an agreement, which related to, among other things, Silver King Communications, Inc.'s ("SKC")acquisition of control of the Company through the transfer to SKC of the common stock and Class B common stock owned by Liberty ("Company Shares"). Pursuant to the agreement between the Chairman and Liberty and certain other agreements entered into at such time, SKC would acquire the Company Shares (which shares represent a majority of the voting power of the outstanding equity securities of the Company) in exchange for additional shares of SKC's common stock and Class B stock. If such transactions are consummated, the Chairman, who became Chairman of the Board and Chief Executive Officer of SKC in August 1995, and acquired a significant number of options to acquire SKC common stock at such time, would also control securities of SKC representing a majority of the outstanding voting power of that entity. In addition, in connection with such transfer of the Company Shares, TCI would acquire beneficial ownership of a substantial additional equity interest in SKC and, through such ownership of SKC securities, would continue to have a substantial equity interest in the Company. The consummation of each of the foregoing transactions is subject to the satisfaction of certain conditions, including, but not limited to, receipt of FCC approval, and approval of the transaction in which SKC is to acquire the Company Shares by the stockholders of SKC. In addition, SKC's acquisition of control of the Company referred to above, will constitute a "change in control" of the Company. There can be no assurance that the transactions described above will be consummated. 8 11 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES GENERAL Home Shopping Network, Inc. (the "Company") is a holding company, the subsidiaries of which conduct the day-to-day operations of the Company's various business activities. The Company's primary business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the Company. A. CONSOLIDATED RESULTS OF OPERATIONS The following discussion presents the material changes in the consolidated results of operations of the Company which have occurred in the quarter ended March 31, 1996, compared with the quarter ended March 31, 1995. Reference should also be made to the Condensed Consolidated Financial Statements included herein. In April 1996, the Company sold a majority of its interest in its infomercial joint venture, HSN Direct Joint Venture ("HSND"). Due to the anticipated sale and gain associated therewith, the results of operation of HSND were not included in the consolidated results of operation for the first quarter of 1996. During 1995, the consolidated results of operations included a $4.3 million pre-tax loss related to HSND. See Note I to the Condensed Consolidated Financial Statements for pro-forma effects of excluding HSND from the Company's 1995 results of operations. All tables and discussion included herein calculate the percentage changes using actual dollar amounts, versus rounded dollar amounts. NET SALES For the quarter ended March 31, 1996, net sales for the Company increased $39.1 million, or 16.0%, to $282.7 million from $243.6 million compared to the same period in 1995. Net sales of HSC increased $44.8 million, or 21.8%, for the quarter ended March 31, 1996, reflecting a 10.2% increase in the number of packages shipped and an 11.9% increase in the average price per unit sold compared to the quarter ended March 31, 1995. In addition, sales by wholly-owned subsidiaries, Internet Shopping Network, Inc. ("ISN") and Vela Research, Inc. ("Vela") increased $4.2 million and $2.8 million, respectively, for the quarter ended March 31, 1996. These increases were offset by a decrease of $11.8 million in sales by HSND. In November 1995, the Company appointed a new chairman of the board and a new president and chief executive officer, both with significant experience in the electronic retailing and programming areas. The Company believes that the improved sales in the quarter ended March 31, 1996 compared to the same period in 1995 were primarily the result of immediate changes made by new management to the Company's merchandising and programming strategies. Management expects to take additional steps designed to attract both first-time and active customers which include improving inventory mix with respect to product assortment and average price per unit, improving inventory management and better planning of programmed shows. The Company believes that its negative performance in the first quarter of 1995, which resulted in a $30.6 million decrease in its consolidated net sales from the comparable 1994 period, was due, in part, to the adverse effects of certain merchandising and programming strategies which had been implemented in late 1994 and 1995. While management is optimistic that results will continue to improve and the Company will remain profitable, there can be no assurance that changes to the Company's merchandising and programming strategies will achieve management's intended results. For the quarter ended March 31, 1996, HSC's merchandise