-----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, BFH95ZjyTDkTsGyyC2GwzAB10/oXSLQBsYQdDTuc8x2xF5f2axaBmvQOPFishIOo ZOu1/oAxtPzxVwcLlcpLTg== 0000950144-97-012146.txt : 19971115 0000950144-97-012146.hdr.sgml : 19971115 ACCESSION NUMBER: 0000950144-97-012146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 000-22069 FILM NUMBER: 97717217 BUSINESS ADDRESS: STREET 1: 2501 118TH AVE NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135728585 10-Q 1 HOME SHOPPING NETWORK, INC. FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 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.)
1 HSN DRIVE, ST. PETERSBURG, FLORIDA (Address of principal executive offices) 33729 (Zip Code) (813) 572-8585 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Total number of shares of outstanding stock as of November 3, 1997: Common stock......................... 71,989,159 Class B common stock................. 20,000,000
================================================================================ 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
- ---------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------- (In thousands) NET SALES....................................... $240,036 $234,321 $752,405 $733,922 Cost of sales................................... 144,288 136,992 444,036 453,483 -------- -------- -------- -------- Gross Profit.......................... 95,748 97,329 308,369 280,439 -------- -------- -------- -------- Operating expenses: Selling and marketing......................... 33,524 35,259 100,898 107,125 Engineering and programming................... 23,245 24,539 70,630 73,280 General and administrative.................... 16,937 17,295 54,746 50,728 Depreciation and amortization................. 8,586 8,437 26,485 24,849 -------- -------- -------- -------- 82,292 85,530 252,759 255,982 -------- -------- -------- -------- Operating profit...................... 13,456 11,799 55,610 24,457 Other income (expense): Interest income............................... 410 409 1,341 1,347 Interest expense.............................. (1,556) (1,867) (5,264) (8,203) Miscellaneous................................. (3,166) 1,046 (9,299) 5,415 -------- -------- -------- -------- (4,312) (412) (13,222) (1,441) -------- -------- -------- -------- Earnings before income taxes and minority interest...................................... 9,144 11,387 42,388 23,016 Income tax expense.............................. (3,201) (4,327) (16,891) (8,747) Minority interest............................... (124) -- (2,390) -- -------- -------- -------- -------- NET EARNINGS.................................... $ 5,819 $ 7,060 $ 23,107 $ 14,269 ======== ======== ======== ========
The accompanying notes are an integral part of these statements. 1 3 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------ September 30, ------------------- December 31, ASSETS 1997 1996 1996 - ------------------------------------------------------------------------------------------------ (In thousands) CURRENT ASSETS Cash and cash equivalents................................... $ 12,277 $ 31,833 $ 16,274 Accounts and notes receivable, net.......................... 35,243 26,044 33,868 Related party receivable.................................... -- -- 4,713 Inventories, net............................................ 151,837 90,728 100,527 Deferred income taxes....................................... 19,026 27,101 23,302 Other current assets, net................................... 1,579 4,786 5,396 -------- -------- -------- Total current assets.............................. 219,962 180,492 184,080 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................ 102,770 90,516 91,361 Buildings and leasehold improvements........................ 70,590 70,240 70,049 Furniture and other equipment............................... 47,683 50,154 47,234 -------- -------- -------- 221,043 210,910 208,644 Less accumulated depreciation and amortization.... 138,478 127,997 129,387 -------- -------- -------- 82,565 82,913 79,257 Land........................................................ 16,889 16,877 16,884 Projects in progress........................................ 7,792 294 980 -------- -------- -------- 107,246 100,084 97,121 OTHER ASSETS Cable distribution fees, net ($37,462; $34,456 and $40,892, respectively, to related parties)......................... 104,137 109,594 113,594 Long-term investments ($12,222; $10,154 and $10,536, respectively, in related parties)......................... 28,391 14,129 24,981 Deferred income taxes....................................... 5,186 6,967 3,649 Other non-current assets ($843; $639 and $1,639, respectively, in notes receivable from related parties)... 6,180 6,770 7,622 -------- -------- -------- 143,894 137,460 149,846 -------- -------- -------- $471,102 $418,036 $431,047 ======== ======== ========
The accompanying notes are an integral part of these statements. 2 4 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------ September 30, --------------------------- December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 1996 - ------------------------------------------------------------------------------------------------------ (In thousands) CURRENT LIABILITIES Current maturities of long-term obligations............... $ 250 $ 230 $ 250 Accounts payable.......................................... 96,800 76,557 65,266 Income taxes payable...................................... 3,598 12,178 8,267 Related party payable..................................... 17,712 -- -- Investment subscription payable........................... -- -- 10,000 Accrued liabilities: Programming fees ($8,474; $621 and $9,051, respectively, to related parties).................................. 17,755 17,321 22,683 Sales returns........................................... 10,866 11,700 11,672 Other................................................... 35,465 46,446 48,401 -------- -------- -------- Total current liabilities....................... 182,446 164,432 166,539 LONG-TERM OBLIGATIONS (net of current maturities)......... 98,097 98,131 97,934 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 and outstanding 71,989,159 shares at September 30, 1997 and December 31, 1996; issued 78,975,959 and outstanding 71,989,959 shares at September 30, 1996...................................... 720 790 720 Class B -- convertible common stock -- $.01 par value; authorized, issued and outstanding 20,000,000 shares.... 200 200 200 Additional paid-in capital................................ 140,062 184,252 140,062 Retained earnings......................................... 51,404 21,946 28,297 Treasury stock -- 6,986,000 common shares, at cost at September 30, 1996...................................... -- (48,718) -- Unearned compensation..................................... (1,827) (2,997) (2,705) -------- -------- -------- 190,559 155,473 166,574 -------- -------- -------- $471,102 $418,036 $431,047 ======== ======== ========
The accompanying notes are an integral part of these statements. 3 5 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------ Class B Convertible Additional Common Common Paid-In Retained Treasury Unearned Stock Stock Capital Earnings Stock Compensation Total - ------------------------------------------------------------------------------------------------------------------------ (In thousands) 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.......... 13 -- 13,665 -- -- -- 13,678 Income tax benefit related to executive stock award program, stock options exercised and employee equity participation plan............................... -- -- 1,530 -- -- -- 1,530 Expense related to executive stock award program and stock options.... -- -- -- -- -- 170 170 Expense related to employee equity participation plan................. -- -- -- -- -- 765 765 Net earnings for the nine months ended September 30, 1996........... -- -- -- 14,269 -- -- 14,269 ---- ---- -------- ------- -------- ------- -------- BALANCE AT SEPTEMBER 30, 1996........ $790 $200 $184,252 $21,946 $(48,718) $(2,997) $155,473 ==== ==== ======== ======= ======== ======= ======== BALANCE AT JANUARY 1, 1997........... $720 $200 $140,062 $28,297 $ -- $(2,705) $166,574 Expense related to executive stock award program...................... -- -- -- -- -- 113 113 Expense related to employee equity participation plan................. -- -- -- -- -- 765 765 Net earnings for the nine months ended September 30, 1997........... -- -- -- 23,107 -- -- 23,107 ---- ---- -------- ------- -------- ------- -------- BALANCE AT SEPTEMBER 30, 1997........ $720 $200 $140,062 $51,404 $ -- $(1,827) $190,559 ==== ==== ======== ======= ======== ======= ========
The accompanying notes are an integral part of these statements. 4 6 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ---------------------------------------------------------------------------------- Nine Months Ended September 30, -------------------- 1997 1996 - ---------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net earnings................................................ $ 23,107 $ 14,269 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of cable distribution fees................ 14,327 12,550 Depreciation and amortization.......................... 12,321 12,420 Equity in (earnings) losses of unconsolidated affiliates............................................ 9,638 (57) Inventory carrying value adjustment.................... (1,726) (1,730) Deferred income taxes.................................. 