return percentage increased to 24.9% from 24.1% for the same period in 1995. Management believes that the increase in return rate is attributable to an increase in the average price per unit sold. New management's merchandising strategy is intended to reduce return rates for the remainder of 1996 by attempting to decrease the average price per unit for the remainder 9 12 of 1996. Promotional price discounts increased to 3.8% of HSC sales for the quarter ended March 31, 1996 from 3.5% in the same period in 1995. At March 31, 1996, HSC had approximately 4.7 million active customers representing a 5.0% decline from March 31, 1995. An active customer is defined as a customer 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 customers have made more than one purchase in the last 18 months, compared to 58.8% at March 31, 1995. Management believes that future levels of net sales of HSC will be dependent on the success of its current efforts to increase market penetration. Market penetration represents the level of active customers within a market. The following table highlights the changes in the estimated unduplicated television household reach, as explained below, of HSN, the Company's primary network, for the twelve months ended March 31, 1996:
--------------------------------------------------------------------------------------------- CABLE* BROADCAST* SATELLITE TOTAL --------------------------------------------------------------------------------------------- (In thousands of households) Households -- March 31, 1995....................... 40,872 22,758 3,750 67,380 Net additions/(deletions).......................... 3,139 (2,078) 38 1,099 Shift in classification............................ 502 (502) -- -- Change in Nielsen household counts................. -- 42 -- 42 ------ ---------- --------- ------ Households -- March 31, 1996....................... 44,513 20,220 3,788 68,521 ====== ======== ====== ======
- --------------- * Households capable of receiving both broadcast and cable transmissions are included under cable and excluded from broadcast to present unduplicated television household reach. According to industry sources, as of March 31, 1996, there were 95.8 million homes in the United States with a television set, 62.5 million basic cable television subscribers and 3.8 million homes with satellite dish receivers. In addition to the households in the above table, as of March 31, 1996 approximately 12.6 million cable television households were reached by the Company's Spree! network, of which 3.8 million were on a part-time basis. Of the total cable television households receiving Spree!, 10.4 million also receive HSN. During the remainder of 1996, cable system contracts covering 3.0 million cable subscribers are subject to termination or renewal. This represents 6.7% of the total number of unduplicated cable households receiving HSN. The Company is pursuing both renewals and additional cable television system contracts, but channel availability, competition, consolidation within the cable industry and cost of carriage are some of the factors affecting the negotiations for cable television system contracts. Although management cannot determine the percentage of expiring contracts that will be renewed or the number of households that will be added through new contracts, management believes that a majority of these contracts will be renewed. COST OF SALES For the quarter ended March 31, 1996, cost of sales increased $30.0 million, or 18.5%, to $191.9 million from $161.9 million for the quarter ended March 31, 1995. As a percentage of net sales, cost of sales increased to 67.9% from 66.5% compared to the quarter ended March 31, 1995. Cost of sales of HSC, ISN and Vela increased $30.6 million, $4.1 million and $1.5 million, respectively, for the quarter ended March 31, 1996. These increases were partially offset by a decrease related to HSND of $4.8 million. As a percentage of HSC's net sales, cost of sales decreased slightly to 69.5% from 69.7% compared to the quarter ended March 31, 1995. The dollar increases in consolidated and HSC's cost of sales relate to the higher sales volume. The increase in consolidated cost of sales percentage when compared to 1995 primarily relates to the exclusion of HSND's results of operations in the first quarter of 1996. 10 13 OPERATING EXPENSES The following table highlights the operating expense section from the Company's Condensed Consolidated Statements of Operations:
----------------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, --------------- $ % 1996 1995 CHANGE CHANGE ----------------------------------------------------------------------------------------- (In millions, except %) Selling and marketing................................. $36.8 $42.2 $ (5.4) (12.8)% Engineering and programming........................... 24.1 25.4 (1.3) (5.0) General and administrative............................ 16.8 19.3 (2.5) (13.1) Depreciation and amortization......................... 8.1 8.9 (.8) (8.8) Restructuring charges................................. -- 2.0 (2.0) (100.0) ------ ------ ------ $85.8 $97.8 $(12.0) (12.3) ===== ===== ======