2,739 13,558 Minority interest...................................... 2,390 -- Common stock issued for services provided.............. 878 935 Provision for losses on accounts receivable............ 341 697 (Gain) loss on sale of assets.......................... 125 (129) Gain on sale of controlling interest in joint venture............................................... -- (1,948) Change in current assets and liabilities: Increase in accounts and notes receivable............ (1,713) (2,944) (Increase) decrease in inventories................... (49,584) 12,566 Decrease in other current assets..................... 3,817 3,363 Increase (decrease) in accounts payable.............. 31,535 (7,740) Increase in related party payable.................... 22,425 -- Decrease in accrued liabilities...................... (35,730) (397) Increase in cable distribution fees.................... (4,870) (22,983) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES......... 30,020 32,430 -------- -------- Cash flows from investing activities: Capital expenditures...................................... (21,656) (2,661) Increase in net long-term investments..................... (13,048) (129) Proceeds from long-term notes receivable.................. 793 48 Increase in other non-current assets...................... (518) (2,995) Proceeds from sale of assets.............................. 412 525 Cash received from sale of controlling interest in joint venture................................................ -- 4,924 Increase in intangible assets............................. -- (26) -------- -------- NET CASH USED IN INVESTING ACTIVITIES............. (34,017) (314) -------- -------- Cash flows from financing activities: Principal payments on long term obligations............... -- (146,325) Net proceeds from issuance of Convertible Subordinated Debentures............................................. -- 97,200 Proceeds from issuance of common stock.................... -- 13,678 Borrowings from secured credit facility................... -- 10,000 -------- -------- NET CASH USED IN FINANCING ACTIVITIES............. -- (25,447) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,997) 6,669 Cash and cash equivalents at beginning of period............ 16,274 25,164 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 12,277 $ 31,833 ======== ========
The accompanying notes are an integral part of these statements 5 7 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 year ended December 31, 1996. In the opinion of the Company, all adjustments necessary for a fair presentation of such Condensed Consolidated Financial Statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim Condensed Consolidated Financial Statements and Notes thereto are presented as permitted by the Securities and Exchange Commission and do not contain certain information included in the Company's annual Consolidated Financial Statements and Notes thereto. On December 20, 1996, the Company consummated a merger (the "Merger") with HSN, Inc. ("HSNi"), formerly known as Silver King Communications, Inc. The Merger does not result in a change in the accounting basis of the net assets of the Company as presented in the accompanying Condensed Consolidated Financial Statements. Certain amounts in the Condensed Consolidated Financial Statements for 1996 were reclassified to conform to the 1997 presentation. NOTE B -- CREDIT FACILITIES On May 1, 1997, HSNi entered into a new $275.0 million revolving credit facility (the "New Facility") with a $35.0 million sub-limit for letters of credit. The New Facility, which replaced the existing credit facilities of both HSNi and the Company, expires on May 1, 2002. The New Facility is unsecured and the interest rate on borrowings is tied to the London Interbank Offered Rate plus an applicable margin. The Company is a guarantor of the New Facility. NOTE C -- INCOME TAXES The Company had taxable income for the quarter and nine months ended September 30, 1997, which utilized the entire net operating loss carryforward from the short taxable year, December 21, 1996 to December 31, 1996. On June 23, 1997, the Internal Revenue Service ("IRS") completed the examination of the Company's federal income tax returns for fiscal years 1992, 1993 and 1994. The IRS proposed adjustments resulting in a potential tax deficiency of $9.3 million, primarily related to the disallowance of deductions pertaining to a legal settlement and stock options exercised under the 1986 Cable Operators Stock Option Plan. On July 23, 1997, the Company made a payment of $1.3 million of tax and $.3 million of interest, for all undisputed issues. These undisputed issues were related to inter-period allocations of tax deductions, which will reverse in subsequent periods. To minimize interest expense in the event of an unfavorable outcome of the disputed items, the Company deposited $2.8 million with the IRS in July 1997. The Company maintains it has meritorious positions with respect to the disputed adjustments and on August 22, 1997, filed a protest with the IRS. In addition, the IRS reversed its position on an issue with respect to a former related party, which will result in a refund of $5.0 million in taxes and interest related to fiscal years 1986 to 1989. The effects of the settlement of undisputed items, the potential impact of the disputed items, and the $5.0 million refund were included in previous years' tax provisions and, accordingly, had no impact on the income tax provision for the quarter and nine months ended September 30, 1997. The Company believes it has made adequate provision for all outstanding tax issues. 6 8 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE D -- 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 disclosure of cash flow information:
- ------------------------------------------------------------------------------- Nine Months Ended September 30, ----------------- 1997 1996 - ------------------------------------------------------------------------------- (In thousands) CASH PAID FOR: Interest.................................................. $5,907 $ 9,077 Income taxes.............................................. 5,531 207 CASH RECEIVED FOR: Income tax refund......................................... 110 14,000
NOTE E -- SUBSEQUENT EVENTS On October 20, 1997, HSNi and Universal Studios, Inc. ("Universal"), a subsidiary of The Seagram Company, Ltd., announced an agreement to contribute the majority of Universal's television assets to HSNi and the Company in a transaction in which Universal will receive $4.1 billion in value in the form of 45% of HSNi's outstanding common equity equivalents and $1.2 billion in cash. In addition, upon consummation of the transaction, HSNi intends to change its corporate name to USA Networks, Inc. The transaction, which is expected to close in the first quarter of 1998, is subject to customary conditions, including the approval of HSNi's stockholders. The Universal assets to be contributed include all the domestic operations and 50% of the international operations of USA Network and the Sci-Fi Network, as well as Universal's domestic production and distribution operations. 7 9 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS IN ACCORDANCE WITH GENERAL INSTRUCTION H TO FORM 10-Q HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES GENERAL Home Shopping Network, Inc., which includes its subsidiaries (collectively, the "Company"), is a majority-owned subsidiary of HSN, Inc., formerly named Silver King Communications, Inc. ("HSNi"). The Company's primary business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the Company, which operates two services, The Home Shopping Network ("HSN") and America's Store, each twenty-four hours a day, seven days a week. On August 25, 1996, the Company entered into a merger agreement ("Merger Agreement") with a subsidiary of HSNi ("Merger Sub") and Liberty HSN, Inc. ("Liberty HSN"), an indirect, wholly-owned subsidiary of Liberty Media Corporation, which in turn, is a wholly-owned subsidiary of Tele-Communications, Inc. On December 20, 1996, pursuant to the Merger Agreement, Merger Sub was merged with and into the Company and the Company became a subsidiary of HSNi. After consummation of the merger, HSNi owned 80.1% of the equity and 90.8% of the voting power of the Company, with the remaining 19.9% of the equity and 9.2% of the voting power owned by Liberty HSN. THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS. THESE ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "OPTIMISTIC," "INTEND," "AIM," "WILL," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, AS WELL AS AFFECT THE COMPANY'S ABILITY TO ACHIEVE ITS GOALS REFERRED TO HEREIN, INCLUDE BUT ARE NOT LIMITED TO, THE FOLLOWING: BUSINESS AND GENERAL ECONOMIC CONDITIONS, MEDIA COVERAGE WHICH MIGHT DISRUPT VIEWERSHIP PATTERNS, COMPETITIVE FACTORS, CHANNEL SPACE AVAILABILITY, THE COST AND AVAILABILITY OF APPROPRIATE MERCHANDISE AND DELIVERY SERVICES, CONSOLIDATION WITHIN THE CABLE INDUSTRY, COST OF CARRIAGE OF THE COMPANY'S PROGRAMMING AND CHANGES IN THE REGULATORY ENVIRONMENT. 