As a percentage of net sales, operating expenses decreased to 30.3% from 40.1% compared to the quarter ended March 31, 1995. In late 1995 and the first quarter of 1996, management instituted measures aimed at streamlining operations primarily by reducing its work force and taking other actions to reduce operating expenses. These changes resulted in some reduction of operating expenses in the first quarter of 1996 compared with the same period in 1995 and are expected to result in future reductions to operating expenses when compared to 1995. SELLING AND MARKETING For the quarter ended March 31, 1996, selling and marketing expenses, as a percentage of net sales, decreased to 13.0% from 17.3% compared to the quarter ended March 31, 1995. The major components of selling and marketing expenses are detailed below:
----------------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, ------------- $ % 1996 1995 CHANGE CHANGE ----------------------------------------------------------------------------------------- (In millions, except %) Telephone, operator and customer service................ $13.3 $12.7 $ .6 4.9% Fees to cable system operators: Commissions........................................... 10.3 7.3 3.0 42.1 Marketing payments for cable advertising.............. 2.7 4.3 (1.6 ) (37.4) Performance bonus commissions......................... 2.7 3.4 (.7 ) (21.8) HSND Selling Expenses................................... -- 6.3 (6.3 ) (100.0)
Telephone, operator and customer service expenses are typically related to sales, call volume and the number of packages shipped. For the quarter ended March 31, 1996, compared to the same period in 1995, these expenses increased at a rate lower than the increase in sales and packages shipped. This was due in part to a new contract with the Company's long distance telephone carrier which was negotiated in the third quarter of 1995. In addition, operator and customer service payroll expenses remained constant due to the work force reduction measures, and volume efficiencies. Management expects telephone, operator and customer service expenses to fluctuate in relation to call and package volume for the remainder of 1996. For the quarter ended March 31, 1996, commissions to cable system operators increased as a result of the increase in sales. Commission payments are based on net merchandise sales after giving effect to customer returns. Additionally, cable operators which have executed affiliation agreements to carry the Company's programming are generally compensated for all sales within their franchise areas, regardless of whether a customer's order results from watching the program via cable, satellite dish, or a broadcast television station. Commissions as a percentage of sales increased due to the growth in cable households and the increase in cable households within broadcast markets. As a result of the above factors, subject to sales volume, fees paid to cable system operators are expected to remain at higher levels in future periods. 11 14 Marketing payments for cable advertising decreased for the quarter ended March 31, 1996, because older agreements containing such payments expired or were renegotiated and new cable carriage agreements were executed. Current contracts, instead of providing marketing payments for cable advertising, generally provide other forms of incentive compensation to cable operators. These include upfront payments of cable distribution fees, as discussed in "Depreciation and Amortization," and performance bonus commissions which require payments based upon HSC attaining certain sales levels in the cable operator's franchise area. Accordingly, marketing payments for cable advertising are expected to decrease, and depreciation and amortization, relating to cable distribution fees, will increase in 1996. Performance bonus commissions decreased because of lower guaranteed minimum commission expense in the quarter ended March 31, 1996, as compared to the quarter ended March 31, 1995, relating to contracts with certain cable operators. Selling and marketing expenses are expected to decrease for the remainder of 1996 related to the sale of a majority of the Company's interest in HSND. The remaining net decrease in selling and marketing expenses is attributable to lower advertising and promotional expenses of the Company's other subsidiary operations. ENGINEERING AND PROGRAMMING For the quarter ended March 31, 1996, engineering and programming expenses, as a percentage of net sales, decreased to 8.5% from 10.4% compared to the quarter ended March 31, 1995 primarily as a result of the increase in net sales. The dollar decrease in engineering and programming expenses for the quarter ended March 31, 1996 was primarily due to lower broadcast costs of $1.9 million relating to fewer broadcast affiliates compared to the quarter ended March 31, 1995. This decrease was partially offset by a $1.2 million increase in the amount payable to Silver King Communications, Inc., compared to the quarter ended March 31, 1995. In addition, engineering and programming expenses