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 third quarter and the first nine months of 1997, compared with the same periods in 1996. Reference should also be made to the Condensed Consolidated Financial Statements included herein. All tables and discussion included herein calculate the percentage changes using actual dollar amounts, versus rounded dollar amounts. NET SALES For the quarter and nine months ended September 30, 1997, net sales for the Company increased $5.7 million, or 2.4%, to $240.0 million from $234.3 million and $18.5 million, or 2.5%, to $752.4 million from $733.9 million, respectively, compared to the same periods in 1996. Net sales of HSC increased $17.2 million, or 8.3%, and $56.4 million, or 8.7% for the quarter and nine months ended September 30, 1997, respectively, compared to the same periods in 1996. HSC's sales reflect increases of 7.9% and 11.2% in the number of packages shipped and decreases of 2.5% and 7.1% in the average price per unit sold for the quarter and nine months ended September 30, 1997, respectively, compared to the same periods in 1996. The increase in HSC net sales was offset by planned decreases in net sales of wholly-owned subsidiaries, HSN Mail Order, Inc. ("Mail Order"), and the retail outlet stores of $8.7 million and $2.6 million, respectively, for the quarter 8 10 ended September 30, 1997, and $25.8 million and $7.8 million, respectively, for the nine months then ended, compared to the same periods in 1996. The Company believes that the improved sales in the quarter and nine months ended September 30, 1997, compared to the same periods in 1996, were primarily the result of ongoing changes made to the Company's merchandising and programming strategies. Management is continuing to take additional steps to improve sales by changing the mix of products sold, introducing new products, optimizing the average price per unit, creating exciting programming, taking measures to increase the frequency of the customer's purchases and attracting new customers. Additional personnel have been hired to assist in implementing these new merchandising and programming strategies. There can be no assurance that the additional changes to the Company's merchandising and programming strategies will achieve management's intended results. For the quarter and nine months ended September 30, 1997, HSC's merchandise return percentage decreased to 22.8% from 23.2% and to 22.7% from 24.3%, respectively, compared to the same periods in 1996. Management believes that the lower return rate is primarily attributable to the decrease in the average price per unit and the mix of products sold, which may vary in subsequent quarters. At September 30, 1997 and 1996, HSC had approximately 4.6 million active customers. An active customer is one who has completed a transaction within the last eighteen months or placed an order within the last seven months. In addition, 61.3% of active customers have made more than one purchase in the last eighteen months, compared to 59.4% at September 30, 1996. The following table highlights the changes in the estimated unduplicated television household reach of HSN, the Company's primary service, for the twelve months ended September 30, 1997:
- -------------------------------------------------------------------------------------------------- Cable* Broadcast Satellite Total - -------------------------------------------------------------------------------------------------- (In thousands of households) Households -- September 30, 1996...................... 46,956 18,921 3,788 69,665 Net additions/(deletions)............................. 3,220 (1,017) -- 2,203 Shift in classification............................... 449 (449) -- -- Change in Nielsen household counts.................... -- (701) -- (701) ------ ------ ----- ------ Households -- September 30, 1997...................... 50,625 16,754 3,788 71,167 ====== ====== ===== ======
- --------------- * Households capable of receiving both broadcast and cable transmissions are included under cable and therefore are excluded from broadcast to present unduplicated household reach. Cable households included 3.8 million and 1.8 million direct broadcast satellite ("dbs") households at September 30, 1997 and 1996, respectively, and therefore, these households are excluded from satellite. According to industry sources, as of September 30, 1997, there were 96.9 million homes in the United States with a television set, 64.4 million basic cable television subscribers and 3.8 million homes with satellite dish receivers, excluding dbs. In addition, as of September 30, 1997, approximately 10.4 million cable television households could be reached by America's Store, of which 3.8 million are on a part-time basis. Of the total cable television households receiving America's Store, 9.0 million also receive HSN. During the remainder of 1997, cable system contracts covering 2.3 million cable subscribers are subject to termination or renewal. This represents 4.5% of the total number of unduplicated cable households receiving HSN. The Company is pursuing both renewals and additional cable television system contracts, but channel availability, competition, consolidation within the cable industry and cost of carriage are some of the factors affecting the negotiations for cable television system contracts. Although management cannot determine the percentage of expiring contracts that will be renewed or the number of households that will be added through new contracts, management believes that a majority of these contracts will be successfully renegotiated. HSNi, as part of its disengagement strategy, has selected its Miami, Florida station as the initial station which will cease broadcasting HSN and commence broadcasting its new local programming format in the 9 11 Spring of 1998. Management is continuing to evaluate the effects that the disaffiliation will have on Home Shopping's ability to reach some of its existing customers in the Miami area, including a reduction in revenues or incurring additional expenses to secure carriage of HSN. The Company believes that the process of disaffiliation can be successfully managed to minimize adverse consequences. GROSS PROFIT For the quarter and nine months ended September 30, 1997, gross profit decreased $1.6 million, or 1.6%, to $95.7 million from $97.3 million and increased $27.9 million, or 10.0%, to $308.4 million from $280.4 million, respectively, compared to the same periods in 1996. As a percentage of net sales, gross profit decreased to 39.9%, from 41.5% for the quarter ended September 30, 1997 and increased to 41.0% from 38.2% for the nine months then ended, compared to the same periods in 1996. Gross profit of HSC increased $1.7 million and $38.2 million, respectively, for the quarter and nine months ended September 30, 1997. These increases were primarily offset by decreases in Mail Order's gross profit of $3.5 million and $10.6 million, respectively, relating to the planned reduction of the mail order business in 1997. As a percentage of HSC's net sales, gross profit decreased to 38.5% from 40.9% and increased to 39.8% from 37.4% for the quarter and nine months ended September 30, 1997, respectively, compared to the same periods in 1996. The dollar increases in HSC's gross profit relate to the higher sales volume. Management believes that the increases in consolidated and HSC's gross profit percentage for the nine months ended September 30, 1997, when compared to 1996, are primarily the result of changes in merchandising and programming strategies, as discussed in "Net Sales." The decreases in consolidated and HSC's gross profit percentages for the quarter ended September 30, 1997, when compared to 1996, were due to planned decreases as a result of product mix changes and promotional activities related to the Company's 20th Anniversary celebration. In addition, the Company had special promotional pricing in reaction to the temporary decrease in viewership resulting from television coverage of the death of Princess Diana and anticipated customer reluctance to order during the UPS strike. OPERATING EXPENSES The following table highlights the operating expense section from the Company's Condensed Consolidated Statements of Operations:
- --------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, 1997 September 30, 1997 ---------------------------- ---------------------------- $ $ % $ $ % Amount Change Change Amount Change Change - --------------------------------------------------------------------------------------------------------- (In millions, except %) Selling and marketing...................... $33.5 $(1.7) (4.9)% $100.9 $(6.2) (5.8)% Engineering and programming................ 23.3 (1.3) (5.3) 70.6 (2.6) (3.6) General and administrative................. 16.9 (.4) (2.1) 54.8 4.0 7.9 Depreciation and amortization.............. 8.6 .2 1.8 26.5 1.6 6.6 ----- ----- ---- ------ $82.3 $(3.2) (3.8) $252.8 $(3.2) (1.3) ===== ===== ==== ======
As a percentage of net sales, operating expenses decreased to 34.3% from 36.5% and to 33.6% from 34.9%, respectively, for the quarter and nine months ended September 30, 1997, compared to the same periods in 1996. SELLING AND MARKETING For the quarter and nine months ended September 30, 1997, selling and marketing expenses, as a percentage of net sales, decreased to 14.0% from 15.0% and to 13.4% from 14.6%, respectively, compared to the same periods in 1996. 10 12 The major components of selling and marketing expenses are detailed below:
- --------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, 1997 September 30, 1997 ---------------------------- ---------------------------- $ $ % $ $ % Amount Change Change Amount Change Change - --------------------------------------------------------------------------------------------------------- (In millions, except %) Telephone, operator and customer service... $11.8 $(1.8) (13.0)% $37.4 $(1.3) (3.4)% Fees to cable system operators: Commissions.............................. 10.1 .8 9.1 31.3 2.3 7.9 Performance bonus commissions............ 2.8 .2 9.3 7.5 (.8) (9.3) Marketing payments for cable advertising........................... 2.2 (.1) (2.6) 6.5 (1.0) (12.8) Mail order catalog expenses................ .3 (2.1) (89.0) 1.0 (6.5) (86.8)
Telephone, operator and customer service expenses are typically related to sales, call volume, and the number of packages shipped. Telephone expense decreased $.7 million or 12.2% for the quarter ended September 30, 1997, and increased only $.6 million, or 3.8%, for the nine months then ended, compared to the same periods in 1996. The increase in call and package volume was offset by a rate reduction received from the Company's telephone carrier in the third quarter of 1997. Operator and customer service payroll expenses decreased $1.0 million, or 13.1%, and $1.9 million, or 8.4%, for the quarter and nine months ended September 30, 1997, respectively, due to volume efficiencies and a reduced work force. For the remainder of 1997, management expects to experience reductions in telephone, operator and customer service expenses in relation to call and package volume when compared to the same period in 1996. For the quarter and nine months ended September 30, 1997, 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 agreements to carry the Company's programming are generally compensated for all sales within their service area resulting from watching HSN and America's Store via cable or a broadcast television station. As a result of the above factors, subject to sales volume, fees paid to cable system operators are expected to remain at these higher levels in future periods. Performance bonus commissions decreased for the nine months ended September 30, 1997, compared to the same period in 1996, due to lower guaranteed minimum commission expense during the first half of 1997. This expense increased for the quarter ended September 30, 1997, compared to the same period in 1996, as a result of subscriber growth in certain cable systems and increased sales in their service areas. Performance bonus commissions are expected to increase for the remainder of 1997, compared to the same period in 1996. Marketing payments for cable advertising decreased for the quarter and nine months ended September 30, 1997, compared to the same periods in 1996, because older agreements requiring such payments expired or were renegotiated and new cable carriage agreements were executed. Current contracts generally provide other forms of incentive compensation to cable operators, including upfront payments of cable distribution fees or performance bonus commissions which require payments based upon HSC attaining certain sales levels in the cable operator's service area. Accordingly, marketing payments for cable advertising are expected to decrease and amortization of cable distribution fees will increase for the remainder of 1997, compared to the same period in 1996. The decrease in mail order catalog expenses relates to the planned reduction of the mail order business in 1997. Total selling and marketing expenses are expected to remain relatively constant as a percentage of net sales for the remainder of 1997. ENGINEERING AND PROGRAMMING For the quarter and nine months ending September 30, 1997, engineering and programming expenses, as a percentage of net sales, decreased to 9.7% from 10.5% and to 9.4% from 10.0%, respectively, compared to the same periods in 1996. 11 13 Broadcast costs payable to SKTV, Inc. ("SKTV"), a wholly-owned subsidiary of HSNi, for the quarter and nine months ended September 30, 1997, decreased $1.2 million and $2.6 million, respectively, compared to the same periods in 1996. The expense for the quarter and nine months ended September 30, 1996, includes $.9 million and $2.7 million, respectively, of bonus commissions which were reversed in the fourth quarter of 1996 and not accrued in the quarter and nine months ended September 30, 1997. In addition, broadcast costs, other than SKTV, decreased $.4 million and $1.2 million for the quarter and nine months ended September 30, 1997, respectively, relating to fewer broadcast affiliates compared to 1996. These decreases were partially offset by increased HSC production and sets costs of $.5 million and $1.9 million for the quarter and nine months ended September 30, 1997, respectively, primarily relating to the launch and development of America's Store in 1997. For the remainder of 1997, engineering and programming expenses are expected to decrease slightly in comparison to the same periods in 1996. GENERAL AND ADMINISTRATIVE For the quarter and