decreased by $1.0 million related to the sale of a majority of the Company's interest in HSND. For the remainder of 1996, these engineering and programming expenses are expected to remain relatively constant in comparison to the first quarter of 1996. GENERAL AND ADMINISTRATIVE For the quarter ended March 31, 1996, general and administrative expenses, as a percentage of net sales, decreased to 5.9% from 7.9% compared to the quarter ended March 31, 1995. For the quarter ended March 31, 1996, decreases in payroll, consulting, legal, repairs and maintenance and other administrative expenses totaling $3.7 million were primarily offset by a $1.2 million credit in the quarter ended March 31, 1995 related to Stock Appreciation Rights. Based on savings expected to be realized in connection with the reduction of the Company's work force and other expense reduction initiatives, management expects general and administrative expenses to remain at lower levels for the remainder of 1996, compared to the same periods in 1995. DEPRECIATION AND AMORTIZATION The decrease in depreciation and amortization for the quarter ended March 31, 1996 was primarily due to a decrease of $1.7 million related to assets that became fully depreciated in 1995, the retirement of certain equipment in the fourth quarter of 1995 and lower capital expenditure levels in the quarter ended March 31, 1996 compared to the same period in 1995. Depreciation expense is expected to remain at lower levels for the remainder of 1996 compared to the same periods in 1995. In addition, amortization expense for name lists decreased $.5 million relating to the sale of the assets of Ortho-Vent, Inc. in the fourth quarter of 1995. These decreases were partially offset by increased amortization of cable distribution fees of $1.4 million to $3.9 million for the quarter ended March 31, 1996. Amortization of these fees is expected to total $16.0 million in 1996 based on existing agreements. This amortization will increase if additional long-term cable contracts containing upfront payments of cable distribution fees are entered into during 1996, as discussed in "Net Sales." 12 15 RESTRUCTURING CHARGES Restructuring charges for the quarter ended March 31, 1995, of $2.0 million, represented management's estimate of costs to be incurred in connection with the closing of the Company's Reno, Nevada, distribution center, which was accomplished in June 1995. The decision to close the Reno distribution center was based on an evaluation of the Company's overall distribution strategy. Management believes that consolidation of the Company's distribution facilities results in operating efficiencies and improved service to customers. OTHER INCOME (EXPENSE) For the quarter ended March 31, 1996, the Company had net other expense of $(1.4) million compared to net other income of $1.7 million for the quarter ended March 31, 1995. Interest expense increased $2.9 million for the quarter ended March 31, 1996, due to a higher level of outstanding borrowings by the Company and a reduction in the useful life of loan costs due to the anticipated refinancing of the Company's Credit Facility. On March 1, 1996, the Company obtained additional financing through a private placement of $100.0 million of Convertible Subordinated Debentures (the "Debentures"), as discussed in "Financial Position, Liquidity and Capital Resources" and Note C to the Condensed Consolidated Financial Statements. Management expects that interest expense for the remainder of 1996 will be approximately equal to 1995. For the quarter ended March 31, 1996, net miscellaneous income decreased $.2 million compared to the same period in 1995. Net miscellaneous income for the quarter ended March 31, 1996, included a one-time $1.5 million payment received in connection with the termination of the Canadian Home Shopping Network license agreement. Net miscellaneous income for the quarter ended March 31, 1995, includes the receipt of proceeds from a lawsuit settlement totaling $.6 million, a gain on the sale of other assets of $.6 million and royalty income related to HSND of $.5 million. INCOME TAXES The Company's effective tax rate was 38.0% for the quarter ended March 31, 1996, and a benefit of (39.0)% for the quarter ended March 31, 1995. The Company's effective tax rate for these periods differed from the statutory rate due primarily to the amortization of goodwill, state income taxes and the provision for interest on adjustments proposed by the Internal Revenue Service. The Company anticipates full realization of its net operating loss carryforward and accordingly no valuation allowance has been provided. The Company's effective tax rate is expected to vary from the statutory rate for the remainder of 1996. NET EARNINGS (LOSS) The Company had net earnings of $2.2 million, or $.02 per share, for the quarter ended March 31, 1996, compared to net loss of $(8.8) million, or $(.10) per share, for the quarter ended March 31, 1995. The increase in earnings for the quarter ended March 31, 1996, was primarily attributable to the increase in net sales of $39.1 million, the increase in gross profit of $9.1 million and the decrease in operating expenses, as discussed above, compared to the quarter ended March 31, 1995. 13 16 SEASONALITY The Company believes that seasonality does impact its business but not to the same extent it impacts the retail industry in general. B. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The following table highlights various balances and ratios from the Condensed Consolidated Financial Statements included herein:
------------------------------------------------------------------------------------------ MARCH 31, ---------------- DECEMBER 31, 1996 1995 1995 ------------------------------------------------------------------------------------------ Cash and cash equivalents (millions)..................... $ 22.8 $ 20.6 $ 25.2 Working capital (millions)............................... $ (7.6) $ 25.7 $ 7.6 Current ratio............................................ .96:1 1.14:1 1.04:1 Accounts and notes receivable, net (millions)............ $ 20.5 $ 32.0 $ 23.6 Inventories, net (millions).............................. $ 92.4 $ 111.3 $ 101.6 Annual inventory turnover (annualized for March periods only).................................................. 7.92 5.63 6.37
The principal sources of cash for the twelve months ended March 31, 1996 were borrowings by the Company under its Credit Facility and the Debentures, which were used principally to repay outstanding borrowings under the Credit Facility, pay cable distribution fees of $57.2 million, pay litigation settlements of $5.6 million and pay for capital expenditures of $10.2 million. The principal sources of cash for the quarter ended March 31, 1996, were the issuance of the Debentures and $11.9 million of operating funds, which were used principally to repay outstanding borrowings under the Credit Facility and to pay cable distribution fees of $8.6 million. Net earnings (loss) adjusted for non-cash items totaled $(22.0) million and $12.8 million, respectively, for the twelve months and three months ended March 31, 1996. The primary reason for the decrease in accounts and notes receivable is "FlexPay" accounts receivable which totaled $11.1 million at March 31, 1996, compared to $21.1 million at March 31, 1995 and $13.0 million at December 31, 1995. The Company's financing of "FlexPay" accounts receivable has not had a significant impact on its liquidity position. The inventory balance is net of a carrying value adjustment of $33.8 million at March 31, 1996, compared to $18.3 million at March 31, 1995 and $33.3 million at December 31, 1995. The inventory carrying value adjustment, which was significantly increased in the fourth quarter of 1995, is primarily related to product which is inconsistent with HSC's new sales and merchandising philosophy. Capital expenditures for the quarter ended March 31, 1996, were $.5 million. The Company estimates capital expenditures will range between $11.0 million and $13.0 million for the remainder of 1996. On February 13, 1996, the covenants in the Credit Facility were amended to, among other things, allow for additional subordinated financing and a reduction in the maximum borrowing availability under the Credit Facility by 30% of any subordinated financing. Accordingly, upon completion of the private placement of the Debentures, the maximum borrowing availability of the Credit Facility was reduced to $120.0 million. The Company used the net proceeds of the Debentures to repay borrowings under its Credit Facility. This repayment and additional repayments made using operating funds reduced the outstanding loan balance to $20.0 million as of April 30, 1996, and $100.0 million was available for borrowing. The Company anticipates that it may use its borrowing capacity under the Credit Facility to finance working capital requirements, capital expenditures and for general corporate purposes. During the remainder of 1996, management expects to pay cable distribution fees totaling $44.9 million relating to new and current contracts with cable system operators. Of this amount, $3.9 million is payable to a related party. 14 17 In April 1996, the Company sold a majority of its interest in HSND for $5.9 million, $4.9 million of which was received as of the closing of the transaction, the remainder of which will be received in four equal annual installments commencing on February 1, 1997. In management's opinion, available cash, internally generated funds and the Credit Facility will provide sufficient capital resources to meet the Company's foreseeable needs. The Company also has credit lines which back letters of credit which are used exclusively to facilitate the purchase of imported inventory. Presentation of letters of credit by vendors results in an immediate charge to the Company's account with no interest charges incurred. As of April 30, 1996, the Company had a $25.0 million committed bank credit line collateralized by the capital stock of HSC and HSN Realty Inc. and an uncommitted unsecured bank credit line offered on a conditional basis. Outstanding letters of credit, which cannot exceed $25.0 million in total in