nine months ended September 30, 1997, general and administrative expenses, as a percentage of net sales, decreased to 7.1% from 7.4% and increased to 7.3% from 6.9%, respectively, compared to the same periods in 1996. General and administrative expenses for the quarter and nine months ended September 30, 1997, included higher payroll costs of $1.3 million and $3.8 million, respectively, compared to the same periods in 1996, primarily relating to additional management personnel hired in late 1996 and early 1997. General and administrative expenses for the quarter ended September 30, 1997, were offset by a $1.9 million credit in bonus expense due to the reversal of bonuses accrued in 1997. For the remainder of 1997, management expects general and administrative expenses to remain higher than the comparable period in the prior year. DEPRECIATION AND AMORTIZATION The increase in depreciation and amortization for the quarter and nine months ended September 30, 1997, was primarily due to amortization of cable distribution fees which increased $.2 million and $1.8 million for the quarter and nine months ended September 30, 1997. Amortization of these fees is expected to total $19.2 million in 1997 based on existing agreements. Amortization amounts will increase if additional long-term cable contracts containing upfront payments of cable distribution fees are entered into during the remainder of 1997, as discussed in "Selling and Marketing." In addition, due to higher capital expenditure levels in 1997 compared to 1996, depreciation expense is expected to increase for the remainder of 1997, compared to the same period in 1996. OTHER INCOME (EXPENSE) Interest expense decreased $.3 million and $2.9 million for the quarter and nine months ended September 30, 1997, respectively, due to a lower level of borrowings by the Company at a lower average interest rate. Management expects that interest expense for the remainder of 1997 will be comparable to the same periods in 1996. For the quarter and nine months ended September 30, 1997, the Company had net miscellaneous expense of $3.2 million and $9.3 million, respectively, primarily due to equity losses relating to the Company's investments in Home Order Television GmbH & Co. and Jupiter Shop Channel Co;. Ltd. For the quarter and nine months ended September 30, 1996, the Company had net miscellaneous income of $1.0 million and $5.4 million, respectively, which primarily included a gain on the sale of other assets of $.8 million in the third quarter of 1996, a one time gain on the sale of a controlling interest in its infomercial joint venture, HSN Direct Joint Venture, of $1.9 million in the second quarter of 1996 and a one time $1.5 million payment received in the first quarter of 1996 in connection with the termination of the Canadian Home Shopping Network license agreement. 12 14 INCOME TAXES The Company's effective tax rate, calculated on earnings before income taxes and minority interest, was 35.0% and 39.8% for the quarter and nine months ended September 30, 1997, respectively, and 38.0% for the quarter and nine months ended September 30, 1996. The Company's effective tax rate for these periods differed from the statutory rate due to the amortization of non-deductible goodwill and state income taxes. The Company's effective tax rate is expected to exceed the statutory rate for the remainder of 1997. SEASONALITY The Company believes that seasonality does impact its business but not to the extent it impacts the retail industry in general. 13 15 PART II -- OTHER INFORMATION ITEM 6(A) -- EXHIBITS Exhibit 27 -- Financial Data Schedule (for SEC use only). 14 16 SIGNATURES Pursuant to the requirements of the Securities and 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 November 13, 1997 /s/ JAMES G. HELD - ------------------------------------------------- -------------------------------------------------------- James G. Held President and Chief Executive Officer Dated November 13, 1997 /s/ JED B. TROSPER - ------------------------------------------------- -------------------------------------------------------- Jed B. Trosper Senior Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) Dated November 13, 1997 /s/ BRIAN J. FELDMAN - ------------------------------------------------- -------------------------------------------------------- Brian J. Feldman Vice President and Controller (Chief Accounting Officer)
15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS ON FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 12,277 0 35,243 0 151,837 219,962 245,724 138,478 471,102 180,055 98,087 0 0 720 189,839 471,102 752,405 752,405 444,036 444,036 252,759 0 5,264 42,388 16,891 23,107 0 0 0 23,107 0 0
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