accordance with the Credit Facility, amounted to $12.4 million at April 30, 1996, on the committed and uncommitted lines, leaving $12.6 million available. For the quarter ended March 31, 1996, the Company did not pay any cash dividends and does not anticipate paying cash dividends in the immediate future. During April 1996, the Company paid $2.5 million, which was accrued in 1995, into an escrow account related to the settlement of certain pending litigation. At April 30, 1996, 2.7 million options to purchase the Company's 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 $25.1 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 the quarter ended March 31, 1995, the Company repurchased an additional 2.6 million shares at a total additional cost of $21.6 million. Under the terms of the Credit Facility, the Company is restricted from purchasing its common stock until it meets certain cash flow ratios. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") effective for fiscal years beginning after December 15, 1995. FAS 123 provides alternatives for the methods used by entities to record compensation expense associated with its stock-based compensation plans. Additionally, FAS 123 provides further guidance on the disclosure requirements relating to stock-based compensation plans. Presently, management intends to present the effects of FAS 123 only on a disclosure basis. 15 18 PART II -- OTHER INFORMATION ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 9, 1996, the annual meeting of stockholders was held. At the annual meeting, stockholders representing 20,000,000 shares of Class B Common Stock and 70,760,579 shares of Common Stock were entitled to vote thereat. Stockholders present or in person by proxy, representing 20,000,000 shares of Class B Common Stock and 64,695,582 shares of Common Stock, voted on the following matters: The stockholders elected the following seven directors of the Company to hold office until the next annual meeting of stockholders or until their successors have been duly elected: Elected by holders of Common Stock voting as a separate class:
NUMBER OF SHARES NUMBER OF SHARES FOR WHICH CAST IN FAVOR AUTHORITY WITHHELD ---------------- ------------------ Leo J. Hindery, Jr.................................... 63,697,563 998,019 General H. Norman Schwarzkopf......................... 63,592,343 1,103,239 Eli J. Segal.......................................... 63,876,949 818,633
Elected by holders of Common Stock and Class B Common Stock voting as a single class:
NUMBER OF SHARES NUMBER OF SHARES FOR WHICH CAST IN FAVOR AUTHORITY WITHHELD ---------------- ------------------ Peter R. Barton....................................... 83,696,718 998,864 Robert R. Bennett..................................... 83,702,043 993,539 Barry Diller.......................................... 83,711,110 984,472 James G. Held......................................... 83,705,459 990,123
The stockholders of both the Common Stock and Class B Common Stock voting as a single class also approved the adoption of the 1996 Stock Option Plan for Employees and the 1996 Stock Option Plan for outside directors as follows:
NUMBER OF NUMBER OF NUMBER OF SHARES CAST SHARES CAST SHARES IN FAVOR AGAINST ABSTAINING ----------- ----------- ----------- 1996 Stock Option Plan for Employees................ 63,093,444 21,394,175 207,963 1996 Stock Option Plan for Outside Directors........ 68,939,578 15,507,819 248,185
ITEM 6(A) -- EXHIBITS Exhibit 27 Financial Data Schedule (SEC use only). ITEM 6(B) -- REPORTS ON FORM 8-K A report on Form 8-K dated February 15, 1996 reported a decrease in the borrowings under the Revolving Credit Facility and the Company's intent to raise $100.0 million of additional financing through Convertible Subordinated Debentures. A report on Form 8-K dated February 26, 1996 reported the financial statements of Home Shopping Network, Inc. for the years ended December 31, 1995 and 1994. A report on Form 8-K dated March 1, 1996 reported the placement of $100.0 million of 5.875% Convertible Subordinated Debentures due March 1, 2006. 16 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOME SHOPPING NETWORK, INC. -------------------------------------------- (Registrant) Dated May 10, 1996 /s/ JAMES G. HELD - -------------------------------------------- -------------------------------------------- James G. Held President and Chief Executive Officer Dated May 10, 1996 /s/ KEVIN J. MCKEON - -------------------------------------------- -------------------------------------------- Kevin J. McKeon Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Dated May 10, 1996 /s/ BRIAN J. FELDMAN - -------------------------------------------- -------------------------------------------- Brian J. Feldman Vice President and Controller (Chief Accounting Officer)
17 20 LOGO EX-27 2 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 22,838 0 20,540 0 92,383 166,977 227,584 122,265 425,431 174,608 123,027 0 0 778 127,018 425,431 282,689 282,689 191,888 191,888 85,777 0 4,081 3,618 1,375 2,243 0 0 0 2,243 .02 .02
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